M/s. Progeon Limited, Bangalore V. ACIT, Bangalore

ITA 1385/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51247 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2003-2004
• Appeal Filed On: 06-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARCHANA CHOWDHARY
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Capital asset; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI BARATHVAJA SANKAR, VICE-PRESIDENT AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.1385(BANG)/2010 (ASSESSMENT YEAR: 2003-04) M/S.PROGEON LTD., NOW: INFOSYS BPO LTD. PLOT NO.26/3, 26/4, 26/6, ELECTRONIC CITY, HOSUR ROAD, BANGALORE-560 100. PAN :AACCP 4467B VS. APPELLANT ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 12(4), BANGALORE. RESPONDENT APPELLANT BY: SHRI PADAMCHAND KHINCHA. RESPONDENT BY : SMT. ARCHANA CHOWDHARY. DATE OF HEARING: 18-8-2011 DATE OF PRONOUNCEMENT: 26-8-2011 O R D E R PER N.BARATHVAJA SANKAR, VP: THIS IS AN APPEAL PREFERRED BY THE ASSESSEE M/S.PR OGEON LTD., NOW KNOWN AS M/S.INFOSYS BPO LTD. FOR THE A SSESSMENT YEAR 2003-04 AGAINST THE APPELLATE ORDER DATED 13-8 -2010 OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-III [CIT(A )], BANGALORE. ITA 1385(BANG)/2010 PAGE 2 OF 8 2. THE SOLITARY ISSUE BROUGHT BEFORE US FOR ADJUDI CATION IS WHETHER THE CIT(A) HAD ERRED IN SUSTAINING THE DISA LLOWANCE IN A SUM OF ` .1,04,11,829/- MADE BY THE ASSESSING OFFICER [AO] HOLDING THAT THE ASSESSEE HAD ACQUIRED INTANGIBLE A SSET GIVING ENDURING BENEFIT IN ACQUIRING APPLICATION SOFTWARE. THE RELEVANT GROUNDS OF APPEAL READ AS UNDER: 1. THE LEARNED ASSESSING OFFICER HAD ERRED IN DISALLOWING THE COST OF APPLICATION SOFTWARE HOLDING THAT THE AMOUNT SPENT ON APPLICATION SOFTWARE IS CAPITAL IN NATURE AND THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CONFIRMING THE SAME. 2. THE LOWER AUTHORITIES HAVE ERRED IN HOLDING THAT THE APPELLANT HAS ACQUIRED INTANGIBLE ASSET GIVING ENDURING BENEFIT AND DISALLOWED THE ENTIRE SUM OF ` .1,04,11,829/- AS CAPITAL EXPENDITURE. ON PROPER APPRECIATION OF FACTS AND LAW APPLICABLE, NO CAPITAL ASSET HAVING ENDURING BENEFIT CAME INTO EXISTENCE. THE DISALLOWANCE BEING CONTRARY TO BOTH FACTS AND LAW IS TO BE DELETED. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, THE AMOUNT SPENT BEING LICENSE FEE WHICH IS REVENUE IN NATURE AND THAT TOO FOR A SMALL PERIOD, NO DISALLOWANCE U/S 37(1) OF THE IT ACT 1961 IS CALLED FOR. 4. THE APPELLANT HAD RIGHTLY CLAIMED THE EXPENDITURE AS BUSINESS EXPENDITURE AND SAME IS TO BE ALLOWED IN FULL. 3. THE BRIEF FACTS AS COLLECTED FROM THE RECORDS A RE THAT WHILE FRAMING THE ASSESSMENT U/S 143(3) OF THE INCO ME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT'], T HE AO NOTICED THAT THE ASSESSEE HAD DEBITED PROFIT AND LOSS ACCOU NT TOWARDS PURCHASE OF COMPUTER SOFTWARE FOR OWN USE UNDER DIF FERENT HEADS AS UNDER: ITA 1385(BANG)/2010 PAGE 3 OF 8 I) COST OF REVENUE ` .40,54,815 II) SELLING AND MARKETING EXPENSES ` .16,417 III) GENERAL AND ADMN. EXPENSES ` .63,40,597 -------------- TOTAL ` `` ` .1,04,11,829 ======== THE ASSESSEE STATED THAT THE COST OF SOFTWARE FOR O WN USE ARE THE APPLICATION SOFTWARE LIKE MS OFFICE, ANTI-VIRUS KIT, TALLY, ETC., WHICH ARE USED FOR DAY-TODAY FUNCTIONING AND THEY A RE VERY MUCH IN THE NATURE OF REVENUE EXPENDITURE AND HENCE THE SAME WERE CHARGED AS EXPENSE. THE AO DID NOT ACCEPT THE PLEA OF THE ASSESSEE. ACCORDING TO HIM, IN VIEW OF THE SPE CIFIC PROVISIONS OF SECTION 32(1)(II) IT IS CLEARLY AN AS SET GIVING ENDURING BENEFIT TO THE ASSESSEE. HENCE, HE DISALLO WED THE CLAIM OF THE ASSESSEE AND TREATED THE SAME AS CAPIT AL EXPENDITURE. HOWEVER, HE ALLOWED 60% OF THE AMOUNT AS DEPRECIATION. WHILE DOING SO, THE AO RELIED ON THE FOLLOWING DECISIONS: I) CIT VS. ARAVALI CONSTRUCTION CO. LTD. ( 215 ITR 30) (RAJ) II) CIT VS. ELECTRON ENGG. CO. LTD . (166 ITR 66), AND III) CIT VS. PREMIER AUTOMOBILES LTD. (206 ITR 1) (BOM) 4. AGGRIEVED, THE ASSESSEE MOVED THE MATTER IN APP EAL BEFORE THE FIRST APPELLATE AUTHORITY BEFORE WHOM IT WAS CONTENDED AS UNDER: ITA 1385(BANG)/2010 PAGE 4 OF 8 A) THE SOFTWARE WAS USED FOR DAY-TODAY FUNCTIONING OF THE BUSINESS, B) THE AMOUNT WAS PAID AS LICENSE FEE FOR THE USE OF SOFTWARE FOR A LIMITED PERIOD OF ONE YEAR, C) BEING A LICENSE FEE FOR A SHORT PERIOD, NEITHER CAP ITAL ASSET CAME INTO EXISTENCE NOR WAS THERE ANY ADVANTA GE OF ENDURING NATURE. D) THE EXPENDITURE DEBITED TO PROFIT AND LOSS ACCOUNT IS AN ALLOWABLE EXPENDITURE U/S 37 OF THE ACT. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE SPE CIAL BENCH (DELHI) OF THIS TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRISES VS. DCIT (114 TTJ 478). AFTER CONSIDERING THE SUBMISSIONS, THE CIT(A) CONFIRMED THE ORDER OF THE AO BY HOLDING THA T THE COST OF APPLICATION OF SOFTWARE AMOUNTING TO ` .1,04,11,829/- WAS CAPITAL IN NATURE. THUS, THE ASSESSEE LOST THE CASE BEFORE THE CIT(A). STILL AGGRIEVED, THE ASSESSEE IS ON SECOND APPEAL BEFORE US. THE GROUNDS RAISED ARE EXTRACTED ELSEWH ERE IN THIS ORDER. 5. AT THE TIME OF HEARING, LEARNED CHARTERED ACCOU NTANT FOR THE ASSESSEE PLACED ON RECORD, COPIES OF THE FO LLOWING: A) SUBMISSIONS FILED BEFORE THE AO VIDE LETTER DT.14-3 -2006; B) WRITTEN SUBMISSIONS FILED BEFORE THE CIT(A) ON 22-9-2009 HE ALSO PLACED ON RECORD COPIES OF THE FOLLOWING DECISIONS/ORDERS: ITA 1385(BANG)/2010 PAGE 5 OF 8 I. CIT VS. M/S.TOYOTA KIRLOSKAR MOTORS PVT.LTD. (JUDGMENT DATED 23-3-2011 OF THE HONBLE KARNATAKA HIGH COURT) II. CIT VS. M/S.RAYCHEM RPG LTD. (JUDGMENT DT.4-7-2011 OF THE HONBLE HIGH COURT OF MUMBAI), III. AMWAY INDIA ENTERPRISES VS. DCIT (2008) [301 ITR (AT) 1] ITAT-SPECIAL BENCH-DELHI; AND IV. IBM INDIA LTD. VS. CIT (2007) 290 ITR (AT) 183. IN ADDITION TO THE ABOVE MATERIALS, HE PLACED ON RE CORD COPIES OF CERTAIN PURCHASE ORDERS TO SHOW THAT THE PERIOD OF LICENSE IS FOR A LIMITED PERIOD ONLY. BY PLACING THE ABOVE MA TERIAL ON RECORD, THE LEARNED C.A. SUBMITTED THAT THE ASSESSE ES CASE IS COVERED BY THE DECISION OF THE HONBLE KARNATAKA HI GH COURT IN THE CASE OF M/S.TOYOTA KIRLOSKAR MOTORS PVT.LTD. (SUPRA) AND ALSO BY THE ORDER OF THE SPECIAL BENCH (DELHI) OF THIS T RIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA). HE HEAVILY RELIED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT AND D REW OUR ATTENTION TO THE FOLLOWING OBSERVATIONS THEREIN: 3. AS RIGHTLY POINTED OUT BY THE AUTHORITIES, WHEN THE LIFE OF A COMPUTER OR SOFTWARE IS LESS THAN TWO YEARS AND AS SUCH, THE RIGHT TO