DCIT, New Delhi V. M/s. Graziano Trasmissioni India Pvt. Ltd., New Delhi

ITA 5536/DEL/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7465 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 16-12-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 10-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIKRAM SAHAI
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 37(1); 32

Judgement Text

ITA NO. 5536/ DEL/ 2013 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C , NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI H.S. SIDHU, JUDICIAL MEMBER I.T.A. N O. 5536 /DEL/2013 A.Y . : 200 8 - 0 9 DCIT, CIRCLE 12(1), NEW DELHI VS. M/S GRAZIANO TRANSMISSIONI INDIA PVT. LTD., INDUSTRIAL SHED D - 8, (BASEMENT) DSIDC PACKAGING COMPLEX, KIRTI NAGAR, NEW DELHI 110 015 (PAN: AAACG4258G) (APPELLANT) (RESPONDENT) DEPARTMENT BY : S H. VIKRAM SAHAI, SR. DR ASSESSEE BY : SH. RAVI SHARMA, ADVOCATE DATE OF HEARING : 16 - 12 - 2014 DATE OF ORDER : 19 - 12 - 2014 ORDER PER H.S. SIDHU : J M REVENUE HAS FILED THIS A PPEAL AGAINST THE IMPUGNED ORDER DATED 30.7.2013 PASSED BY THE LD. CIT(A) - XV , NEW DELHI RELEVANT TO ASSESSMENT YEAR 200 8 - 0 9 . 2. THE FOLLOWING GROUNDS HAVE BEEN RAISED : - 1. WHETHER LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS. 55,70,045/ - ON ACCOUNT OF ITA NO. 5536/ DEL/ 2013 2 TRADE MARK FEE BY HOLDING THAT IT WAS A REVENUE EXPENDITURE AND WITHOUT CONSIDERING THAT RIGHT TO USE THE TRADE MARK ACQUIRED BY THE ASSESSEE WAS AN INTANGIBLE ASSET AS DEFINED U/S. 32 OF THE I.T. ACT? 2. THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF LICENSE FEE OF RS. 3,44,550/ - BY HOLDING IT AS REVENUE EXPENDITURE AND WIT HOUT CONSIDERING THAT THE ASSESSEE HAD ACQUIRED PROPORTIONATE RIGHTS TO USE THE SOFTWARE, WHICH WAS AN INTANGIBLE ASSET AS DEFINED U/S. 32 OF THE I.T. ACT? 3. THE APPELLANT CRAVES LEAVE, TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE T IME OF THE HEARING. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF GEARS, SYNCHRONIZERS, TRANSMISSION COMPONENTS ETC. FOR ROAD VEHICLES. DURING THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT IN TERMS OF AN AGREEMENT DATED 18.12.2007, THE ASSESSEE HAD BEEN ALLOWED USE OF THE BRAND NAME, OERLIKON BY ITS PARENT COMPANY, M/S OC OERLIKON CORPN. AG, SWITZERLAND. UNDER THE AGREEMENT, THE ASSESSEE WAS REQUIRED TO PAY TRADEMARK FEES @1.5% OF THE TURNOVER. VIDE SUBSEQUENT AGREEMENT DATED 30.12.2010, THIS FEES WAS REDUCED TO 1%. THE AO HELD THE ABOVE FEE AS CAPITAL IN NATURE IN VIEW OF THE AMENDED PROVISIONS OF SECTION 32(1)(II) AND ALLOWED DEPRECIATION THEREON @25%. SECONDLY, THE AO ALSO CAPITALIZED AN A MOUNT OF RS. 8,61,374/ - ON ACCOUNT OF LICENSE FEE PAID BY THE ASSESEE TOWARDS ITA NO. 5536/ DEL/ 2013 3 PURCHASE OF COMPUTER SOFTWARE FOR ITS USERS AND DISALLOWED THE SAME. 4. AGAINST THE ORDER OF THE LD. AO, ASSESSEE APPEALED BEFORE THE LD. CIT(A), WHO VIDE IMPUGNED ORDER DATED30.7.2013 HAS STATISTICALLY ALLOWED THE APPEAL OF THE ASSESSEE. 5. AGGRIEVED WITH THE ORDER OF THE LD. CIT(A), REVENUE IS IN APPEAL BEFORE US. 6 . AT THE TIME OF HEARING, LD. COUNSEL OF THE ASSESSEE STATED THAT THE ISSUE S IN DISPUTES IN THE PRESENT APPEAL HAVE ALREADY BEEN ADJUDICATED AND DECIDED IN FAVOR OF THE ASSESSEE BY THE HON BLE JURISDICTIONAL HIGH COURT. HE HAS FILED THE RELEVANT COPIES O F THE ORDERS OF THE HON BLE HIGH COURT AND REQUESTED THAT THE APPEAL FILED BY THE REVENUE MAY BE DISMISSED. 6.1 ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY THE ASSESSING OFFICER. 7. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. AS REGARDS GROUND NO. 1 IS CONCERNED, THE REVENUE HAS CHALLENGED THE IMPUGNED ORDER OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF RS. 55,70,045/ - ON ACCOUNT OF TRADE MARK FEE BY HOLDING THAT IT WAS A REVENUE EXPENDITURE AND WITHOUT CONSIDERING THAT RIGHT TO USE THE TRADE MARK ACQUIRED BY THE ASSESSEE WAS AN INTANGIBLE ASSET AS DEFINED U/S. 32 OF THE I.T. ACT . AFTER HEARING BOTH THE PARTIES ON THE ISSUE IN DISPUTE AS WELL AS AFTER GOING THROUGH THE ORDERS PASSED BY THE REVENUE AUTHORITIES ALONGWITH ORDER DATED 11.7.2011 PASSED BY THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. G4S SECURITIES SYSTEM (INDIA) PVT. LTD. IN ITA NOS. 1943/DEL/2010, 763/DEL/2011 & 765/DEL/2011 763/2011W HEREIN THE HON BLE HIGH COURT HAS ADJUDICATED THE MATTER AS UNDER: - ITA NO. 5536/ DEL/ 2013 4 6. WE HAVE HEARD THE LEARNED COUNSEL FOR THE PARTIES AND PERUSED THE RECORD. 7. AT THE OUTSET IT MAY BE NOTED THAT IT WAS FOLLOWING AGREEMENT DATED 20.06.2002 BETWEEN GROUP 4 FALCK A/S, DENMARK AND GROUP 4 HOLDING PVT. LTD., THAT A FURTHER SUB LICENSE AGREEMENT WAS ENTERED INTO BY GROUP 4 HOLDING PVT. LTD. AND THE ASSESSEE. THIS SUB LICENSE AGREEMENT IS ALSO DATED 20.06.2002. 8. SIMILAR DEFINITION OF TRADE MARK, G4F KNOWHOW, AS EXISTING IN THE AGREEMENT BETWEEN G4F AND GROUP4 HOLDING PRIVATE LIMITED ARE ALSO INCORPORATED IN THE SUB LICENSE AGREEMENT. CLAUSE 4.1 OF THE SUB LICENSE AGREEMENT PROVIDES FOR THE OPERATIONAL PERIOD OF THE AGREEMENT FOR A TERM OF 5 YEAR FROM THE EFFECTIVE DATE, AND CONTINUANCE THEREAFTER FOR FURTHER SUCCESSIVE 5 YEARS PERIOD UNLESS EITHER PARTY GIVE 6 MONTHS WRITTEN NOTICE TO OTHER PARTY PRIOR TO THE END OF ANY SUCH 5 YEAR PERIOD THAT THE AGREEMENT SHOULD NOT BE RENEWED. CLAUSE 17 OF THE SUB LICENSE AGREEMENT AC KNOWLEDGES THAT G4F HAS THE RIGHT TO ENFORCE, OR TO ENJOY THE BENEFIT OF ANY TERM OF THIS AGREEMENT WHICH IS EXPRESSLY OR IMPLIEDLY IN FAVOUR OF G4F. IN CLAUSE 4.6 OF THE SUB LICENSE AGREEMENT, IT HAS BEEN PROVIDED THAT ON TERMINATION OR EXPIRATION OF THE SUB LICENSE AGREEMENT, THE ASSESSEE SHALL RETURN ALL G4F KNOWHOW OBTAINED IN PURSUANT TO THE AGREEMENT. AT CLAUSE 4.7 IT HAS BEEN PROVIDED THAT ON TERMINATION OR EXPIRATION OF THE AGREEMENT, THE ITA NO. 5536/ DEL/ 2013 5 APPELLANT/ASSESSEE SHALL NOT THEREAFTER MAKE ANY USE OF THE T RADE MARK, TRADE NAME OR G4F KNOWHOW AND SHALL FORTHWITH CHANGE ITS CORPORATE AND/OR TRADE NAMES. 9. FROM THE TERMS OF THE AGREEMENT IT IS NOTICED THAT THIS ARRANGEMENT WAS FOR A PERIOD OF 5 YEARS, WHICH MAY BE EXTENDED BY ANOTHER PERIOD OF 5 YEARS UNLESS EITHER PARTY GIVES 6 MONTHS NOTICE TO THE OTHER PARTY PRIOR TO THE END OF SUCH 5 YEARS PERIOD. THE PAYMENT OF COMMISSION @ 1% WAS BASED ON THE NET SALES AND NOT LUMPSUM. ON THE TERMINATION OF EXPIRATION OF THE SUB LICENSE AGREEMENT, THE ASSESSEE WAS TO RET URN ALL G4F KNOWHOW OBTAINED PURSUANT TO THE SAID AGREEMENT. NOT ONLY THAT, THE ASSESSEE WAS NOT EVEN ENTITLED TO MAKE USE OF THE TRADE MARK NAME OR G4F KNOWHOW AND WAS FORTHWITH TO CHANGE ITS CORPORATE AND/OR TRADE NAMES. ALL RIGHTS AND KNOWHOW, THEREFOR E, CONTINUED TO VEST IN G4F AND IT WAS ONLY THE RIGHT TO USE THE KNOWHOW THAT WAS MADE AVAILABLE TO THE ASSESSEE AND THAT TOO BASED ON ITS NET SALES. THAT MEANS ALL THE ROYALTY PAID IN THE SHAPE OF 1% OF NET SALES FOR THE USE OF TRADE MARK AND RIGHT TO USE KNOWHOW COULD NOT BE CONSIDERED TO BE OF ENDURING NATURE AND THUS CAPITAL EXPENDITURE. THE EXPENDITURE WAS TO BE OF REVENUE NATURE. IN THE CASE OF JONAS WOOD HEAD AND SONS VS. CIT, 117 ITR 55, IT WAS HELD THAT THE QUESTION REGARDING CAPITAL OR REVENUE EXP ENDITURE DEPENDS ON THE TERMS OF AGREEMENT IN EACH CASE. IN THE CASE OF CIT VS. ITA NO. 5536/ DEL/ 2013 6 GUJARAT CARBON LTD., 254 ITR 294, IT WAS HELD THAT THE PAYMENT OF REVENUE UNDER THE AGREEMENT WAS DIRECTLY RELATABLE TO SERVICES WHICH WERE IN THE REVENUE FIELD AND WERE ALLOWA BLE AS REVENUE EXPENDITURE. IN THE CASE OF GOODYEAR (I) LTD. VS. ITO 73 ITD 189(DELHI), THE ASSESSEE HAD NOT ACQUIRED OWNERSHIP RIGHT OF TECHNICAL KNOWHOW BUT TRANSFER OF USE OF LICENSES. THERE WAS NO ADVANTAGE OF ENDURING NATURE AND HENCE IT WAS HELD TO BE A CASE OF REVENUE EXPENDITURE. IN THE CASE OF TRAVANCORE SUGAR AND CHEMICALS LTD. 62 ITR 566 (SC) IT WAS HELD THAT WHENEVER A PAYMENT IS BASED ON A PERCENTAGE OF TURNOVER OR PROFITS, IT NECESSARILY HAS NO RELATION TO THE CAPITAL VALUE OF THE ASSET, BECA USE IT CANNOT BE KNOWN AT THE TIME OF THE AGREEMENT WHAT THE TURNOVER OR PROFITS WILL BE OVER A PERIOD OF YEARS. IN ANOTHER CASE REPORTED AS DCIT VS. SWARAJ ENGINES LTD. (2002) 124 TAXMAN 188, THE TRIBUNAL HELD, REVENUE PAYMENT IS ALLOWABLE AS REVENUE EXPE NDITURE, SINCE IT IS RELATED TO SALES AND THAT IT IS PAID FOR BETTER CONDUCT, EFFICIENCY AND IMPROVEMENT OF THE EXISTING BUSINESS OR PRODUCT MANUFACTURED BY THE ASSESSEE. IN THE CASE OF CIT VS. LUMAX INDUSTRIES LTD. (2008) 173 TAXMAN 290 (DELHI), THIS COUR T HAS ALSO HELD THAT THE PAYMENT OF LICENSE FEE ON YEAR TO YEAR BASIS FOR ACQUISITION OF TECHNICAL KNOWLEDGE WOULD NOT AMOUNT TO CAPITAL EXPENDITURE, BUT THE REVENUE EXPENDITURE. 10. FROM THE RATIO OF THE ABOVE SAID CASES, WE ARE OF THE CONSIDERED VIEW THA T UNDER THE TERMS OF THE ITA NO. 5536/ DEL/ 2013 7 AGREEMENT AS NOTED ABOVE, THE OWNERSHIP RIGHTS OF THE TRADE MARK AND KNOWHOW THROUGHOUT VESTED WITH G4F AND ON THE EXPIRATION OR TERMINATION OF THE AGREEMENT THE ASSESSEE WAS TO RETURN ALL G4F KNOWHOW OBTAINED BY IT UNDER THE AGREE MENT. THE PAYMENT OF ROYALTY WAS ALSO TO BE ON YEAR TO YEAR BASIS ON THE NET SALES OF THE ASSESSEE AND AT NO POINT OF TIME THE ASSESSEE WAS ENTITLED TO BECOME THE EXCLUSIVE OWNER OF THE TECHNICAL KNOWHOW AND THE TRADE MARK. HENCE, THE EXPENDITURE INCURRED BY THE ASSESSEE AS ROYALTY IS REVENUE EXPENDITURE AND IS THEREFORE, RELATABLE UNDER SECTION 37(1) OF THE ACT. WE THUS, ANSWER THE QUESTION IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE AND CONSEQUENTLY DISMISS ALL THE THREE APPEALS. 7.1 IN VIEW OF ABO VE, WE ARE OF THE CONSIDERED VIEW THAT ABOVE ISSUE IS EXACTLY THE SIMILAR TO THE ISSUE INVOLVED IN THE PRESENT APPEAL AND COVERED BY THE AFORESAID DECISION. HENCE, RESPECTFULLY FOLLOWING THE ABOVE PRECEDENT, WE DECIDE THE ISSUE IN DISPUTE IN FAVOR OF THE ASSESSEE AND AGAINST THE REVENUE. 7.2 AS REGARDS GROUND NO. 2 IS CONCERNED, THE REVENUE HAS CHALLENGED THE IMPUGNED ORDER OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF LICENSE FEE OF RS. 3,44,550/ - BY HOLDING IT AS REVENUE EXPENDITURE AND WITHOUT CONSIDERING THAT THE ASSESSEE HAD ACQUIRED PROPORTIONATE RIGHTS TO USE THE SOFTWARE, WHICH WAS AN INTANGIBLE ASSET AS DEFINED U/S. 32 OF THE I.T. ACT. AFT ER HEARING BOTH THE PARTIES ON THE ISSUE IN DISPUTE AS WELL AS AFTER GOING THROUGH THE ITA NO. 5536/ DEL/ 2013 8 ORDERS PASSED BY THE REVENUE AUTHORITIES ALONGWITH ORDER DATED 04.11.2011 PASSED BY THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ASAHI INDIA SAFETY GLA SS LTD. IN ITA NOS. 1110/2006 & 1111/2006 WHEREIN THE HON BLE HIGH COURT HAS ADJUDICATED THE MATTER AS UNDER: - 8. HAVING HEARD THE LEARNED COUNSEL FOR THE PARTIES, WHAT HAS EMERGED ON FACTS AS FOUND BY THE AUTHORITIES BELOW IS AS FOLLOWS: THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING SAFETY GLASS WHICH IS USED IN AUTOMOBILES. THUS THE MAIN SOURCE OF INCOME OF THE ASSESSEE IS FROM THE SAID ACTIVITY. THE ASSESSEE APPEARS TO HAVE ENTERED INTO AN AGREEMENT WITH ARTHUR ANDERSON & ASSOCIATES IN THE FINANCI AL YEAR 1996 - 97 (ASSESSMENT YEAR 1997 - 98) FOR INSTALLATION OF A SOFTWARE APPLICATION FOR ASSISTANCE IN AREAS RELATED TO FINANCIAL ACCOUNTING, INVENTORY AND PURCHASE. IT HAS EMERGED THAT AN OFFER WAS MADE IN RESPECT OF SUCH A SOFTWARE APPLICATION BY ARTHUR ANDERSON & ASSOCIATES, WHICH FIND A REFLECTION IN A LETTER DATED 25.06.1996. THE SAID AGREEMENT BETWEEN THE ASSESSEE AND ARTHUR ANDERSON & ASSOCIATES ALSO REQUIRED THE ASSESSEE TO ENTER INTO A BACK - TO - BACK AGREEMENT WITH ORACLE. THE REASONS PERHAPS BEING T HAT THE SOFTWARE APPLICATION SUPPLIED BY THE AURTHOR ANDERSON & ASSOCIATES WORKED ON ORACLE APPLICATION. IT IS PRECISELY FOR THIS REASON THAT ARTHUR ANDERSON & ASSOCIATES REQUIRED THE ITA NO. 5536/ DEL/ 2013 9 ASSESSEE TO ENTER INTO A LICENCE AGREEMENT WITH ORACLE TITLED MASTER SOF TWARE LICENCE AND SERVICES AGREEMENT. THE ASSESSEE WAS THUS, REQUIRED TO PAY: APART FROM THE FEE TO ARTHUR ANDERSON & ASSOCIATES QUA ITS AGREEMENT WITH IT; LICENCE FEE TO ORACLE. AS A MATTER OF FACT ORACLE ALSO OFFERED SUPPORT AND MAINTENANCE SERVICES FOR WHICH A FURTHER ADDITIONAL FEE WAS REQUIRED TO BE PAID TO ORACLE. 8.1 THE ASSESSEE THUS ADMITTEDLY IN RESPECT OF THE AFORESAID TRANSACTIONS INCURRED AN EXPENDITURE TO THE TUNE OF RS 1,36,77,664/ - AND RS 1,70,68,811/ - IN ASSESSMENT YEARS 1997 - 98 AND 1998 - 9 9 RESPECTIVELY. IN THE BOOKS OF ACCOUNTS FOR THE ASSESSMENT YEARS 1997 - 98 THE ASSESSEE HAD NOT WRITTEN OFF ANY SUM, WHILE IN THE SUCCEEDING ASSESSMENT YEAR, I.E., 1998 - 99 THE ASSESSEE HAD WRITTEN OFF A PART OF THE EXPENDITURE AMOUNTING TO RS 9,91,228/ - . 8. 2 GIVEN THESE FACTS, COULD IT BE SAID THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IN THE AFOREMENTIONED ASSESSMENT YEARS WAS IN THE NATURE OF CAPITAL EXPENDITURE. 9. THE REVENUE IN SUPPORT OF ITS STAND HAS TAKEN RECOURSE TO THE TEST OF ENDURING BENEFIT. IT IS IN OUR VIEW NOW SOMEWHAT TRITE TO SAY THAT THE TEST OF ENDURING BENEFIT IS NOT A CERTAIN OR A CONCLUSIVE TEST WHICH THE COURTS CAN APPLY ALMOST BY ROTE. WHAT IS REQUIRED TO BE SEEN IS THE REAL INTENT AND ITA NO. 5536/ DEL/ 2013 10 PURPOSE OF THE EXPENDITURE AND WHETHER THE EXP ENDITURE RESULTS IN CREATION OF FIXED CAPITAL FOR THE ASSESSEE. IT IS IMPORTANT TO BEAR IN MIND THAT WHAT IS REQUIRED TO BE SEEN IS NOT WHETHER THE ADVANTAGE OBTAINED LASTS FOREVER BUT WHETHER THE EXPENSE INCURRED DOES AWAY WITH A RECURRING EXPENSE(S) DEFR AYED TOWARDS RUNNING A BUSINESS AS AGAINST AN EXPENSE UNDERTAKEN FOR THE BENEFIT OF THE BUSINESS AS A WHOLE. IN OTHER WORDS, THE EXPENDITURE WHICH IS INCURRED, WHICH ENABLES THE PROFIT MAKING STRUCTURE TO WORK MORE EFFICIENTLY LEAVING THE SOURCE OF THE PRO FIT MAKING STRUCTURE UNTOUCHED, WOULD IN OUR VIEW BE AN EXPENSE IN THE NATURE OF REVENUE EXPENDITURE. FINE TUNING BUSINESS OPERATIONS TO ENABLE THE MANAGEMENT TO RUN ITS BUSINESS EFFECTIVELY, EFFICIENTLY AND PROFITABLY; LEAVING THE FIXED ASSETS UNTOUCHED W OULD 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 WI TH 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. VS CIT (1989) 177 ITR 377; CIT VS J.K. SYNTHETICS (2009) 309 ITR 371 AT PAG E 412 AND CIT VS. INDIAN VISIT.COM (SUPRA)]. 9.1. THIS IS THE APPROACH WHICH THE SUPREME COURT HAS APPLIED EVEN IN CASES WHERE THERE IS A ONCE FOR ITA NO. 5536/ DEL/ 2013 11 ALL OR A LUMP SUM PAYMENT. WHAT IS TO BE SEEN IN THE FACTS OF THIS CASE, AS ALREADY NOTICED 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 ACCOUNTING STAFF OF THE ASSESSEE. THE TRIBUNAL, WHICH IS DECIDEDLY THE FINAL FACT FINDING AUTHORITY HAS AFTER NOTICING THE MATERIAL ON RECORD OBSERVED THAT THE EXPENDITURE WAS INCURRED UNDER VARIOUS SUB - HEADS, WHICH INCLUDED LICENCE FEE, ANNUAL TECHNICAL SUPPORT FEE, PROFESSIONAL CHARGES, DATA ENTRY OPERATOR CHARGES, TRAINING CHARGES AND TRAVELLING EXPENSES. THE FINAL FIGURE WAS A CONSOLIDATION OF EXPENSES INCURRED UNDER THESE SUB - HEADS. THE TRIBUNAL, IN OUR VIEW, AND RIGHTLY SO, CAME TO THE CONCLUSION THAT NONE OF THESE RESULTED IN EITHER CREATION OF A NEW ASSET OR BROUGHT FO RTH A NEW SOURCE OF INCOME FOR THE ASSESSEE. THE TRIBUNAL CLASSIFIED THE SAID EXPENSES AS BEING RECURRING IN NATURE TO UPGRADE AND/OR TO RUN THE SYSTEM. 10. IN THE BACKGROUND OF THE AFOREMENTIONED FINDINGS, IT CANNOT BE SAID THAT THE EXPENSES BROUGHT ABOUT IN AN ENDURING BENEFIT TO THE ASSESSEE. THE ASSESSING OFFICER WAS PERHAPS SWAYED BY THE FACT THAT IN THE SUCCEEDING FINANCIAL YEAR, I.E., 1997 - 98 (ASSESSMENT YEAR 1998 - 99), THE AMOUNT SPENT WAS LARGE. FIRST OF ALL, THE EXTENT OF THE EXPENDITURE CANNOT BE A DECISIVE FACTOR IN DETERMINING ITS NATURE. AS OBSERVED BY THE ITA NO. 5536/ DEL/ 2013 12 TRIBUNAL, THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR HAD A TURNOVER OF RS 150 CRORES AND THAT EVEN WITHOUT THIS EXPENDITURE IT WOULD HAVE CONTINUED TO ACHIEVE THE SAID TURNOVER; THOUGH THE E XPENDITURE 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 RESONANCE IN SUBMISSIONS OF THE LEARNED COUNSEL FOR THE REVENUE IS, IN O UR VIEW 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 ON - GOING PROJECT WOULD NOT IPSO FACTO GIVE IT A COLOUR OF CAPITAL EXPENDITURE. A CAREFUL READING OF THE TRIBUNAL S JUDGMENT SHOW THAT AFTER NOTICING THE SUBMISSION OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IN THE SAID ASSESSMENT YEAR WAS FOR REMOVING DEFICIENCIES WHICH WERE FOUND IN THE SOFTWARE INSTALLED IN THE EARLIER ASSESSMENT YEAR, AND THAT, OUT OF A SUM OF RS 1.71 CRORES A SUM OF RS 49 LACS WAS INCURRED TO MODIFY, CUSTOMIZE AND UPGRADE THE SOFTWARE INSTALLED, WHILE THE BALANCE EXPENDITURE WAS USED FOR DEVELOPMENT AND IMPLEMENTATION IT RETURNED A FINDING THAT THE EXPENSES WERE INCURRED TO UPGRADE AND RUN THE SYSTEM. IN VIEW OF THESE FINDINGS WE ARE OF THE OPINION THAT ASSESSING OFFICER DISCOVERED AN ITA NO. 5536/ DEL/ 2013 13 ERRONEOUS PRINCIPLE ON THE BASIS OF WHICH HE DENIED THE EXEMPTION TO THE ASSESSEE. 11. SOFTWARE IS NOTHING BUT ANOTHER WORD FOR COMPUTER PROGRAMMES, I.E., INSTRUCTIONS, THAT MAKE THE HARDWARE WORK. SOFTWARE IS BROADLY OF TWO TYPES, I.E., THE SYSTEMS SOFTWARE, WHICH IS ALSO KNOWN AS THE OPERATING SYSTEM WHICH CONTROLS TH E WORKING OF THE COMPUTER; WHILE THE OTHER BEING APPLICATIONS SUCH AS WORD PROCESSING PROGRAMS, SPREAD SHEETS AND DATA BASE WHICH PERFORM THE TASKS FOR WHICH PEOPLE USE COMPUTERS. BESIDES THESE THERE ARE TWO OTHER CATEGORIES OF SOFTWARE, THESE BEING: NETWO RK SOFTWARE AND LANGUAGE SOFTWARE. THE NETWORK SOFTWARE ENABLES GROUPS OF COMPUTERS TO COMMUNICATE WITH EACH OTHER, WHILE LANGUAGE SOFTWARE PROVIDES WITH TOOLS REQUIRED TO WRITE PROGRAMMES. (SEE MICROSOFT COMPUTER DICTIONARY, 5TH EDITION SOFTWARE AT PAGE 489). 12. THE AFORESAID WOULD SHOW THAT WHAT THE ASSESSEE ACQUIRED THROUGH ARTHUR ANDERSON AND ASSOCIATES WAS AN APPLICATION SOFTWARE WHICH, ENABLED IT TO EXECUTE TASKS IN THE FIELD OF ACCOUNTING, PURCHASES AND INVENTORY MAINTENANCE. THE FACT THAT THE APP LICATION SOFTWARE WOULD HAVE TO BE UPDATED FROM TIME TO TIME BASED ON THE REQUIREMENTS OF THE ASSESSEE IN THE CONTEXT OF THE ADVANCEMENT OF ITS BUSINESS AND/OR ITS DIVERSIFICATION, IF ANY; THE CHANGES BROUGHT ABOUT DUE TO STATUTORY AMENDMENTS BY LAW OR BY PROFESSIONAL BODIES LIKE THE INSTITUTE OF CHARTERED ITA NO. 5536/ DEL/ 2013 14 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 INCU RRED ON ACCOUNT OF CORRUPTION OF THE SOFTWARE DUE TO UNINTENDED OR INTENDED INGRESS INTO THE SYSTEM OUGHT NOT GIVE A COLOUR TO THE EXPENDITURE INCURRED AS ONE EXPENDED ON CAPITAL ACCOUNT. GIVEN THE FACT THAT THERE ARE MYRIAD FACTORS WHICH MAY CALL FOR EX PENSES TO BE INCURRED IN THE FIELD OF SOFTWARE APPLICATIONS, IT CANNOT BE SAID THAT EITHER THE EXTENT OF THE EXPENSE OR THE EXPENSE BEING INCURRED IN CLOSE PROXIMITY, IN THE SUBSEQUENT YEARS, WOULD BE CONCLUSIVELY DETERMINATIVE OF ITS NATURE. THE ASSESSING OFFICER HAS, IN OUR VIEW, ERRED PRECISELY FOR THESE VERY REASONS. 13. BEFORE WE CONCLUDE, WE MAY ALSO DEAL WITH THE ONE LAST ISSUE RAISED BY THE LEARNED COUNSEL FOR THE REVENUE WHICH IS THAT IN THE BOOKS OF ACCOUNTS, THE ASSESSEE HAD NOT WRITTEN OFF THE E XPENSE IN ISSUE, WHILE IN THE SUCCEEDING ASSESSMENT YEAR ONLY A PART OF THE EXPENSE HAD BEEN WRITTEN OFF AND, THEREFORE, THE ASSESSEE S OWN UNDERSTANDING OF THE NATURE OF THE EXPENSE INVOLVED WAS THAT IT WAS EXPENDED ON CAPITAL ACCOUNT. 13.1 THE AFORESAID SUBMISSION IS ONLY TO BE STATED TO BE REJECTED. THE REASON BEING: THAT THE TREATMENT OF A PARTICULAR EXPENSE OR, A PROVISION IN THE BOOKS OF ACCOUNTS CAN NEVER BE CONCLUSIVELY ITA NO. 5536/ DEL/ 2013 15 DETERMINATIVE OF THE NATURE OF THE EXPENSE. AN ASSESSEE CANNOT BE DENIED A CLAIM FOR DEDUCTION WHICH IS OTHERWISE TENABLE IN LAW ON THE GROUND THAT THE ASSESSEE HAD TREATED IT DIFFERENTLY IN ITS BOOKS. THE OBSERVATION OF THE SUPREME COURT IN THE CASE OF KEDAR NATH JUTE MANUFACTURING CO. LTD. VS CIT (1971) 82 ITR 363 PUTS THIS BEYOND D OUBT. THE RELEVANT OBSERVATIONS OF THE SUPREME COURT ON THIS ASPECT OF THE MATTER ARE EXTRACTED HEREINBELOW: WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING THERETO AND NOT ON THE VIEW WHIC H THE ASSESSEE MIGHT TAKE OF HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN THE BOOKS OF ACCOUNTS BE DECISIVE OR CONCLUSIVE IN THE MATTER .. 13.2 THEREFORE, THE AFORESAID CONTENTION IS OF NO AVAIL TO THE REVENUE. 14. FOR THE FOREGOING REASONS, WE ARE OF THE VIEW THAT THE QUESTIONS OF LAW FOR EACH OF THE AFOREMENTIONED ASSESSMENT YEARS HAVE TO BE ANSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF THE ASSESSEE. RESULTANTLY, THE AFOREMENTIONED APPEALS ARE DISMISSED. 7.3 IN VIEW OF ABOVE, WE ARE OF THE CONSIDERED VIEW THAT ABOVE ISSUE IS EXACTLY THE SIMILAR TO THE ISSUE INVOLVED IN THE PRESENT APPEAL AND COVERED BY THE AFORESAID DECISION. HENCE, RESPECTFULLY ITA NO. 5536/ DEL/ 2013 16 FOLLOWING THE ABOVE PRECEDENT, WE DECIDE THE ISSUE IN DISPUTE IN FAVOR OF THE ASSESSEE AN D AGAINST THE REVENUE. 8 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE O PEN C OURT ON 19 / 12 /20 1 4 . SD/ - SD/ - [ G.D. AGRAWAL ] [ H.S. SIDHU ] VICE PRESIDENT JUDICIAL MEMBER DATE 19 / 12 /201 4 SRBHATNAGAR COPY FORWARDED TO: - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES ITA NO. 5536/ DEL/ 2013 17