Bharti Cellular Ltd., V. DCIT, Circle-2(1),

ITA 395/DEL/2004

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1249 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 18-11-2009
• Assessment Year: 1998-1999
• Appeal Filed On: 29-01-2004
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: L M
• Assessee Lawyers: J C BHALLA
• Keywords: Capital asset; Opportunity of being heard; Revenue expenditure; Capital expenditure; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C : NEW DELHI BEFORE SHRI C.L.SETHI AND SHRI R.D.RANJAN ITA NO.395/DEL/2004 ASSESSMENT YEAR : 1998-99 BHARTI CELLULAR LIMITED D-184, OKHLA INDUSTRIAL AREA PHASE-1, NEW DELHI. PAN AAACB0874C VS. JT. COMMISSIONER OF INCOME TAX, SPECIAL RANGE 14,NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI J.C.BHALLA, A.R. RESPONDENT BY : SHRI L.M.PANDEY, CIT DR ORDER PER RANJAN, AM : THIS APPEAL BY THE ASSESSEE FOR THE ASSESSMENT YEAR 1998-99 ARISES OUT OF ORDER OF LD. CIT(A)-V, NEW DELHI. 2. THE ONLY ISSUE FOR CONSIDERATION RELATES TO DISA LLOWING THE COMPUTER SOFTWARE EXPENSES AMOUNTING TO RS. 2,75,62,703/- ON THE GROUND THAT THE SAME WERE CAPITAL IN NATURE. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT RELYING ON THE ORDER FOR ASSESSMENT YEAR 1997-98 OB SERVED THAT THE SOFTWARE PURCHASED BY ASSESSEE HAD BEEN USED AS PART OF TECH NOLOGY REQUIRED FOR BILLING AND ON ORACLE FOR FINANCIAL ACCOUNTING. SUCH A LARGE EX PENDITURE COULD NOT BE INCURRED FOR A SHORT PERIOD OF TIME, THEREFORE, THE EXPENDIT URE INCURRED WAS CAPITAL IN NATURE. 3. ON APPEAL, THE LD. CIT(A) UPHELD THE DISALLOWANC E BY OBSERVING THAT SOFTWARES WERE NOT AS TEMPORARY AS HAD BEEN MADE OU T BY THE ASSESSEE. THE SOFTWARE REMAINED IN SERVICE FOR SEVERAL YEARS. HE OBSERVED THAT THE ASSESSEE HAD INCURRED EXPENDITURE ON ACQUISITION OF SOPHISTICATE D SOFTWARE AND, THEREFORE, THEIR USE WAS FOR MORE THAN A YEAR AND HENCE, THE SAME WA S CAPITAL IN NATURE. 2 4. BEFORE US, THE LD. A.R. OF ASSESSEE SUBMITTED TH AT THE ISSUE HAS BEEN DECIDED BY THE I.T.A.T. IN THE LIGHT OF DECISION OF SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES V. DCIT 111 ITD 112. HE FURTHER S UBMITTED THAT THE I.T.A.T. DELHI BENCH-B FOR ASSESSMENT YEAR 1997-98 WHILE DEC IDING THE ISSUE HAS EXAMINED EACH AND EVERY ITEM AND HAS DECIDED WHETHE R THEY WERE EXPENDITURE IN REVENUE FIELD OR IN CAPITAL FIELD. ONLY IN RESPECT OF CERTAIN AMOUNT, THE MATTER WAS REMANDED TO ASSESSING OFFICER WITH THE DIRECTIONS T O EXAMINE THE CASE IN THE LIGHT OF DECISION OF SPECIAL BENCH IN THE CASE OF AMWAY I NDIA ENTERPRISES (SUPRA). ON THE OTHER HAND, THE LD. SR. D.R. SUPPORTED THE ORDE R OF LD. CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE I.T.A.T. SPECIAL BENCH DELHI IN THE CAS E OF AMWAY INDIA ENTERPRISES V. DCIT (SUPRA) IN PARA 58 AND 59 HAS LAID DOWN THE CRITERIA AS TO WHETHER THE EXPENDITURE WAS REVENUE IN NATURE OR CAPITAL EXPEND ITURE. PARA 58 AND 59 ARE REPRODUCED AS UNDER: 58. THE FOLLOWING FACTORS WOULD BE RELEVANT TO DET ERMINE WHETHER THE ADVANTAGE OPERATES IN THE CAPITAL FIELD OR REVENUE FIELD: (I) NATURE OF BUSINESS OF THE ASSESSEE: IT IS NECES SARY TO OBTAIN AN UNDERSTANDING OF THE BUSINESS FUNCTION OR EFFECT OF A CONCERNS SOFTWARE. SOFTWARE NORMALLY FUNCTIONS AS A TOOL ENABLING BUSINESS TO BE CARRIED ON MORE EFFICIENTLY . THE SCOPE, POWER, LONGEVITY OF SUCH A TOOL AND ITS CENR TRALITY TO THE FUNCTIONS OF THE BUSINESS WILL ALL BEAR ON ITS TREATMENT. IN THE CASE OF M/S SQL STAR INTERNATIONAL LTD., ONE OF THE ASSESSES IN THE CASES REFERRED TO THE SPECIAL BENCH , THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF SOFT WARE DEVELOPMENT AS WELL AS RUNNING A TRAINING CENTER TO IMPART SPECIALIZED TRAINING TO THE STUDENTS IN SOFTWARE TE CHNOLOGY. IF THE SOFTWARE WERE USED IN SUCH BUSINESS TO IMPART T RAINING TO THE STUDENTS, THEN THE SAME WOULD BE PART OF THE PR OFIT-MAKING APPARATUS OF THE ASSESSEE AND CONSEQUENTLY EXPENDIT URE ON SOFTWARE, CAPITAL. SIMILARLY, EXAMPLE OF A TRAVEL AGENT CAN BE CITED H ERE AS AN ILLUSTRATION WHEREIN THE EXPENDITURE INCURRED ON AC QUISITION OF 3 A SOFTWARE FOR THE PURPOSE OF ENABLING THE ASSESSEE TO MAKE BOOKING OF AIR TICKETS WOULD BE A CAPITAL EXPENDITU RE BECAUSE SUCH A SOFTWARE CERTAINLY FORMS PART OF THE PROFIT- MAKING APPARATUS OF THE TRAVEL AGENCY BUSINESS INASMUCH AS THE BUSINESS OF AIR TICKET BOOKING IS DONE WITH THE HEL P OF THAT SOFTWARE. ANOTHER EXAMPLE WHICH CAN BE CONSIDERED HERE IS THA T OF ACQUISITION OF TURBO GOLD SOFTWARE FOR RS.17.61 LAK HS BY ONE OF THE ASSESSEES IN THE PRESENT CASE I.E. M/S AMWAY INDIA ENTERPRISES. AS SUBMITTED BEFORE US, THE SAID SOFTW ARE HELPS IN COMPRESSION OF SIZE OF E-MAILS SENT THROUGH THE LOT US NOTES MAILING SYSTEM AND IT INCLUDES LICENSES FOR 150 USE RS WHO ARE USING LOTUS NOTES MAILING SYSTEM AND SOFTWARE LICEN SE FOR RUNNING ON ITS SERVER. IF USE OF THIS SOFTWARE IN T HE BUSINESS OF THE ASSESSEE IS LIMITED TO FACILITATE MERELY AN EFF ECTIVE AND FAST COMMUNICATION IN ORDER TO INCREASE ITS ORGANIZ ATIONAL EFFICIENCY, THE SAME CANNOT BE TREATED AS FORMING P ART OF THE PROFIT-MAKING APPARATUS OF THE ASSESSEE. ON THE OTH ER HAND, IF SUCH SOFTWARE IS BEING USED BY AN ASSESSEE ENGAGED IN THE BUSINESS OF PLACEMENT AGENCY WHERE THE APPLICATIONS FROM PERSONS SEEKING JOBS ARE INVITED THROUGH E-MAIL AND ARE ALSO FORWARDED TO THE CONCERNED CLIENTS THROUGH E-MAIL, THE SAME MAY FORM PART OF PROFIT-MAKING APPARATUS OF THE ASS ESSEES BUSINESS OF PLACEMENT AGENCY AND CAN BE TREATED AS A CAPITAL ASSET. (II) AS A GENERAL RULE IT MAY BE STATED THAT THE MO RE EXPENSIVE THE COMPUTER SOFTWARE THE MORE IT IS LIKELY TO BE CENTR AL TOOL OF THE BUSINESS AND THE MORE ENDURING IS LIKELY TO BE ITS EFFECT ADDING TO THE PROFIT-EARNING APPARATUS. IF THERE AR E ASSOCIATED CAPITAL EXPENDITURE LIKE PURCHASE OF NEW COMPUTER E QUIPMENT FOR RUNNING THE SOFTWARE DEVELOPED UNDER A PROJECT, THEN IT CAN BE CONSIDERED AS CAPITAL EXPENDITURE. THIS IS E SPECIALLY THE CASE WHERE THE NEW HARDWARE IS NOT MERELY DESIR ABLE BUT NECESSARY FOR THIS PURPOSE. (III) DEGREE OF ASSOCIATED ORGANIZATIONAL CHANGE: S IMILARLY THE DEGREE OF CHANGE INTENDED IN THE WAY OPERATIONS ARE CARRIED OUT AS A RESULT OF THE COMPUTER SOFTWARE, FOR EXAMP LE, SAVINGS IN THE NUMBER, AND CHANGES IN THE LOCATION OF STAFF USED TO PROVIDE SERVICES TO CUSTOMERS WILL HAVE A BEARING. THE MORE RADICAL THE CHANGES, THE MORE LIKELY THE EXPENDITUR E WILL BE 4 CAPITAL. THESE CHANGES ARE LIKELY TO BE MOST RADICA L WHEN OPERATIONS PREVIOUSLY CARRIED ON MANUALLY ARE COMPU TERIZED. (IV) IT HAS TO BE BORNE IN MIND THAT COMPUTER SOFTW ARE INDUSTRY IS OF A FAST CHANGING NATURE. THEREFORE WHATEVER SOFTW ARE PURCHASED BY AN ASSESSEE WOULD BECOME OUTDATED MUCH EARLIER THAN EXPECTED. THE ASSESSEE HAS THEREFORE T O UPGRADE HIS SOFTWARE. AN ELEMENT OF UPGRADING DOES NOT AUTO MATICALLY MAKE THE EXPENDITURE CAPITAL. THE PRESENCE OF AN EL EMENT OF UPGRADING, THEREFORE, WILL NOT NECESSARILY CAUSE TH E EXPENDITURE IN QUESTION TO BE CAPITAL. 59. OUR CONCLUSIONS ON THE ISSUE UNDER CONSIDERATIO N THUS CAN BE SUMMARIZED AS UNDER: (I) WHEN THE ASSESSEE ACQUIRES A COMPUTER SOFTWARE OR FOR THAT MATTER THE LICENSE TO USE SUCH SOFTWARE, HE ACQUIRE S A TANGIBLE ASSET AND BECOMES OWNER THEREOF AS HELD ABOVE RELYI NG ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TC S(SUPRA) (II) HAVING REGARD TO THE FACT THAT SOFTWARE BECOME S OBSOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHIN A S HORT SPAN OF TIME, IT AN BE SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE IS SHORTER (SAY LESS THAN 2 YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE. ANY SOFTWARE HAVING ITS UTILIT Y TO THE ASSESSEE FOR A PERIOD BEYOND TWO YEARS CAN BE CONSI DERED AS ACCRUAL OF BENEFIT OF ENDURING NATURE. HOWEVER, THA T BY ITSELF WILL NOT MAKE THE EXPENDITURE INCURRED ON SOFTWARE AS CAPITAL IN NATURE AND THE FUNCTIONAL TEST AS DISCUSSED ABOV E ALSO NEEDS TO BE SATISFIED. (III) ONCE THE TESTS OF OWNERSHIP AND ENDURING BENE FIT ARE SATISFIED, THE QUESTION WHETHER EXPENDITURE INCURRE D ON COMPUTER SOFTWARE IS CAPITAL OR REVENUE HAS TO BE S EEN FROM THE POINT OF VIEW OF ITS UTILITY TO A BUSINESSMAN A ND HOW IMPORTANT AN ECONOMIC OR FUNCTIONAL ROLE IT PLAYS I N HIS BUSINESS. IN OTHER WORDS, THE FUNCTION TEST BECOMES MORE IMPORTANT AND RELEVANT BECAUSE O THE PECULIAR NATUR E OF THE COMPUTER SOFTWARE AND ITS POSSIBLE USE IN DIFFERENT AREAS OF BUSINESS TOUCHING EITHER CAPITAL OR REVENUE FIELD O R ITS UTILITY 5 TO A BUSINESSMAN WHICH MAY TOUCH EITHER CAPITAL OR REVENUE FIELD. SINCE THE ISSUE IS COVERED BY THE DECISION OF SPECI AL BENCH, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH TH E DIRECTION TO EXAMINE THE NATURE OF EXPENDITURE IN THE LIGHT OF DECISION OF SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA). THE ASSESSING OFFICER WI LL ALSO KEEP IN MIND THE DECISION OF I.T.A.T. FOR ASSESSMENT YEAR 1997-98 WH ILE ARRIVING AT THE CONCLUSION WHETHER THE PARTICULAR EXPENDITURE IS IN REVENUE FI ELD OR IN THE CAPITAL FIELD BUT THE DECISION HAS TO BE IN THE LINE WITH THE DECISION OF SPECIAL BENCH(SUPRA). THE ASSESSING OFFICER WILL DECIDE THE ISSUE AFTER AFFOR DING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 6. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 27TH NO VEMBER, 2009. SD/- (C.L.SETHI) SD/- (K.D.RANJAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 27.11.2009. PSP COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR