3I INFOTECH LTD, NAVI MUMBAI V. ASST CIT 10(3), MUMBAI

ITA 697/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3772 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2016
• Appeal Filed By: Assessee
• Bench Allotted: I
• Next Hearing Date: 19-11-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 30-01-2014
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Question of law; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL I , BENCH MUMBAI BEFORE SHRI R.C.SHARMA , A M & SHRI AMARJIT SINGH , J M ./ ITA NO . 697 /MUM /20 14 ( / ASSESSMENT YEAR : 20 0 5 - 20 06 ) 31 I NFOTECH LIMITED, TOWER NO.5, 3 RD FLOOR TO 6 TH FLOOR, INTERNATIONAL INFOTECH PARK, VASHI, NAVI MUMBAI - 400703 VS. ACIT - 10(3), MUMBAI - 400020 ./ ./ PAN/GIR NO. : A A A C I 5205 Q ( / APPELLANT ) .. ( / RESPONDENT ) /ASSESSEE BY : SHRI GIRISH DAVE /REVENUE BY : SHRI SANTOSH MANKOSKAR / DATE OF HEARING : 03 / 0 2 / 2016 / DATE OF PRONOUNCEMENT 11/05 /201 6 / O R D E R PER R.C.SHARMA (A .M) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) , MUMBAI , FOR THE ASSESSMENT YEAR 200 5 - 20 06 , IN THE MATTER OF IMPOSITION OF PENALTY U/S. 271(1)(C) OF THE I.T.ACT . 2. IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED FOR LEVYING PENALTY WITH RESPECT OF DISALLOWANCE OF ASSESSEES CLAIM FOR SOFTWARE EXPENSES AS REVENUE EXPENDITURE. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT CONSULTAN CY AND IT SUPPORT SERVICES. DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AO DISALLOWED EXPENDITURE OF ITA NO. 697/14 2 RS.15,61,07,344/ - INCURRED ON DEVELOPMENT/UPGRADATION OF VARIOUS SOFTWARE PRODUCTS. THE CIT(A) CONFIRMED THE ADDITION. AFTER CONFIRMING THE DISALLOWANCE AO ALSO LEVIED PENALTY U/S.271(1)(C), AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT DURING THE COURSE OF SCRUTINY ASSESSMENT ASSESSEES CLAIM OF DEVELOPMENT/UPGRADATION OF SOFTW ARE EXPENSES WAS DECLINED. FOR THE SAID DISALLOWANCE THE AO HAS LEVIED PENALTY U/S.271(1)(C) OF THE I.T. ACT. WE FOUND THAT EVEN IN EARLIER YEAR S SIMILAR DISALLOWANCE SO MADE WAS CONFIRMED BY THE CIT(A) AND TRIBUNAL . T HE TRIBUNAL HAVE OBSERVED THAT AGAINST THE ORDER OF TRIBUNAL FOR EARLIER YEARS, THE ASSESSEE HAS GONE IN THE APPEAL BEFORE THE HONBLE HIGH COURT AND HON BLE HIGH COURT HAS ADMITTED THE SUBSTANTIAL QUESTION OF LAW. 5. FROM THE RECORD WE FOUND THAT SIMILAR CLAIM OF ASSESSEE WAS DECLINED BY THE TRIBUNAL VIDE ITS ORDER DATED 30 - 7 - 2010 FOR THE ASSESSMENT YEAR 2002 - 03, AGAINST WHICH THE ASSESSEE PREFERRED APPEAL BEFORE THE HONBLE BOMBAY HIGH COURT, WHICH HAS BEEN ADMITTED BY ORDER DATED 18 - 1 - 2012 IN THE INCOME TAX APPEAL NO.1013 OF 2011 AND FOLL OWING SUBSTANTIAL QUESTIONS OF LAW HAVE BEEN ADMITTED WITH THE FOLLOWING OBSERVATIONS : - (1) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL ERRED IN HOLDING THAT EXPENDITURE OF RS.12,59,33,429/ - , INCURRED BY THE APPELL ANT ON DEVELOPMENT/UPGRADATION OF SOFTWARE IS CAPITAL IN NATURE ? (II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL ERRED IN DENYING THE APPELLANTS ALTERNATIVE ITA NO. 697/14 3 CLAIM OF DEDUCTION OF RS.12,59,33,429/ - , AS SCIENTIFIC RESEARCH EXPENDITURE UNDER SECTION 35 OF THE ACT.? IT IS CLEAR FROM THE ABOVE THAT THE HON BLE HIGH COURT HAS ACCEPTED THE SUBSTANTIAL QUESTION OF LAW AGAINST THE SAID DISALLOWANCE, THEREFORE, ASSESSEES CLAIM HAS BECOME DEBATABLE. IN VIEW OF THE DECISIO N OF JURISDICTIONAL HIGH COURT IN THE CASE OF NAYAN BUILDERS AND DEVELOPERS, 368 ITR 722, IT WAS HELD THAT WHEN THE SUBSTANTIAL QUESTION OF LAW HAS BEEN ADMITTED, NO PENALTY SHOULD BE IMPOSED WITH RESPECT TO SUCH DISALLOWANCE/ADDITION. 6. WE ALSO FOUND FR OM THE QUANTUM ORDER OF THE TRIBUNAL IN EARLIER YEARS THAT THE TRIBUNAL HAVE HELD THAT EXPENDITURE INCURRED BY THE ASSESSEE AND TREATED AS WORK - IN - PROGRESS, ARE CAPITAL EXPENDITURE AND THE ASSESSEE WILL BE ELIGIBLE FOR DEPRECIATION ON THESE EXPENDITURE IN THE YEAR WHEN THESE HAVE BEEN CAPITALIZED. 7 . IT WAS CONTENDED BY LD. AR THAT SIMILAR EXPENDITURE WAS TREATED BY HONBLE DELHI HIGH COURT IN THE CASE OF G.E. CAPITAL SERVICE LTD., 300 ITR 420 (DEL) AS REVENUE BY OBSERVING THAT DUE TO TECHNICAL CHANGES AND NEED TO UPGRADE THE SOFTWARE ON A REGULAR BASIS, ANY EXPENDITURE INCURRED BY ASSESSEE TOWARDS THE UPGRADATION OF MS OFFICE CANNOT BE SAID TO BE CAPITAL EXPENDITURE AND IT COULD NOT BE SAID THAT THE SOFTWARE WAS OF AN ENDURING NATURE. THE ITAT MUMBAI BENCH IN THE CASE OF EXPRESS AIROTRONICS PVT. LTD. (2007) (ITA NO.7105/MUM/2002) HAS HELD AS UNDER : - IT IS HELD THAT PURCHASE OF ACCOUNTING SOFTWARE IN VIEW OF FAST CHANGING TECHNOLOGY IN THE FIELD OF SOFTWARE, NEED FOR ITS REPLACEMENT AT SHORT INTERVAL ARE E SSENTIAL AND THEREFORE, THE SAME COULD NOT BE DISALLOWED MERELY ON THE GROUND OF ACQUIRING BENEFIT OF ENDURING NATURE. ITA NO. 697/14 4 SIMILARLY, THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF IBM INDIA LTD. 105 ITD 1, HAS HELD AS UNDER : - WHERE IN THE COURSE OF BU SINESS, THE ASSESSEE ACQUIRES AN APPLICATION SOFTWARE MERELY TO CARRY OUT ITS BUSINESS OPERATION EFFICIENTLY AND SMOOTHLY, THOUGH THERE WAS AN ENDURING BENEFIT, IT DID NOT RESULT INTO ACQUISITION OF ANY CAPITAL ASSET AND THEREFORE THE SAID EXPENDITURE WAS TO BE TREATED AS REVENUE EXPENDITURE. THE ITAT JAIPUR BENCH IN THE CASE OF BUSINESS INFORMATION PROCESSING SERVICES 73 ITD 304 AND DELHI HIGH COURT IN THE CASE OF MEDIA VIDEO LTD., 122 TAXMANN 28 AND HONBLE CALCUTTA HIGH COURT IN THE CASE OF ITC CLASSIC FINANCE LTD., 112 TAXMAN 155, HAVE HELD THAT EXPENDITURE ON SOFTWARE WAS ALLOWABLE AS REVENUE EXPENDITURE. 8 . FURTHER RELIANCE WAS PLACED ON THE DECISION OF HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF PRAGA TOOLS LTD., 123 ITR 773 , WHEREIN IT WAS H ELD THAT WHERE THE EXPENDITURE HAS A DIRECT NEXUS, CONNECTION NOR RELATION TO THE CARRYING ON OF OR CONDUCTING THE BUSINESS OF THE ASSESSEE, IT MUST BE REGARDED AS AN INTEGRAL PART OF THE PROFIT - MAKING PROCESS. IN SUCH A CASE, IT MUST BE HELD TO BE A REVEN UE EXPENDITURE. RELIANCE WAS ALSO PLACED ON THE DECISION OF SPECIAL BENCH IN THE CASE OF AMWAY ENTERPRISES LTD., 111 ITD 112. 9 . IT IS CLEAR FROM THE ABOVE JUDICIAL PRONOUNCEMENTS THAT ALLOWING OR DISALLOWING SOFTWARE EXPENDITURE AS REVENUE IS A DEBATABLE ISSUE, THEREFORE, NO PENALTY CAN BE IMPOSED MERELY FOR THE DISALLOWANCE OF THE ASSESSEES CLAIM. 10 . THE HONBLE SUPREME COURT IN THE CASE OF RELIANCE PETROPRODUCTS PVT. LTD. (SLP(C) NO.27161 OF 2008 (SC), HELD AS UNDER : - ITA NO. 697/14 5 MERELY BECAUSE THE ASSESSEE HA D CLAIMED THE EXPENDITURE, WHICH CLAIM WAS NOT ACCEPTED OR WAS NOT ACCEPTABLE TO THE REVENUE, THAT BY ITSELF WOULD NOT, IN OUR OPINION, ATTRACT THE PENALTY UNDER SECTION 271(1)(C). IF WE ACCEPT THE CONTENTION OF THE REVENUE THEN IN CASE OF EVER Y RETURN WHE RE THE CLAIM MADE IS NOT ACCEPTED BY ASSESSING OFFICER FOR ANY REASON, THE ASSESSEE WILL INVITE PENALTY UNDER SECTION 271(1)(C) . THAT IS CLEARLY NOT THE INTENDMENT OF THE LEGISLATURE. 11 . IN VIEW OF THE ABOVE, WE DO NOT FIND ANY MERIT FOR THE PENALTY SO IMPOSED U/S.271(1)(C) OF THE ACT AND ACCORDINGLY, WE DELETE THE SAME. 1 2 IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . O RDER PRONOUNCED IN THE OPEN COURT ON THIS 11/05 / 201 6 . SD/ - SD/ - ( AMARJIT SINGH ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 11/05 /201 6 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//