ACIT, Ludhiana V. M/s Majestic Auto Ltd, Ludhiana

ITA 1086/CHANDI/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77188 (ITAT-CHANDIGARH)
• Duration Of Justice: 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 26-11-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 27-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Depreciation; Business expenditure; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO. 1086/CHD/2013 ASSESSMENT YEARS : 2002-03 A.C.I.T. CIRCLE 1 V M/S MAJESTIC AUTO LTD LUDHIANA C-48, FOCAL POINT LUDHIANA AABCM 2162 M (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI MANJIT SINGH RESPONDENT BY: SHRI SUBHASH AGGARWAL DATE OF HEARING 16.7.2014 DATE OF PRONOUNCEMENT 24.7.2014 O R D E R PER T.R. SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER DATED 10. 9.2013 OF THE LD CIT(A)-II, LUDHIANA. 2. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOW ING GROUNDS: THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE IN RESPECT OF CAPITAL EXPENDITURE OF RS. 5883576/- UNDER THE HEAD DEALER NETWORKING SOFTWARE WHICH IN FACT WAS CAPITAL EXPE NDITURE AS AGAINST REVENUE EXPENDITURE CLAIMED BY THE ASSESSEE . 2 THAT THE ORDER OF LD. CIT(A) BE SET ASIDE AND THA T OF ASSESSING OFFICER BE RESTORED. 3 AFTER HEARING BOTH THE PARTIES WE FIND THAT ORIGI NALLY SOFTWARE EXPENSES TO THE TUNE OF RS. 5883576/- WAS DISALLOWED BY THE ASSESSING OFFICER BEING OF CAPITAL NATURE . ON APPEAL IT SEEMS THAT FIRST APPELLATE AUTHORITY HAS DELETED TH E ADDITION PARTIALLY BY RS. 44.12 LAKHS AND THE REVENUE HAD FI LED APPEAL BEFORE THE TRIBUNAL. THE TRIBUNAL ADJUDICATED THIS ISSUE IN ITA NO. 99/CHD/2007 IN CASE OF THE ASSESSEE AND FOLLOWI NG THE DECISION OF SPECIAL BENCH OF ITAT, DELHI IN CASE OF AMWAY 2 INDIA ENTERPRISES V DCIT, 114 TTJ 426 ( DELHI) SET ASIDE THE ISSUE TO THE FILE OF ASSESSING OFFICER FOR EXAMINAT ION OF THE NATURE OF THE EXPENDITURE AND THE RELEVANT PARA REA DS AS UNDER: WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIV AL CONTENTIONS. THE COMMISSIONER OF INCOME-TAX (A) HAS FOLLOWED THE DEC ISION OF HIS PREDECESSOR IN THE CASE OF M/S HIGHWAY INDUSTRIES L TD. AND MUNJAL SALES CORPORATION. SO HOWEVER, ON THE BASIS OF THE VARIOU S DECISIONS OF THE TRIBUNAL WHETHER DEDUCTION IS PERMISSIBLE AS REVENU E EXPENDITURE OR NOT DEPENDS UPON THE NATURE OF THE SOFTWARE. REPLACEMEN T OF SOFTWARE OR ITS UP-GRADATION IS ALLOWABLE AS REVENUE EXPENDITURE. S O HOWEVER, ACQUISITION OF SOFTWARE AT FIRST INSTANCE IS CONSID ERED TO BE ON CAPITAL ACCOUNT. WE HARDLY NEED TO MENTION THAT A DECISION IN EACH CASE IS DEPENDANT ON THE BASIS OF FACTS OF THAT CASE. SO HO WEVER THE PRINCIPLE OF LAW FOR ALLOWANCE OF DEDUCTION COULD BE THE TOUCH S TONE ON WHICH THE FACTS HAVE GOT TO BE TESTED. THE SPECIAL BENCH OF T HE TRIBUNAL (DELHI) IS EXPECTED TO DECIDE THE ISSUE SHORTLY. WE ACCORDINGL Y RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WHO IS DIRECTE D TO DECIDE THE ISSUE AFRESH KEEPING IN VIEW THE DECISION OF SPECIAL BENC H RELATING TO THIS ISSUE. IN CASE THE CLAIM OF THE ASSESSEE RELATING T O REVENUE EXPENDITURE IS NOT ALLOWED THE ASSESSING OFFICER IS DIRECTED TO ALLOW DEPRECIATION @ 60% AS APPLICABLE IN THE CASE OF COMPUTERS A AGAINS T 25% ALLOWED TO HIM. WE DIRECT ACCORDINGLY. PURSUANT TO ABOVE THE ASSESSING OFFICER EXAMINED TH E MATTER IN DETAIL AND AGAIN HELD THAT THERE WAS AN ENDURING BENEFIT AND THEREFORE DEPRECIATION CAN BE ALLOWED AND THE EXPEN DITURE WAS HELD TO BE OF CAPITAL NATURE. 4 ON APPEAL BEFORE THE LD. CIT(A) DETAILED SUBMISSI ONS WERE MADE AND HE AGREED WITH THE SAME AND DECIDED T HE ISSUE IN FAVOUR OF ASSESSEE BY FOLLOWING THE ORDER OF THE TRIBUNAL IN CASE OF HERO CYCLES LTD IN ITA NO. 313/CHD/2013. 5 BEFORE US. LD. D.R FOR THE REVENUE STRONGLY SUPPO RTED THE ORDER OF THE ASSESSING OFFICER. 6 ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE MATTER IS COVERED BY THE DECISIO N OF CHANDIGARH BENCH OF THE TRIBUNAL IN CASE OF HERO CY CLES LTD (SUPRA) (COPY OF WHICH WAS FURNISHED BEFORE US). 7 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND T HAT THIS ISSUE IS IDENTICAL TO THE ISSUE WHICH CAME UP FOR C ONSIDERATION OF THE TRIBUNAL WHICH WAS ADJUDICATED IN CASE OF HE RO CYCLES 3 LTD (SUPRA) AND THE SAME WAS ADJUDICATED VIDE PARA 12 TO 14 WHICH ARE AS UNDER: 12. WE FIND THAT THE HON'BLE DELHI HIGH COURT IN CI T V ASAHI INDIA SAFETY GLASS LTD. (SUPRA) HAD ALLOWED THE CLAIM OF SOFTWARE EXPENDITURE AS REVENUE IN NATURE HOLDING AS UNDER : 9. THE REVENUE IN SUPPORT OF ITS STAND HAS TAKEN RECO URSE TO THE TEST OF ENDURING BENEFIT. IT IS IN OUR VIEW NOW SOM EWHAT TRITE TO SAY THAT THE TEST OF ENDURING BENEFIT IS NOT A CERT AIN OR A CONCLUSIVE TEST WHICH THE COURTS CAN APPLY ALMOST B Y ROTE. WHAT IS REQUIRED TO BE SEEN IS THE REAL INTENT AND PURPOSE OF THE EXPENDITURE AND WHETHER THE EXPENDITURE RESULTS IN CREATION OF FIXED CAPITAL FOR THE ASSESSEE. IT IS IMPORTANT TO BEAR IN MIND THAT WHAT IS REQUIRED TO BE SEEN IS NOT WHETHER THE ADVA NTAGE OBTAINED LASTS FOREVER BUT WHETHER THE EXPENSE INCURRED DOES AWAY WITH A RECURRING EXPENSE(S) DEFRAYED TOWARDS RUNNING A BUS INESS AS AGAINST AN EXPENSE UNDERTAKEN FOR THE BENEFIT OF TH E BUSINESS AS A WHOLE. IN OTHER WORDS, THE EXPENDITURE WHICH IS I NCURRED, WHICH ENABLES THE PROFIT MAKING STRUCTURE TO WORK MORE EF FICIENTLY LEAVING THE SOURCE OF THE PROFIT MAKING STRUCTURE U NTOUCHED, WOULD IN OUR VIEW BE AN EXPENSE IN THE NATURE OF REVENUE EXPENDITURE. FINE TUNING BUSINESS OPERATIONS TO ENABLE THE MANAG EMENT TO RUN ITS BUSINESS EFFECTIVELY, EFFICIENTLY AND PROFITABL Y; LEAVING THE FIXED ASSETS UNTOUCHED WOULD BE AN EXPENDITURE IN THE NAT URE OF REVENUE EXPENDITURE EVEN THOUGH THE ADVANTAGE MAY L AST FOR AN INDEFINITE PERIOD. TEST OF ENDURING BENEFIT OR ADVA NTAGE WOULD THUS COLLAPSE IN SUCH LIKE CASES. IT WOULD IN OUR VIEW B E ONLY TRUER IN CASES WHICH DEAL WITH TECHNOLOGY AND SOFTWARE APPLI CATION, WHICH DO NOT IN ANY MANNER SUPPLANT THE SOURCE OF INCOME OR ADDED TO THE FIXED CAPITAL OF THE ASSESSEE. [SEE ALEMBIC CHE MICAL WORKS CO. LTD. V. CIT [1989] 177 ITR 377 / 43 TAXMAN 312 (SC); CIT V. J.K. SYNTHETICS LTD. [2009] 309 ITR 371 / 176 TAXMAN 355 (DELHI) AND INDIAN VISIT.COM (P.) LTD. (SUPRA)]. 9.1 THIS IS THE APPROACH WHICH THE SUPREME COURT HAS A PPLIED EVEN IN CASES WHERE THERE IS A ONCE FOR ALL OR A LU MP SUM PAYMENT. WHAT IS TO BE SEEN IN THE FACTS OF THIS CA SE, AS ALREADY NOTICED BY US HEREINABOVE, THAT THE ASSESSING OFFIC ER AS A MATTER OF FACT HAS RETURNED A FINDING THAT THE EXPENDITURE UNDERTAKEN WAS FOR OVERHAULING THE ACCOUNTANCY OF THE ASSESSEE AND TO EFFICIENTLY TRAIN THE ACCOUNTING STAFF OF THE ASSESSEE. THE TRI BUNAL, WHICH IS DECIDEDLY THE FINAL FACT FINDING AUTHORITY HAS AFTE R NOTICING THE MATERIAL ON RECORD OBSERVED THAT THE EXPENDITURE WA S INCURRED UNDER VARIOUS SUB-HEADS, WHICH INCLUDED LICENCE FEE , ANNUAL TECHNICAL SUPPORT FEE, PROFESSIONAL CHARGES, DATA E NTRY OPERATOR CHARGES, TRAINING CHARGES AND TRAVELLING EXPENSES. THE FINAL FIGURE WAS A CONSOLIDATION OF EXPENSES INCURRED UNDER THES E SUB-HEADS. THE TRIBUNAL, IN OUR VIEW, AND RIGHTLY SO, CAME TO THE CONCLUSION THAT NONE OF THESE RESULTED IN EITHER CREATION OF A NEW ASSET OR BROUGHT FORTH A NEW SOURCE OF INCOME FOR THE ASSESS EE. THE TRIBUNAL CLASSIFIED THE SAID EXPENSES AS BEING RECU RRING IN NATURE TO UPGRADE AND/OR TO RUN THE SYSTEM. 10. IN THE BACKGROUND OF THE AFOREMENTIONED FINDINGS, IT CANNOT BE SAID THAT THE EXPENSES BROUGHT ABOUT IN AN ENDURING BENEFIT TO THE ASSESSEE. THE ASSESSING OFFICER WAS PERHAPS SWAYED BY THE FACT THAT IN THE SUCCEEDING FINANCIAL YEAR, I.E., 1997-9 8 (ASSESSMENT YEAR 1998-99), THE AMOUNT SPENT WAS LARGE. FIRST OF ALL, THE EXTENT OF THE EXPENDITURE CANNOT BE A DECISIVE FACTOR IN D ETERMINING ITS NATURE. AS OBSERVED BY THE TRIBUNAL, THE ASSESSEE I N THE RELEVANT ASSESSMENT YEAR HAD A TURNOVER OF RS. 150 CRORES AN D THAT EVEN WITHOUT THIS EXPENDITURE IT WOULD HAVE CONTINUED TO ACHIEVE THE SAID TURNOVER; THOUGH THE EXPENDITURE INCURRED IN I SSUE WOULD HAVE ENABLED IT TO RUN ITS BUSINESS MORE EFFICIENTL Y. THEREFORE, THE RATIONALE SUPPLIED BY THE ASSESSING OFFICER IN SUPP ORT OF ITS ORDER WHICH FOUND RESONANCE IN SUBMISSIONS OF THE LEARNED COUNSEL FOR 4 THE REVENUE IS, IN OUR VIEW FLAWED AND, HENCE IT WO ULD HAVE TO BE REJECTED. 10.1 SECONDLY, THE MERE FACT THAT THE ASSESSING OFFICER RECORDS THAT THE EXPENDITURE, IN FINANCIAL YEAR 1997-98 (AS SESSMENT YEAR 1998-99), WAS INCURRED TOWARDS WHAT HE TERMS AS AN 'ONGOING PROJECT' WOULD NOT IPSO FACTO GIVE IT A COLOUR OF C APITAL EXPENDITURE. A CAREFUL READING OF THE TRIBUNAL'S JU DGMENT SHOW THAT AFTER NOTICING THE SUBMISSION OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IN THE SAID ASSESSMENT YEAR WA S FOR REMOVING DEFICIENCIES WHICH WERE FOUND IN THE SOFTW ARE INSTALLED IN THE EARLIER ASSESSMENT YEAR, AND THAT, OUT OF A SUM OF RS. 1.71 CRORES A SUM OF RS. 49 LAKHS WAS INCURRED TO MODIFY , CUSTOMIZE AND UPGRADE THE SOFTWARE INSTALLED, WHILE THE BALAN CE EXPENDITURE WAS USED FOR DEVELOPMENT AND IMPLEMENTATION - IT RE TURNED A FINDING THAT THE EXPENSES WERE INCURRED TO UPGRADE AND RUN THE SYSTEM. IN VIEW OF THESE FINDINGS WE ARE OF THE OPI NION THAT ASSESSING OFFICER DISCOVERED AN ERRONEOUS PRINCIPLE ON THE BASIS OF WHICH HE DENIED THE EXEMPTION TO THE ASSESSEE. 11. SOFTWARE IS NOTHING BUT ANOTHER WORD FOR COMPUTER PROGRAMMES, I.E., INSTRUCTIONS, THAT MAKE THE HARDW ARE WORK. SOFTWARE IS BROADLY OF TWO TYPES, I.E., THE SYSTEMS SOFTWARE, WHICH IS ALSO KNOWN AS THE OPERATING SYSTEM WHICH CONTROL S THE WORKING OF THE COMPUTER; WHILE THE OTHER BEING APPLICATIONS SUCH AS WORD PROCESSING PROGRAMS, SPREAD SHEETS AND DATABASE WHI CH PERFORM THE TASKS FOR WHICH PEOPLE USE COMPUTERS. BESIDES T HESE THERE ARE TWO OTHER CATEGORIES OF SOFTWARE, THESE BEING: NETWORK SOFTWARE AND LANGUAGE SOFTWARE. THE NETWORK SOFTWAR E ENABLES GROUPS OF COMPUTERS TO COMMUNICATE WITH EACH OTHER, WHILE LANGUAGE SOFTWARE PROVIDES WITH TOOLS REQUIRED TO W RITE PROGRAMMES. (SEE MICROSOFT COMPUTER DICTIONARY, 5TH EDITION 'SOFTWARE' AT PAGE 489). 12. THE AFORESAID WOULD SHOW THAT WHAT THE ASSESSEE AC QUIRED THROUGH ARTHUR ANDERSON AND ASSOCIATES WAS AN APPLI CATION SOFTWARE WHICH, ENABLED IT TO EXECUTE TASKS IN THE FIELD OF ACCOUNTING, PURCHASES AND INVENTORY MAINTENANCE. TH E FACT THAT THE APPLICATION SOFTWARE WOULD HAVE TO BE UPDATED F ROM TIME TO TIME BASED ON THE REQUIREMENTS OF THE ASSESSEE IN T HE CONTEXT OF THE ADVANCEMENT OF ITS BUSINESS AND/OR ITS DIVERSIF ICATION, IF ANY; THE CHANGES BROUGHT ABOUT DUE TO STATUTORY AMENDMEN TS BY LAW OR BY PROFESSIONAL BODIES LIKE THE INSTITUTE OF CHARTE RED ACCOUNTANTS OF INDIA, WHICH ARE GIVEN THE RESPONSIBILITY OF CON CEIVING AND FORMULATING THE ACCOUNTING STANDARDS FROM TIME TO T IME, AND PERHAPS ALSO, BY REASON OF THE FACT THAT EXPENSES M AY HAVE TO BE INCURRED ON ACCOUNT OF CORRUPTION OF THE SOFTWARE D UE TO UNINTENDED OR INTENDED INGRESS INTO THE SYSTEM - OU GHT NOT GIVE A COLOUR TO THE EXPENDITURE INCURRED AS ONE EXPENDED ON CAPITAL ACCOUNT. GIVEN THE FACT THAT THERE ARE MYRIAD FACTO RS WHICH MAY CALL FOR EXPENSES TO BE INCURRED IN THE FIELD OF SO FTWARE APPLICATIONS, IT CANNOT BE SAID THAT EITHER THE EXT ENT OF THE EXPENSE OR THE EXPENSE BEING INCURRED IN CLOSE PROX IMITY, IN THE SUBSEQUENT YEARS, WOULD BE CONCLUSIVELY DETERMINATI VE OF ITS NATURE. THE ASSESSING OFFICER HAS, IN OUR VIEW, ERR ED PRECISELY FOR THESE VERY REASONS. 13. WE FIND THAT THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT V VOITH PAPER FABRICS INDIA LTD. (SUPRA) HAD ALLOWED THE EXPENDITURE INCURRED ON UP-GRADATION OF THE SOFTWARE TO SUIT TH E NEW REQUIREMENT. 14. IN THE FACTS OF THE PRESENT CASE BEFORE US, AS POINTED OUT BY US IN THE PARAS HEREIN ABOVE, THE ASSESSEE HAD INCURRED A N EXPENDITURE OF RS.55 LACS FOR THE SUPPLY OF INTEGRATED SYSTEM FOR BUSINESS MANAGEMENT WHICH WAS AN ONLINE APPLICATION SYSTEM SOFTWARE. T HE SAID EXPENDITURE WAS INCURRED TO ACQUIRE THE LICENCE TO USE THE SOFT WARE INCLUDING ITS IMPLEMENTATION AND ALSO TRAINING OF THE EMPLOYEES T O WORK ON THE SAID SYSTEM. THE EXPENDITURE INCURRED ON SUCH SOFTWARE WHICH ADMITTEDLY WAS REPLACED AFTER A GAP OF TWO YEARS COULD NOT BE HELD TO HAVE RESULTED IN ENDURING BENEFIT TO THE ASSESSEE. THE SAID EXPENDI TURE HAD BEEN INCURRED 5 FOR INCREASING EFFICIENCY OF THE BUSINESS OF THE AS SESSEE AND AS SUCH WAS ALLOWABLE AS BUSINESS EXPENDITURE. ACCORDINGLY, W E DIRECT THE ASSESSING OFFICER TO ALLOW THE EXPENDITURE OF RS.55 LACS INCU RRED ON SOFTWARE AS REVENUE EXPENDITURE, IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN CIT V ASAHI INDIA SAFETY GLASS LTD. ( SUPRA) AND CIT VS AMWAY INDIA ENTERPRISES (SUPRA). THE GROUND NOS. 1 & 2 RAISED BY THE ASSESSEE ARE, THUS ALLOWED. FROM ABOVE IT BECOMES CLEAR THAT THE DECISION OF SP ECIAL BENCH IN CASE OF AMWAY INDIA ENTERPRISES V DCIT, 114 TTJ 426 (DELHI) WAS OVERRULED BY THE HON'BLE DELHI HIGH COU RT AND SOFTWARE EXPENSES WERE HELD TO BE ALLOWABLE. THERE FORE FOLLOWING OUR ABOVE ORDER WE UPHOLD THE ORDER OF TH E LD. CIT(A). 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 24.7.2014 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 24.7.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR