The DCIT, Circle-4, Ahmedabad V. Gates Information Systems Pvt.Ltd., Ahmedabad

ITA 3486/AHD/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 50817 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 30-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K PATEL
• Keywords: Capital asset; Depreciation; Capital expenditure

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD , .'.#$%, '& ' ' BEFORE SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ./ I.T.A. NO.3486/AHD/2010 ( ) * ) * ) * ) * / / / / ASSESSMENT YEAR : 2006-07) THE DCIT CIRCLE-4 AHMEDABAD ) ) ) ) / VS. GAYTES INFORMATION SYSTEMS PVT.LTD. 511, SAKAR-V, MITHAKHALI RAILWAY CROSSING NAVRANGPURA AHMEDABAD + '& ./,- ./ PAN/GIR NO. : AABCG 3740 R ( +. / // / APPELLANT ) .. ( /0+. / RESPONDENT ) +. 1 ' / APPELLANT BY : SHRI A.K. PATEL, D.R. /0+. 2 1 ' / RESPONDENT BY : - NONE - )3 2 & / / / / DATE OF HEARING : 30/09/2011 4$* 2 & / DATE OF PRONOUNCEMENT : 14.10.11 '5 / O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE REVENUE WHIC H HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-XX AHMEDABAD DATED 12-10-2010 PASSED FOR A.Y. 2006-07 AND THE GROUNDS RAISED ARE AS FOLLOWS:- 1.1. THE LEARNED CIT(A)-XX, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF ITA NO.3486/AHD /2010 DCIT VS. GAYTES INFORMATION SYSTEMS P.LTD. ASST.YEAR - 2006-07 - 2 - RS.7,32,118/ - MADE BY THE ASSESSING OFFICER BY TREATING THE EXPENDITURE ON HARDWARE AND COMPUTER CONSUMABLES AS CAPITAL EXPENDITURE. 1.2. IN DOING SO, THE LEARNED CIT(A) HAS ERRED DIN LAW A ND ON FACTS IN NOT APPRECIATING THAT AS A RESULT OF IN CURRING OF THE AFORESAID EXPENDITURE TOWARDS HARDWARE AND COMPUTER CONSUMABLES, THE ASSESSEE HAD DERIVED BENE FIT WHICH IS OF ENDURING NATURE AND THEREFORE THE SAID EXPENDITURE WAS RIGHTLY TREATED AS CAPITAL EXPENDIT URE BY THE ASSESSING OFFICER. 1.3. IN DOING SO, THE LEARNED CIT(A) HAS ERRED IN LAW AN D ON FACTS IN NOT APPRECIATING THAT THE SAID EXPENDITURE INCURRED WAS NOT FOR THE PURPOSE OF RUNNING OF BUSI NESS ON DAY-TO-DAY BASIS BUT WAS INCURRED TO SUPPORT THE APPLICATION OF SOFTWARE DEVELOPED BY THE ASSESSEE COMPANY WHICH RESULTED IN A BENEFIT OF ENDURING NA TURE OF THE ASSESSEE. 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S.143(3) OF THE ACT DATED 29/12/200 6 WERE THAT THE ASSESSEE-COMPANY IS IN THE BUSINESS OF SOFTWARE DE VELOPMENT. IN THE P&L ACCOUNT, AN EXPENDITURE OF RS.18,30,293/ - WAS DEBITED BEING AN EXPENDITURE STATED TO BE INCURRED ON HARD WARE AND COMPUTER CONSUMABLES. THE AO HAS ALSO NOTED THAT INCOME SHOWN BY THE ASSESSEE FROM SOFTWARE DEVELOPMENT WAS AT RS .67,88,380/-. AS PER AOS CALCULATION THE EXPENDITURE WAS 27% ON HARDWARE AND COMPUTER CONSUMABLES AS AGAINST THE TOTAL INCOME DE CLARED. IT WAS INFORMED THAT THE ITEMS PURCHASED AND CLAIMED AS AN EXPENDITURE WERE IN SUPPORT OF THE APPLICATION OF SOFTWARE DEVE LOPMENT. THE AO WAS OF THE VIEW THAT THE EXPENDITURE WAS CAPITAL IN NATURE ITA NO.3486/AHD /2010 DCIT VS. GAYTES INFORMATION SYSTEMS P.LTD. ASST.YEAR - 2006-07 - 3 - THEREFORE ALLOWED THE DEPRECIATION @ 60% I.E. AN AM OUNT OF RS.10,98,176/- AND THE BALANCE AMOUNT OF RS.7,32,10 8/- WAS DISALLOWED. THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 3. HAVING HEARD THE SUBMISSIONS, LD.CIT(A) HAS OPIN ED AS UNDER:- 4.2. DURING THE COURSE OF APPELLATE PROCEEDINGS TH E AR OF THE APPELLANT STATED THAT THE COMPUTER HARDWARE PURCHAS ED WAS UTILIZED BY THE APPELLANT IN MANUFACTURING MACHINES WHICH WERE SOLD AS KIOSKS BY THE APPELLANT. THE AR EXPL AINED THAT HARDWARE AND COMPUTER CONSUMABLES ARE ESSENTIAL FOR DEVELOPING VARIOUS KIOSK UNITS WHICH WAS SOLD BY TH E APPELLANT. 4.3. I HAVE GONE THROUGH THE ASSESSMENT ORDER AS AL SO THE SUBMISSIONS OF THE AR CAREFULLY. IT IS SEEN THAT THE AO HAS WRONGLY INFERRED THAT THE HARDWARE AND COMPUTER CONSUMABLES PURCHASED BY THE APPELLANT WERE USED A S CAPITAL ASSETS BY THE APPELLANT. COMPUTER HARDWARE AND COM PUTER CONSUMABLES MAY BE CAPITAL GOODS. HOWEVER, THE APP ELLANT WAS USING THE SAME FOR DEVELOPING KIOSKS WHICH WERE SOLD. SINCE COMPUTER HARDWARE AND COMPUTER CONSUMABLES AR E THE RAW MATERIALS OF THE ASSESSEE USES THE PROCESS OF M ANUFACTURE OF KIOSKS HENCE IN NO STRETCH OF IMAGINATION COULD THE AMOUNTS SPENT ON PURCHASES OF THESE MATERIALS BE CALLED CAP ITAL EXPENSES. IN VIEW OF THE ABOVE THE ADDITION MADE BY THE AO OF RS.7,32,118/- IS NOT JUSTIFIED. THE SAME IS HENCE DELETED. NOW THE REVENUE IS IN APPEAL BEFORE US. ITA NO.3486/AHD /2010 DCIT VS. GAYTES INFORMATION SYSTEMS P.LTD. ASST.YEAR - 2006-07 - 4 - 4. IT IS WORTH TO MENTION THAT ON THE DATE OF HEARI NG NO ONE HAS APPEARED FROM THE SIDE OF THE RESPONDENT-ASSESSEE. THEREFORE, WE HAVE PROCEEDED EX-PARTE QUA THE ASSESSEE, AFTER HEARING THE ARGUMENT OF THE LD.DR MR. A.K. PATEL. 5. ONCE THE ADMITTED FACTUAL POSITION IS THAT THE A SSESSEE- COMPANY IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND ALSO IN THE BUSINESS OF PROVIDING SOFTWARE SUPPORT SERVICES, TH EREFORE THE SOFTWARE BOUGHT DURING THE YEAR AND DEBITED TO P&L ACCOUNT WAS ADMITTEDLY IN RESPECT OF THE BUSINESS ACTIVITY OF T HE ASSESSEE. THE CONTENTION OF THE ASSESSEE WAS THAT ON USAGE OF THE SOFTWARE PURCHASED DURING THE YEAR, THE ASSESSEE HAS EARNED INCOME OF RS.67,88,380/-, ON UTILIZATION OF THE SAID SOFTWARE . SINCE ON INCURRING OF THE EXPENDITURE, REVENUE HAS BEEN GENE RATED, THEREFORE THERE WAS NO QUESTION OF DOUBTING THE NEXUS OF THE EXPENDITURE WITH THE EARNING OF THE ASSESSEE. FURTHER, FROM THE ORD ER OF THE AO, THERE IS NO INDICATION THAT THE ASSESSEE HAS ACQUIRED AN ASSET OF ENDURING BENEFIT AND NO REVENUE WAS GENERATED IMMEDIATELY. IN FACT, IN ONE OF THE CASE DECIDED BY THE HONBLE PUNJAB & HARYAN A HIGH COURT PRONOUNCED IN THE CASE OF CIT VS. VARINDER AGRO CHEMICALS LTD. 309 ITR 272 (P&H) IT WAS HELD THAT THERE WAS NOTHING TO SHOW THAT THE SOFTWARE USED BY THE ASSESSEE WAS OF ENDURING N ATURE AND WOULD NOT BECOME OUTDATED. SINCE TECHNOLOGY IS FAST CHA NGING AND DAY- ITA NO.3486/AHD /2010 DCIT VS. GAYTES INFORMATION SYSTEMS P.LTD. ASST.YEAR - 2006-07 - 5 - BY-DAY SYSTEMS ARE BEING DEVELOPED IN A NEW WAY, SO FTWARE MAY BE TREATED LIKE RAW-MATERIAL. THE HONBLE COURT HAS H ELD THAT THE COMPUTERS SOFTWARE EXPENSES WERE REVENUE EXPENDI TURE. THE EXPENDITURE IN QUESTION WAS UNDISPUTEDLY HAD DI RECT NEXUS WITH THE DAY-TO-DAY INCOME GENERATION OF THE COMPANY AND THERE WAS NOTHING ON RECORD TO DEMONSTRATE THAT IT WAS TOWAR DS ACQUISITION OF AN ASSET, WE ARE OF THE VIEW THAT SINCE THE ACQUISI TION WAS NOT A ONE TIME EXPENDITURE BUT AN EXPENDITURE OF RECURRING NA TURE IN THE SAID LINE OF BUSINESS THEREFORE RESPECTFULLY FOLLOWING T HE DECISION OF HONBLE HIGH COURT, WE FIND NO FALLACY IN THE VIEW TAKEN BY THE LD.CIT(A), HENCE ALL THE GROUNDS REVOLVED AROUND TH IS ISSUE ARE DISMISSED. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS D ISMISSED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 14.10. 2011. SD/- SD/- ( A.K. GARODIA ) ( MUKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEM BER AHMEDABAD; DATED 14/ 10 /2011 6..), .)../ T.C. NAIR, SR. PS ITA NO.3486/AHD /2010 DCIT VS. GAYTES INFORMATION SYSTEMS P.LTD. ASST.YEAR - 2006-07 - 6 - '5 2 /7 8'7* '5 2 /7 8'7* '5 2 /7 8'7* '5 2 /7 8'7*/ COPY OF THE ORDER FORWARDED TO : 1. +. / THE APPELLANT 2. /0+. / THE RESPONDENT. 3. 9 / CONCERNED CIT 4. 9() / THE CIT(A)-XX AHMEDABAD 5. 7<# /) , , / DR, ITAT, AHMEDABAD 6. # =3 / GUARD FILE. '5) '5) '5) '5) / BY ORDER, 07 / //TRUE COPY// > >> >/ // / , , , , ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD 1. DATE OF DICTATION..10.10.2011 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 10.10.2011 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.14.10.11 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 14.10.11 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER