M/s Hero Cycles Ltd., Ludhiana V. ACIT, Ludhiana

ITA 191/CHANDI/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68495 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2001-2002
• Appeal Filed On: 18-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 244A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R.SOOD ACCOUNTANT MEMBER ITA NO.191/CHD/2013 ASSESSMENT YEAR : 2001-02 M/S HERO CYCLES LTD., VS THE ACIT, G.T.ROAD, HERO NAGAR, CIRCLE-V, LUDHIANA. LUDHIANA. PAN : AAACH-4073P (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SUBHASH AGG ARWAL RESPONDENT BY : SHRI MANJIT SINGH DATE OF HEARING : 11.09.2013 DATE OF PRONOUNCEMENT : 13.09.2013 O R D E R PER T.R.SOOD, AM THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER DATED 28.12.2012, PASSED BY THE LD. CIT(APPEALS) LU DHIANA U/S 250(6) OF THE INCOME-TAX ACT,1961 ( IN SHORT T HE ACT ). 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOLL OWING GROUND OF APPEAL : 1. THAT THE LD. CIT(APPEALS)-II HAS ERRED IN CONFI RMING THE CAPITALIZATION OF A SUM OF RS.1,24,48,000/- BEING T HE COST OF SOFTWARE EXPENSES. 2. THAT THE ACTION OF THE CIT(APPEALS)-II IN CONFIR MING THE ORDER OF THE ASSESSING OFFICER IS AGAINST THE LAW A ND FACTS OF CASE. 3. THAT THE LD. CIT(APPEALS)-II HAS ERRED IN CONFIR MING THE WITHDRAWAL IF INTEREST UNDER SECTION 244A AT RS.2,68,247/-. 3. OUT OF THE ABOVE, GROUND NO.3 WAS NOT PRESSED AT THE TIME OF HEARING. THEREFORE, THE SAME IS DISMISSED AS NO T PRESSED. 2 GROUND NOS. 1 & 2 4. AFTER HEARING BOTH THE PARTIES, WE FIND THAT DUR ING ASSESSMENT PROCEEDINGS, ASSESSING OFFICER NOTICED T HAT ASSESSEE HAS PURCHASED SOME SOFTWARE IN THE FORM OF SAP APPLICATIONS WHICH WAS NOT ALLOWED AS REVENUE EXPEN DITURE AND MATTER TRAVELED TO TRIBUNAL. THE TRIBUNAL SET ASID E THE ORDER AND ASKED THE ASSESSING OFFICER TO DETERMINE THE NA TURE OF SOFTWARE EXPENSES IN VIEW OF DECISION OF SPECIAL BE NCH IN CASE OF AMWAY (INDIA) ENTERPRISES VS DCIT 114 TTJ 276. DURING SET ASIDE PROCEEDINGS, ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS INSTALLED A NEW SOFTWARE WHICH WAS USED FOR THE PUR POSE OF INCREASING THE EFFICIENCY OF THE COMPANY. THEREFOR E, THIS TEST WAS AGAINST THE ASSESSEE. THE SECOND TEST OF ENDUR ING BENEFIT WAS ALSO HELD TO BE AGAINST THE ASSESSEE BECAUSE AS SESSEE COULD NOT SHOW ANYTHING THAT SOFTWARE WAS BEING UPG RADED FREQUENTLY. THE LAST TEST WAS ALSO HELD AGAINST TH E ASSESSEE BECAUSE ASSESSEE COULD NOT SUBSTANTIATE ON THIS CON TENTION AND RATHER ACCEPTED THE FACT THAT PURCHASE OF SOFTWARE HAS HELPED THE ASSESSEE IN HIS VARIOUS OPERATIONS AND INCREASE D THE EFFICIENCY. IN THE LIGHT OF THESE OBSERVATIONS, TH E SOFTWARE EXPENSES WERE HELD TO BE CAPITAL IN NATURE AND 25% DEPRECIATION WAS ALLOWED. 5. ON APPEAL, THE ORDER OF ASSESSING OFFICER HAS BE EN CONFIRMED BY LD. CIT(APPEALS). 6. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE O RDER OF 3 TRIBUNAL FOR ASSESSMENT YEAR 1998-99 IN ITA NO. 313/CHD/2013. 7. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDER OF CIT(APPEALS). 8. AFTER HEARING RIVAL SUBMISSIONS, WE FIND THAT TH IS ISSUE WAS ADJUDICATED BY THE TRIBUNAL VIDE PARA 9 TO 14 W HICH READS AS UNDER : 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING IN THE PRESENT APPEAL IS WHETHER THE COMPUTER EXPENDITURE INCURRED BY THE ASSESSEE AT RS.55 LACS WAS CAPITAL OR REVENUE EXPENDITURE IN NATURE. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD MADE A PURCHASE OF RS.55 LACS FRO M HERO CORPORATE SERVICES LTD. AND THE NARRATION IN THE BI LL WAS SUPPLY OF INTEGRATED SYSTEM FOR BUSINESS MANAGEMENT ONLI NE SYSTEM APPLICATION SOFTWARE (REMAINING MODULES) AND PROFES SIONAL SERVICES RENDERED AND CUSTOMER SUPPORT FOR THE ABOV E, TOTALING RS.55,00,000/-.. 10. THE ASSESSEE DURING THE APPELLATE PROCEEDINGS B EFORE CIT(APPEALS) HAD FILED LETTER DATED 30.10.2010 EXPL AINING THE NATURE OF THE SOFTWARE PURCHASED DURING THE YEAR, W HICH IS AS UNDER : 'THIS SOFTWARE APPLICATION HAS MERELY FACILITATED T HE ASSESSEE'S OPERATION AT DIFFERENT ANGLES AND ENABLE D TO CARRY ON COMPANY 'S BUSINESS MORE EFFICIENTLY. ' AS ALREADY MENTIONED ABOVE, THERE WAS NO ADVANTAGE OF THIS SOFTWARE IN THE CAPITAL FIELD, NOR THIS SOFTWARE HA S INCREASED THE PRODUCTION. THIS SOFTWARE IS A MERELY SUPPLEMENT OR REPLACEMENT OF HUMAN LABOUR WHICH HELPS IN DOING WORK MORE EFFI CIENTLY. THIS SOFTWARE HAD ENHANCED THE EFFICIENCY OF THE OPERATI ON AND WAS NOT AN AID IN THE MANUFACTURING PROCESS AND THEREFORE T HERE IS NO ENDURING BENEFIT. (III) THE EXPENSES INCURRED ARE RELATING TO ACQUIRI NG LICENSE TO USE THE SOFTWARE, IMPLEMENTATION THEREOF, TRAINING TO E MPLOYEE ETC. (IV) IN VIEW OF THE TECHNOLOGICAL CHANGES IN THE PR ESENT WORLD, NO ENDURING BENEFIT CAN BE SAID TO ACCRUE TO THE AS SESSEE. REFERENCE MAY BE MADE TO THE DECISION OF HON'BLE SU PREME COURT IN THE CASE OF ALEMBIC CHEMICALS WORKS CO. LT D VS CIT, 177 ITR 377 & CIT VS MADRAS AUTO SERVICES PVT. LTD, 233 ITR 468 (SC). 11. IN THE FIRST ROUND OF PROCEEDINGS, THE CLAIM OF EXPENDITURE WAS DENIED TO THE ASSESSEE BY THE ASSESSING OFFICER WHICH IN-TURN WAS ALLOWED BY THE CIT(APPEALS). HOWEVER, THE TRIB UNAL SET ASIDE 4 THE MATTER TO THE FILE OF ASSESSING OFFICER IN VIEW OF THE RATIO LAID DOWN BY THE SPECIAL BENCH OF DELHI TRIBUNAL IN AMWA Y INDIA ENTERPRISES VS DCIT (SUPRA). WE FIND THAT THE HON' BLE DELHI HIGH COURT IN CIT V AMWAY INDIA ENTERPRISES (SUPRA) HAD REVERSED THE ORDER OF THE TRIBUNAL AND HELD THAT THE EXPENDITURE INCURRED ON PURCHASE OF SOFTWARE EXPENSES WAS TO BE ALLOWED AS REVENUE EXPENDITURE HOLDING THE SAID EXPENDITURE AS BUSINES S EXPENDITURE. RELIANCE WAS PLACED ON THE EARLIER RATIO LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN CIT V ASAHI INDIA SAFETY GLASS LTD. (SUPRA). 12. WE FIND THAT THE HON'BLE DELHI HIGH COURT IN CI T V ASAHI INDIA SAFETY GLASS LTD. (SUPRA) HAD ALLOWED THE CLA IM 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 SOMEWHAT TR ITE TO SAY THAT THE TEST OF ENDURING BENEFIT IS NOT A CERTAIN OR A CONC LUSIVE TEST WHICH THE COURTS CAN APPLY ALMOST BY ROTE. WHAT IS REQUIRED T O BE SEEN IS THE REAL INTENT AND PURPOSE OF THE EXPENDITURE AND WHETHER T HE EXPENDITURE RESULTS IN CREATION OF FIXED CAPITAL FOR THE ASSESS EE. IT IS IMPORTANT TO BEAR IN MIND THAT WHAT IS REQUIRED TO BE SEEN IS NO T WHETHER THE ADVANTAGE OBTAINED LASTS FOREVER BUT WHETHER THE EX PENSE INCURRED DOES AWAY WITH A RECURRING EXPENSE(S) DEFRAYED TOWA RDS RUNNING A BUSINESS AS AGAINST AN EXPENSE UNDERTAKEN FOR THE B ENEFIT OF THE BUSINESS AS A WHOLE. IN OTHER WORDS, THE EXPENDITUR E WHICH IS INCURRED, WHICH ENABLES THE PROFIT MAKING STRUCTURE TO WORK M ORE EFFICIENTLY LEAVING THE SOURCE OF THE PROFIT MAKING STRUCTURE U NTOUCHED, WOULD IN OUR VIEW BE AN EXPENSE IN THE NATURE OF REVENUE EXP ENDITURE. FINE TUNING BUSINESS OPERATIONS TO ENABLE THE MANAGEMENT TO RUN ITS BUSINESS EFFECTIVELY, EFFICIENTLY AND PROFITABLY; L EAVING THE FIXED ASSETS UNTOUCHED WOULD BE AN EXPENDITURE IN THE NATURE OF REVENUE EXPENDITURE EVEN THOUGH THE ADVANTAGE MAY LAST FOR AN INDEFINITE PERIOD. TEST OF ENDURING BENEFIT OR ADVANTAGE WOULD THUS COLLAPSE IN SUCH LIKE CASES. IT WOULD IN OUR VIEW BE ONLY TRUER IN CASES WHICH DEAL WITH TECHNOLOGY AND SOFTWARE APPLICATION, WHICH DO NOT IN ANY MANNER SUPPLANT THE SOURCE OF INCOME OR ADDED TO THE FIXED CAPITAL OF THE ASSESSEE. [SEE ALEMBIC CHEMICAL WORKS CO. LTD. V. C IT [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 LUMP SUM P AYMENT. WHAT IS TO BE SEEN IN THE FACTS OF THIS CASE, AS ALREADY NOTIC ED BY US HEREINABOVE, THAT THE ASSESSING OFFICER 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 ACCOUN TING STAFF OF THE ASSESSEE. THE TRIBUNAL, WHICH IS DECIDEDLY THE FINA L FACT FINDING AUTHORITY HAS AFTER NOTICING THE MATERIAL ON RECORD OBSERVED THAT THE EXPENDITURE WAS INCURRED UNDER VARIOUS SUB-HEADS, W HICH INCLUDED LICENCE FEE, ANNUAL TECHNICAL SUPPORT FEE, PROFESSI ONAL CHARGES, DATA ENTRY OPERATOR CHARGES, TRAINING CHARGES AND TRAVEL LING EXPENSES. THE FINAL FIGURE WAS A CONSOLIDATION OF EXPENSES INCURR ED UNDER THESE SUB- HEADS. THE TRIBUNAL, IN OUR VIEW, AND RIGHTLY SO, C AME TO THE CONCLUSION THAT NONE OF THESE RESULTED IN EITHER CR EATION OF A NEW ASSET OR BROUGHT FORTH A NEW SOURCE OF INCOME FOR THE ASS ESSEE. THE TRIBUNAL CLASSIFIED THE SAID EXPENSES AS BEING RECURRING IN NATURE TO UPGRADE AND/OR TO RUN THE SYSTEM. 5 10. IN THE BACKGROUND OF THE AFOREMENTIONED FINDINGS, IT CANNOT BE SAID THAT THE EXPENSES BROUGHT ABOUT IN AN ENDURING BENE FIT TO THE ASSESSEE. THE ASSESSING OFFICER WAS PERHAPS SWAYED BY THE FAC T THAT IN THE SUCCEEDING FINANCIAL YEAR, I.E., 1997-98 (ASSESSMEN T YEAR 1998-99), THE AMOUNT SPENT WAS LARGE. FIRST OF ALL, THE EXTEN T OF THE EXPENDITURE CANNOT BE A DECISIVE FACTOR IN DETERMINING ITS NATU RE. AS OBSERVED BY THE TRIBUNAL, THE ASSESSEE IN THE RELEVANT ASSESSME NT YEAR HAD A TURNOVER OF RS. 150 CRORES AND THAT EVEN WITHOUT TH IS EXPENDITURE IT WOULD HAVE CONTINUED TO ACHIEVE THE SAID TURNOVER; THOUGH THE EXPENDITURE INCURRED IN ISSUE WOULD HAVE ENABLED IT TO RUN ITS BUSINESS MORE EFFICIENTLY. THEREFORE, THE RATIONALE SUPPLIED BY THE ASSESSING OFFICER IN SUPPORT OF ITS ORDER WHICH FOUND RESONAN CE IN SUBMISSIONS OF THE LEARNED COUNSEL FOR THE REVENUE IS, IN OUR V IEW FLAWED AND, HENCE IT WOULD HAVE TO BE REJECTED. 10.1 SECONDLY, THE MERE FACT THAT THE ASSESSING OFFICER RECORDS THAT THE EXPENDITURE, IN FINANCIAL YEAR 1997-98 (ASSESSMENT YEAR 1998-99), WAS INCURRED TOWARDS WHAT HE TERMS AS AN 'ONGOING PROJE CT' WOULD NOT IPSO FACTO GIVE IT A COLOUR OF CAPITAL EXPENDITURE. A CA REFUL READING OF THE TRIBUNAL'S JUDGMENT SHOW THAT AFTER NOTICING THE SU BMISSION OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IN THE SAID ASSESSMENT YEAR WAS FOR REMOVING DEFICIENCIES WHICH WERE FOUND IN THE S OFTWARE 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, CUSTOMI ZE AND UPGRADE THE SOFTWARE INSTALLED, WHILE THE BALANCE EXPENDITURE W AS USED FOR DEVELOPMENT AND IMPLEMENTATION - IT RETURNED A FIND ING THAT THE EXPENSES WERE INCURRED TO UPGRADE AND RUN THE SYSTE M. IN VIEW OF THESE FINDINGS WE ARE OF THE OPINION THAT ASSESSING OFFICER DISCOVERED AN ERRONEOUS PRINCIPLE ON THE BASIS OF WHICH HE DEN IED THE EXEMPTION TO THE ASSESSEE. 11. SOFTWARE IS NOTHING BUT ANOTHER WORD FOR COMPUTER PROGRAMMES, I.E., INSTRUCTIONS, THAT MAKE THE HARDWARE WORK. SO FTWARE IS BROADLY OF TWO TYPES, I.E., THE SYSTEMS SOFTWARE, WHICH IS ALS O KNOWN AS THE OPERATING SYSTEM WHICH CONTROLS THE WORKING OF THE COMPUTER; WHILE THE OTHER BEING APPLICATIONS SUCH AS WORD PROCESSIN G PROGRAMS, SPREAD SHEETS AND DATABASE WHICH PERFORM THE TASKS FOR WHICH PEOPLE USE COMPUTERS. BESIDES THESE THERE ARE TWO OTHER CA TEGORIES OF SOFTWARE, THESE BEING: NETWORK SOFTWARE AND LANGUAG E SOFTWARE. THE NETWORK SOFTWARE ENABLES GROUPS OF COMPUTERS TO COM MUNICATE WITH EACH OTHER, WHILE LANGUAGE SOFTWARE PROVIDES WITH T OOLS REQUIRED TO WRITE PROGRAMMES. (SEE MICROSOFT COMPUTER DICTIONAR Y, 5TH EDITION 'SOFTWARE' AT PAGE 489). 12. THE AFORESAID WOULD SHOW THAT WHAT THE ASSESSEE AC QUIRED THROUGH ARTHUR ANDERSON AND ASSOCIATES WAS AN APPLICATION S OFTWARE WHICH, ENABLED IT TO EXECUTE TASKS IN THE FIELD OF ACCOUNT ING, PURCHASES AND INVENTORY MAINTENANCE. THE FACT THAT THE APPLICATIO N SOFTWARE WOULD HAVE TO BE UPDATED FROM TIME TO TIME BASED ON THE R EQUIREMENTS OF THE ASSESSEE IN THE CONTEXT OF THE ADVANCEMENT OF ITS B USINESS AND/OR ITS DIVERSIFICATION, IF ANY; THE CHANGES BROUGHT ABOUT DUE TO STATUTORY AMENDMENTS BY LAW OR BY PROFESSIONAL BODIES LIKE TH E INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, WHICH ARE GIVEN THE RESPONSIBILITY OF CONCEIVING AND FORMULATING THE ACCOUNTING STANDARDS FROM TIME TO TIME, AND PERHAPS ALSO, BY REASON OF THE FACT THAT EXPENSES MAY HAVE TO BE INCURRED ON ACCOUNT OF CORRUPTION OF THE SOFTWAR E DUE TO UNINTENDED OR INTENDED INGRESS INTO THE SYSTEM - OUGHT NOT GIV E A COLOUR TO THE EXPENDITURE INCURRED AS ONE EXPENDED ON CAPITAL ACC OUNT. GIVEN THE FACT THAT THERE ARE MYRIAD FACTORS WHICH MAY CALL F OR EXPENSES TO BE 6 INCURRED IN THE FIELD OF SOFTWARE APPLICATIONS, IT CANNOT BE SAID THAT EITHER THE EXTENT OF THE EXPENSE OR THE EXPENSE BEI NG INCURRED IN CLOSE PROXIMITY, IN THE SUBSEQUENT YEARS, WOULD BE CONCLU SIVELY DETERMINATIVE OF ITS NATURE. THE ASSESSING OFFICER HAS, IN OUR VIEW, ERRED 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 AL LOWED THE EXPENDITURE INCURRED ON UP-GRADATION OF THE SOFTWAR E TO SUIT THE 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 INCU RRED AN EXPENDITURE OF RS.55 LACS FOR THE SUPPLY OF INTEGRA TED SYSTEM FOR BUSINESS MANAGEMENT WHICH WAS AN ONLINE APPLICATION SYSTEM SOFTWARE. THE SAID EXPENDITURE WAS INCURRED TO ACQ UIRE THE LICENCE TO USE THE SOFTWARE INCLUDING ITS IMPLEMENTATION AN D ALSO TRAINING OF THE EMPLOYEES TO WORK ON THE SAID SYSTEM. THE E XPENDITURE INCURRED ON SUCH SOFTWARE WHICH ADMITTEDLY WAS REPL ACED AFTER A GAP OF TWO YEARS COULD NOT BE HELD TO HAVE RESULTED IN ENDURING BENEFIT TO THE ASSESSEE. THE SAID EXPENDITURE HAD BEEN INCURRED FOR INCREASING EFFICIENCY OF THE BUSINESS OF THE ASSESS EE AND AS SUCH WAS ALLOWABLE AS BUSINESS EXPENDITURE. ACCORDINGL Y, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE EXPENDITURE OF RS.55 LACS INCURRED ON SOFTWARE AS REVENUE EXPENDITURE, IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN CIT V ASAHI INDI A SAFETY GLASS LTD. (SUPRA) AND CIT VS AMWAY INDIA ENTERPRISES (SU PRA). THE GROUND NOS. 1 & 2 RAISED BY THE ASSESSEE ARE, THUS ALLOWED. 9. FOLLOWING THE ABOVE ORDER, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH SEPTEMBER,2013. SD/- SD/- (BHAVNESH SAINI) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 13 TH SEPTEMBER, 2013. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR ITAT, CHD.