EAGLE FILMS, MUMBAI V. ACIT CIR 11(1), MUMBAI

ITA 6232/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9457 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 09-11-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 17-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V KRISHNAMOORTHY
• Assessee Lawyers: ANIL R WANI
• Keywords: Depreciation; Principle of natural justice; Revenue expenditure

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E MUMBAI . . , . / BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER / AND , . . SHRI RAJENDRA, ACCOUNTANT MEMBER . / ITA NO. 6232/M/2010 / ASSESSMENT YEAR 2001-02 EAGLE FILMS, 220, FAMOUS CINE BUILDING DR. E MOSES ROAD, MAHALAXMI, MUMBAI-400 011. PAN: AAAFE 3147 N VS. ACIT, CIR 11(1), ROOM NO. 439, AAYAKAR BHAVAN, MUMBAI. ( / APPELLANT ) ( ! / RESPONDENT ) ' / APPELLANT BY : SHRI ANIL R WANI ! # ' /RESPONDENT BY : SHRI V. KRISHNAMOORTHY # $%& / DATE OF HEARING : 09-11-2012 '( # $%& / DATE OF PRONOUNCEMENT : 05-12-2012 )* / O R D E R PER RAJENDRA, AM THE APPELLANT HAS FILED THIS APPEAL AGAINST THE ORD ER DT. 02-06-2010 OF THE CIT(A)- 3, MUMBAI ON THE FOLLOWING GROUNDS: 1. THE LD. CIT(A)-3 SERIOUSLY ERRED IN LAW AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, IN ARBITRARILY CONFIRMING THE DISALLOWANC E OF RS. 75,00,000/- BEING SOFTWARE UPGRADATION EXPENSES WITHOUT APPRECIATING THE APPEL LANTS CONTENTION THAT THE SAME IS FULLY ALLOWABLE BEING REVENUE IN NATURE, APPLYIN G THE VARIOUS CRITERIA LAID DOWN BY HONBLE ITAT (DELHI) IN THE CASE OF AMWAY INDIA ENT ERPRISES VS. DCIT REPORTED IN 114 TTJ 476. THE APPELLANT PRAYS THAT THE EXPENDIT URE OF RS. 75,00,000/- BE ALLOWED AS A REVENUE EXPENDITURE AS CLAIMED IN THE RETURN. 2. WITHOUT PREJUDICE TO THE GROUND NO.1 ABOVE, THE APP ELLANT PRAYS THAT SUITABLE DIRECTIONS BE GIVEN FOR GRANT OF DEPRECIATION ON TH E WRITTEN DOWN VALUE IN RESPECT OF SOFTWARE EXPENSES IN THE SUBSEQUENT YEARS IN CASE T HE SAME IS HELD TO BE NOT REVENUE IN NATURE. 3. YOUR APPELLANT CRAVES LEAVE, TO ADD TO, AMEND, MODI FY OR ALTER THE AFORESAID GROUNDS AND/OR ADDUCE FURTHER EVIDENCE, BEFORE OR AT THE TI ME OF HEARING. 2. ASSESSEE-FIRM ENGAGED IN THE BUSINESS OF PRODUCTION AND DISTRIBUTION OF FILMS, FILED ITS RETURN OF INCOME ON 30-10-2001 DECLARING INCOME OF RS. 1,00,06,950/-. ITA NO. 6232/M/2010 EAGLE FILMS 2 ASSESSING OFFICER (AO) FINALISED THE ASSESSMENT ON 26-03-2004 AT RS. 2.14 CRORES U/S. 143(1) OF THE INCOME TAX ACT, 1961 (ACT). MATT ER TRAVELLED UPTO TRIBUNAL. VIDE ITS ORDER DT. 09-04-2008 TRIBUNAL DECIDED THE ISSUE OF ADDITION OF RS. 75 LAKHS MADE BY THE AO TOWARDS SOFTWARE EXPENSES AS UNDER: ON THE PERUSAL OF THE ORDER OF THE ASSESSING OFFICE R, IT IS SEEN THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY CLEAR FINDING IN RESPECT OF THE NATURE OF THE EXPENSES INCURRED BY THE ASSESSEE ON SMOKE MXE SOFTWARE WHET HER IT IS A CAPITAL OR REVENUE IN NATURE. WHEN THE MATTER IS DECIDED BY THE CIT(A ) HE HAS ALSO NOT DISCUSSED IN DETAIL HOW THE EXPENSES INCURRED BY THE ASSESSEE OF RS. 75,00,000/- IS TO BE ALLOWED FULLY AS A REVENUE EXPENDITURE. AS STATED HEREINAB OVE, THE HONBLE SPECIAL BENCH (DELHI) HAS LAID DOWN SOME CRITERIA FOR DETERMINING THE NATURE OF THE EXPENSES INCURRED ON ANY SOFTWARE AND IN OUR OPINION BOTH TH E LOWER AUTHORITIES HAVING DECIDED THE ISSUE NOT IN ACCORDANCE WITH THE CRITER IA AS EXPRESSED BY THE SPECIAL BENCH (DELHI) IN THE CASE OF AMWAY INDIA ENTERPRISE S (SUPRA). WE, THEREFORE, CONSIDER DEEM IT FIT TO RESTORE THIS ISSUE TO THE F ILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION FOR DECIDING THE NATURE OF THE EXPENSE S INCURRED BY THE ASSESSEE OF RS. 75,00,000/- TOWARDS SMOKE MXE SOFTWARE AFTER CONSID ERING THE CRITERIA LAID DOWN BY THE SPECIAL BENCH (DELHI) IN THE CASE OF AMWAY INDI A ENTERPRISES (SUPRA). THE ASSESSING OFFICER SHOULD GIVE REASONABLE OPPORTUNIT Y OF BEING HEARD TO THE ASSESSEE AS PER LAW AND PRINCIPLES OF NATURAL JUSTICE. 3. IN PURSUANCE OF THE ABOVE RESTORATION, AO GAVE AN O PPORTUNITY TO THE ASSESSEE TO REPRESENT ITS CASE. AFTER CONSIDERING THE SUBMI SSION OF THE ASSESSEE, AO HELD THAT IN THE CASE OF AMWAY INDIA ENTERPRISES LTD., DELIVE RED BY THE ITAT, DELHI, THREE TESTS WERE LAID DOWN TO DECIDE THE NATURE OF EXPENDITURE INCURRED WITH REGARD TO SOFTWARE EXPENSES AFTER APPLYING THE OWNERSHIP TEST, ENDURIN G BENEFIT TEST AND FUNCTIONAL TEST. HE HELD THAT THE ASSESSEE HAD PURCHASED MXE SOFTWAR E ON 15-03-2001 ON WHICH DATE VERSION 4.0 OF THE SOFTWARE WAS AVAILABLE, THAT TH E ASSESSEE DID NOT BUY NEW VERSION FOR A LONGER PERIOD OF TIME, THAT IT USED THE SOFTW ARE FOR MORE THAN ONE YEAR, AS PER THE INVOICE, THE SOFTWARE WAS PURCHASED ON 15-03-2001, THAT NO SUBSEQUENT INVOICE WAS BROUGHT ON RECORD SUGGESTING THAT THE ASSESSEE UPDA TED THE SAID SOFTWARE WITHIN THE PERIOD OF ONE/TWO YEARS, THAT ASSESSEE USED THE SMO KE SOFTWARE FOR A LONGER DURATION OF TIME, THAT IT WAS NOT ELIGIBLE FOR CLAIMING ENTI RE SUM OF RS. 75 LAKHS AS REVENUE EXPENDITURE. HE FURTHER HELD THAT SMOKE SOFTWARE WA S VERY-WELL A PART OF THE APPARATUS OF THE ASSESSEE, THAT ASSESSEE HAD EARNED SUBSTANTIAL EQUIPMENT HIGHER INCOME, THAT IT USED THE EQUIPMENT REGULARLY FOR PR ODUCTION OF POST PRODUCTION FACILITIES LIKE EDITING SPECIAL EFFECTS AND POST PR ODUCTION JOBS OF FEATURE FILMS, THAT SOFTWARE PROVIDED THE ASSESSEE FLEXIBLE TO EDIT AN FINISH STANDARD AND HIGH DEFINITION PROJECTS ON A SINGLE SYSTEM, THAT IT OFFERED REAL T IME CAPABILITIES OF STANDARD DEFINITION VIDEO AND TV, THAT THE SMOKE SOFTWARE SYSTEM WAS A COMPLETE SYSTEM TO EDIT AND FINISH STANDARD AND HIGH DEFINITION PROJECTS ON A S INGLE SYSTEM, THAT SOFTWARE HAVING SUCH FUNCTIONAL APPARATUS WAS A PART OF PROFIT MAKI NG APPARATUS OF THE ASSESSEE, THAT THE ASSESSEE HAD PURCHASED NEW COMPUTER EQUIPMENT F OR RUNNING THE SOFTWARE ,HAT COMPUTER PLATFORM AMOUNTING TO RS. 25 LAKHS WAS PUT TO USE ON 31-03-2001 AS PER ADMISSION OF THE ASSESSEE, THAT ASSESSEE-FIRM HAD N OT MADE ANY OF THE TESTS LAID DOWN BY ITAT, DELHI IN THE CASE OF AMWAY INDIA ENTERPRIS ES LTD., HE HELD THAT EXPENDITURE INCURRED BY THE ASSESSEE WAS CAPITAL IN NATURE AND HE ALLOWED DEPRECIATION @ 25%. HE HELD THAT THE ASSET WAS PUT TO USE FOR L ESS THAN 180 DAYS, DEPRECIATION WOULD BE ALLOWED AT 12.5% OF RS. 75 LAKHS AMOUNTING TO RS. 9.3 LAKHS. HE ADDED THE BALANCE AMOUNT OF RS. 65.62 LAKHS TO THE TOTAL INCO ME OF THE ASSESSEE FOR THE AY UNDER CONSIDERATION. ITA NO. 6232/M/2010 EAGLE FILMS 3 4. ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY (FAA). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE-F IRM, AND THE AO, HE HELD THAT APPELLANT HAD PURCHASED THE SOFTWARE NAMELY SMOKE M XE FOR RS. 75 LAKHS-THAT WOULD BE THE VERSION OF 4 OF THE SOFTWARE OF THE SY STEM, THAT VERSION 5 OF THE SYSTEM INTRODUCED IN JANUARY 2002,THAT DOCUMENTS SUBMITTED BY THE APPELLANT ARE ABOUT PURCHASE OF VERSION 5 WHICH WAS OF A LATER DATE, TH AT THE SMOKE SYSTEM WAS A COMPLETE SYSTEM TO EDIT AND FINISH STANDARD AND HIG H DEFINITION PROJECTS, THAT IT PLACED THROUGH MULTI-LAYER EFFECTS, THAT THE LITERATURE OF THE SMOKE SYSTEM PROVED THAT THE SOFTWARE WORK ON ITS SPECIALISED DESKTOP SOFTWARE, THAT THE SOFTWARE COULD NOT BE UTILIZED ON AN ORDINARY HARDWARE COMPUTER SYSTEM, T HAT THE SOFTWARE TRAVELLED ALONG WITH ITS HARDWARE, THAT THE SYSTEM WAS NON-LENIER E DIT SYSTEM WITH SPECIALISED HARDWARE SPECIFIC PROCESSORS AND STORAGE CAPACITIES , IT REQUIRED TRAINING FOR ITS USER, THAT DUE TO SOPHISTICATION IT HAD SIGNIFICANTLY IMP ACT ON APPELLANTS PROCESS AND ITS HIGH REVENUE EARNING POTENTIAL. 5. WITH REGARD TO OWNERSHIP TEST, FAA HELD THAT SMOKE MXE SYSTEM WAS A COMPLETE SYSTEM INCLUDING SOFTWARE AND SPECIALIZED HARDWARE THAT IT RAN ON, THAT ACQUISITION BY THE APPELLANT OF THE SOFTWARE WAS AN OWNERSHIP, THAT APPELLANT HAD OWNERSHIP BOTH OF TANGIBLE AND INTANGIBLE ASSETS I. E., HARDWARE AND SOFTWARE, THAT BEFORE THE AO, ASSESSEE HAS ARGUED FOR ALLOWABILITY OF THE EXPENDITURE AS REVENUE EXPENSES FOR PURCHASE OF SOFTWARE, THAT IN THE APPE LLATE PROCEEDINGS, ASSESSEE CLAIMED IT TO BE SOFTWARE UPGRADATION EXPENSES, THAT THERE WAS NO SMOKE SYSTEM PURCHASED EARLIER BY THE APPELLANT-THAT WAS UPGRADED BY THE P URCHASE OF SOFTWARE/HARDWARE OF RS. 75 LAKHS, THAT THERE WAS NO QUESTION OF APPELLA NT BEING ALLOWED SOFTWARE UPGRADATION EXPENSES REGARDING PURCHASE OF SMOKE MX E SYSTEM, THAT ASSESSEE WAS PROVIDING FREE TRAINING ON THE SAID SYSTEM, THAT US ERS COULD LEARN TO USE AND UNDERSTAND ITS APPLICATION PROVED THAT SOFTWARE ITS ELF HAS PURCHASED BY APPELLANT AND THAT THE EXPENSES WERE NOT MERELY UPGRADATION OF EX ISTING SOFTWARE. FINALLY, FAA HELD THAT EXPENSES INCURRED WAS NOT FOR UPGRADATION OF SOFTWARE. FAA FURTHER HELD THAT PERIOD OF TIME FOR WHICH APPELLANT ACQUIRED TH E RIGHT TO USE THE SOFTWARE WAS NOT RESTRICTED TO A LIMITED SPAN OF TIME, THAT NO SUBSE QUENT EVIDENCE WAS BROUGHT ON RECORD TO INDICATE THAT APPELLANT HAD UPGRADED SOFT WARE WITHIN ONE OR TWO YEARS OR EVEN LATER, THAT APPELLANT USED THE SAID SOFTWARE A ND SYSTEM FOR A LONG TIME, THAT SOFTWARE/SYSTEM WAS USED NOT ONLY FOR ASSESSEES OW N FILMS BUT ALSO FOR HIRING OUT, WITH REGARD TO FUNCTIONAL TEST, FAA HELD THAT BY AC QUIRING SOPHISTICATED NON-LENIER EDITING SYSTEM, ASSESSEE ACQUIRED A LEADERSHIP IN T HE FIELD OF PRODUCTION OF FILMS, THAT IT ACQUIRED A REVENUE EARNING ASSET, THAT SYSTEM EN ABLED THE ASSESSEE TO EARN REVENUE BY HIRING OUT TIME ON THE SAME SYSTEM. HE FURTHER H ELD THAT THE SYSTEM BECAME AN IMPORTANT CENTRAL TOOL IN APPELLANTS BUSINESS, THA T THE CHANGE BROUGHT BY THE SYSTEM WAS RADICAL AS UNDERLINED BY THE OBSERVATION OF THE TRIBUNAL. FINALLY, FAA HELD THAT SOFTWARE PURCHASED WAS A NEW SOFTWARE AND NOT MEREL Y UPGRADATION OF SOFTWARE ON AN EXISTING SMOKE XME SYSTEM. HE UPHELD THE DECISION OF THE AO. AFTER APPLYING THE TESTS LAID DOWN BY THE DELHI TRIBUNAL IN THE CASE O F AMWAY HE HELD THAT THE EXPENDITURE COULD NOT BE ALLOWED AS REVENUE EXPENDI TURE. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT MATTER WAS RESTORED BY THE TRIBUNAL TO TH E FILE OF THE AO TO DECIDE THE CASE IN LIGHT OF THE ORDER OF THE DELHI TRIBUNAL DELIVERED IN THE CASE OF AMWAY INDIA ENTERPRISES LTD.AO AS WELL AS FAA HAS GIVEN A CATEG ORICAL FINDING THAT AFTER APPLYING THE TESTS SUGGESTED BY THE DELHI TRIBUNAL, IT COULD NOT BE HELD THAT EXPENDITURE INCURRED WAS REVENUE IN NATURE. WE FIND THAT SMOKE MXE SYSTEM WAS NOT ITA NO. 6232/M/2010 EAGLE FILMS 4 UPGRADATION OF THE EXISTING SOFTWARE. HENCE, EXPEND ITURE INCURRED BY THE ASSESSEE FOR PURCHASING THE SAID SYSTEM CANNOT BE ALLOWED AS REV ENUE EXPENDITURE. GROUND NO.1 IS DECIDED AGAINST THE ASSESSEE. 7. AS FAR AS GROUND NO. 2 IS CONCERNED, WE ARE OF THE OPINION THAT THE ASSESSEE IS ENTITLED TO DEPRECIATION AS PER THE PROVISIONS OF T HE ACT. WE HAVE PERUSED THE STATEMENT OF FACTS FILED BY THE ASSESSEE, ALONG WIT H THE FORM NO. 35, BEFORE THE FAA. GROUND NO.2 UNDER CONSIDERATION IS EXTENSION OF THE SIMILAR GROUND OF APPEAL FILED BEFORE THE FAA AND THE STATEMENTS OF FACT SUBMITTED BY THE ASSESSEE BEFORE HIM. WE ARE OF THE OPINION THAT ASSESSEE IS ENTITLED TO CLA IM DEPRECIATION WITH REGARD TO SMOKE MXE SYSTEM. IN OUR OPINION DEPRECIATION @ 60% SHOU LD BE ALLOWED FOR SMOKE MXE SYSTEM. IT IS FOUND FROM THE RECORDS THAT ASSET-IN -QUESTION WAS USED FOR LESS THAN 180 DAYS, SO ASSESSEE IS ENTITLED FOR PROPORTIONATE DEP RECIATION ALLOWANCE. AO SHOULD ALLOW THE DEPRECIATION ACCORDINGLY. WITH THESE DIR ECTIONS WE DECIDE GROUND NO.2 IN FAVOUR OF THE ASSESSEE. APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH DECEMBER, 2012. )* # '( & , -). 5 TH DECEMBER, 2012 ( # / 0 SD/- SD/- ( . . / B.R. MITTAL ) ( / RAJENDRA ) )1 / JUDICIAL MEMBER & )1 / ACCOUNTANT MEMBER MUMBAI, -) DATE: 5 TH DECEMBER, 2012 TNMM COPY TO: 1. APP ELL ANT 2. RESPONDENT 3. THE CONCERNED CIT (A) 4. THE CONCERNED CIT 5. DR E BENCH, ITAT, MUMBAI 6. GUARD FILE !2$ $ //TRUE COPY// )* )* )* )* / BY ORDER, 3 33 3 / 4 4 4 4 DY./ASST. REGISTRAR , / ITAT, MUMBAI