USE IT IS FOR A LIMITED PERIOD, THE FEE PAID FOR ACQUISITION OF THE SAID RIGHT IS ALLOWABLE AS REVENUE EXPENDITURE AND THESE SOFT-WARES IF THEY ARE LICENSED FOR A PARTICULAR PERIOD, FOR UTILIZING THE SAME FOR THE SUBSEQUENT YEARS FRESH LICENSE FEE IS TO BE PAID. THEREFORE, WITHOUT RENEWING THE LICENSE OR WITHOUT PAYING THE FEE ON SUCH RENEWAL, IT IS NOT POSSIBLE TO USE THOSE SOFTWARES. IN THOSE CIRCUMSTANCES, ITA 1385(BANG)/2010 PAGE 6 OF 8 THE FINDINGS RECORDED BY THE AUTHORITIES THAT THE FEE PAID FOR OBTAINING THE SOFTWARE AND THE LICENSE AND FOR RENEWING THE SAME IS TO BE CONSTRUED AS ONLY REVENUE EXPENDITURE DO NOT CALL FOR INTERFERENCE BY THE COURT. THUS IT WAS PLEADED THAT THE POINT AT ISSUE IS COVE RED BY THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA. PER CONTRA, LEARNED DEPARTMENTAL REPRESENTATIVE RE LIED ON THE ORDERS OF THE LOWER AUTHORITIES AND REITERAT ED THE SAME AS HIS SUBMISSIONS. HE ALSO PLEADED THAT NEITHER OF THE LOWER AUTHORITIES HAD RECORDED ANYTHING ABOUT THE PERIOD OF LICENSE IN RESPECT OF SOFTWARE ACQUIRED BY THE ASSESSEE. 6. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED THE FACTS OF THE CASE ON RECORD. IT IS TRUE THAT THE H ONBLE HIGH COURT OF KARNATAKA HAS HELD THAT IF THE PERIOD OF L ICENSE FOR WHICH THE SOFTWARE IS ACQUIRED IS FOR A SHORT PERIO D, THE SAME IS TO BE TREATED AS REVENUE EXPENDITURE. THE SPECIAL BENCH (DELHI) OF THIS TRIBUNAL, IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA), HAS OBSERVED AS UNDER: FOR ASCERTAINING AS TO WHETHER EXPENDITURE ON COMPUTER SOFTWARE GIVES AN ENDURING BENEFIT TO AN ASSESSEE, THE DURATION OF TIME FOR WHICH THE ASSESSEE ACQUIRES RIGHT TO USE THE SOFTWARE BECOMES RELEVANT. HAVING REGARD TO THE FACT THAT SOFTWARE BECOMES OBSOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHIN A SHORT SPAN OF TIME, IT CAN BE ITA 1385(BANG)/2010 PAGE 7 OF 8 SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE I S SHORTER (SAY LESS THAN 2 YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE. THOUGH WE ARE BOUND BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT AND THAT OF THE SPECIAL B ENCH, AS RIGHTLY POINTED OUT BY THE LEARNED DEPARTMENTAL REP RESENTATIVE, NEITHER THE ASSESSMENT ORDER NOR THE APPELLATE ORDE R CONSISTS OF ANY DISCUSSION REGARDING THE LENGTH OF THE PERIOD F OR WHICH SOFTWARE WAS ACQUIRED AGAINST THE PAYMENT OF LICENS E FEE. IN SUCH FACTS AND CIRCUMSTANCES, WE DEEM IT FIT AND PR OPER TO RESTORE THIS MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO LOOK INTO THE LENGTH OF PERIODS OF EACH SOFTWARE AC QUIRED DURING THE ASSESSMENT YEAR UNDER QUESTION AND THEN TO APPL Y THE PRINCIPLES LAID DOWN BY THE HONBLE HIGH COURT AND THE SPECIAL BENCH CITED SUPRA. IN OTHER WORDS, IN PRINCIPLE, T HE AO HAS TO FOLLOW THE DECISION OF THE HONBLE HIGH COURT AND S PECIAL BENCH CITED SUPRA BUT AFTER VERIFICATION OF THE LENGTH OF THE PERIOD OF EACH SOFTWARE ACQUIRED BY THE ASSESSEE. 7. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH AUGUST, 2011. SD/- SD/- (GEORGE GEORGE K) JUDICIAL MEMBER (N.BHARATHVAJA SANKAR) VICE-PRESIDENT PLACE : BANGALORE DATED: 26 TH AUGUST, 2011. ITA 1385(BANG)/2010 PAGE 8 OF 8 EKS COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE