Samit Enterprises Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 1926/DEL/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 7460 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2006-2007
• Appeal Filed On: 29-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KISHORE B
• Keywords: Depreciation; Capital expenditure
• Section: 37(1)

Judgement Text

ITA NO.1926/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO.1926/DEL/2010 ASSTT. YEAR: 2006-07 SAMIT ENTERPRISES PVT. LTD., VS ASSTT. COM MISSIONER OF INCOME TAX, II FLOOR, BLOCK-B, CI RCLE 7(1), NEW DELHI. VATIKA ATRTIUM, SECTOR ROAD, DLF PHASE-V, GURGAON. (PAN/GIR NO.AAACS0463Q) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI K. SAMPATH RESPONDENT BY: SHRI KISHORE B., SR. DR O R D E R PER G.E. VEERABHADRAPPA, V.P. THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDE R OF CIT(A)-X, NEW DELHI DATED 18.2.2010 FOR ASSTT. YEAR 2006-07. 2. THE ONLY DISPUTE IN THIS APPEAL RELATES TO TREAT ING THE SOFTWARE DEVELOPMENT CHARGES OF RS.16,27,888 AS CAPITAL EXPE NDITURE. ACCORDING TO THE ASSESSEE, THE SAID EXPENDITURE SHOULD HAVE BEEN TREATED AS REVENUE IN NATURE. THE ASSESSEE IS A LIMITED COMPANY AND WAS ENGAGED IN REPRESENTING MANY OVERSEAS BASED COMPANIES PROMOTING THEIR CAPAB ILITIES AND EXPERTISE IN ITA NO.1926/DEL/2010 2 THE OIL AND GAS INDUSTRY IN INDIA. THE AO PRODUCED THE DETAILS OF SOFTWARE DEVELOPMENT EXPENSES AND ACCORDING TO HIM, THESE EX PENSES HAVE BEEN INCURRED TO DEVELOP GENERIC PROCESS ENGINE, SPECIFI C PLUG/INS FOR BUSINESS PROCESS. THE ACTIVITIES CARRIED OUT DURING THE DEV ELOPMENT OF THESE ABOVE STATED PRODUCTS ARE THINGS LIKE SOFTWARE ARCHITECT URE DESIGN MODELS, DATA BASE DESIGN, FRONT END PROTOTYPE GUI DESIGN ETC. ACCORDING TO HIM, THESE EXPENDITURES CONSTITUTE CAPITAL EXPENDITURE AS THIS SOFTWARE HAS BEEN DEVELOPED BY THE ASSESSEE FOR LONG TERM USE AND THE Y COMPRISE THE BASIC PLANT AND MACHINERY OF THE ASSESSEES BUSINESS. TH E ASSESSEE, ACCORDING TO AO, IS DERIVING AN ADVANTAGE OF ENDURING NATURE FRO M THESE EXPENSES. ACCORDINGLY, THE AO TREATED THESE EXPENDITURES TO B E CAPITAL IN NATURE AND ALLOWED DEPRECIATION AT 60%. THE ASSESSEE WAS UNSU CCESSFUL BEFORE THE CIT(A) AND IS BEFORE US. THE ASSESSEE FILED THE DE TAILS OF THESE EXPENDITURES IN THE PAPER BOOK FILED BY HIM AND HE HAS ALSO PROD UCED THE COPY OF AGREEMENT BETWEEN THE ASSESSEE COMPANY AND THE SOFT WARE DEVELOPMENT COMPANY KNOWN AS VENIRE IT LTD., GURGAON. THE AGRE EMENT INCLUDED DETAILS WITH REGARD TO THE WORK PRODUCT RESPONSIBIL ITY, RESOURCE ROLE AND THE DISCIPLINE AND PROCESS ETC. ACCORDING TO THE ASSES SEE, THE SOFTWARE DEVELOPER AFTER ATTEMPTING MANY TIMES, FAILED IN HI S JOB. HE DID PARTIAL DOCUMENTATION OF THE SOFTWARE PRODUCT ARCHITECTURE AND CREATED AND ITA NO.1926/DEL/2010 3 DEVELOPED CERTAIN INITIAL MODULES, BUT WHILE SO DOI NG FOR A WHILE, THE SOFTWARE ARCHITECT OF THE SUPPLIER COMPANY LEFT THE SERVICES OF THAT COMPANY WHEREAFTER THAT COMPANY WAS CONSTRAINED TO SOURCE A NOTHER SOFTWARE ARCHITECT TO CARRY OUT AND CONCLUDE THE DEVELOPMENT . THE NEW ARCHITECT WANTED TO DISCARD ALL THE DEVELOPMENTAL WORK DONE B Y THE PREVIOUS ARCHITECT INDICATING THAT THROUGH HIS NEW METHODOLOGY HE WOUL D ADD MORE FEATURES. HOWEVER, REALIZING THAT SUCH WAS ONLY A TRADE GIMMI CK, THE ASSESSEE INSISTED ON OBTAINING THE REFUND AFTER THE CLOSURE OF THE CO NTRACT. ACCORDING TO HIM, THE SOFTWARE DID NOT GO TO PROVIDE ANY ENDURING BEN EFIT AS THE SOFTWARE NEVER SAW THE LIGHT OF THE DAY AND THERE WAS NO QUESTION OF ANY ENDURING BENEFIT. THE EXPENDITURE WAS OPERATIVE AND THAT BEING THE CA SE AND HAVING BEEN INCURRED NECESSARILY AND EXCLUSIVELY FOR THE PURPOS E OF BUSINESS, IT QUALIFIED TO BE AN ALLOWABLE EXPENDITURE IN TERMS OF SECTION 37(1) OF THE I.T.ACT, 1961. HOWEVER, THE ASSESSEE HAS ALSO RELIED UPON THE DECI SION OF SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES VS DCIT 111 ITD 112 AND THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS INDIA N VISIT.COM (P) LTD. 219 CTR (DEL) 603 AND ALSO THE DECISION OF CIT VS SOUT HERN ROADWAYS LTD. 304 ITR 84 (MAD). ITA NO.1926/DEL/2010 4 3. LD. DR, ON THE OTHER HAND, STRONGLY SUPPORTED TH E IMPUGNED ORDERS. ACCORDING TO HIM, THE EXPENDITURE IN QUESTION ARE C ORRECTLY TREATED AS CAPITAL IN NATURE. 4. WE HAVE CAREFULLY GONE THROUGH THE RECORDS INCLU DING THE AGREEMENT AS ALSO THE DECISIONS RELIED UPON BY THE PARTIES. THE ASSESSEE DISPUTED THE VARIOUS CONCLUSIONS REACHED BY THE A.O BY INSISTING THAT THERE WAS NO ENDURING BENEFIT IN THE AFORESAID EXPENDITURE AND N O ASSET HAS COME INTO EXISTENCE. ACCORDING TO THE ASSESSEE, THE SOFTWARE DEVELOPER AFTER ATTEMPTING MANY TIMES, FAILED IN HIS JOB. THE AO HAS NOT GIVEN ANY SPECIFIC FINDING ON THESE CONTENTIONS NOR DOES THE CIT (APPEALS). IN OU R VIEW THE ISSUE REQUIRES EXAMINATION, IN THE LIGHT OF PROPOSITIONS LAID DOWN BY THE SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES CITED SUPRA. T HE AO SHALL REFRAME THE ISSUE, AFTER GOING THROUGH THE DETAILS FURNISHED BY THE ASSESSEE AND IN THE LIGHT OF THE PRINCIPLES AND GUIDELINES GIVEN BY THE SPECIAL BENCH. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TRE ATED TO BE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13.08.2010. SD/- SD/- ( A.D. JAIN ) (G.E. VEERABHADRAPPA) JUDICIAL MEMBER VICE PRESIDENT DT. 13 TH AUGUST 2010 GS ITA NO.1926/DEL/2010 5 COPY FORWARDED TO: 1. SAMIT ENTERPRISES (P) LTD., GURGAON. 2. ACIT CIRCLE 7(1), NEW DELHI. 3. ITO, WARD 9(4), NEW DELHI 4. CIT(A)-X, NEW DELHI. 5. CIT 5. DR BY ORDER DY. REGISTRAR