TaxTMI 
TaxTMI 
2013 (8) TMI 835
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....nditure is included in lab maintenance charges. The learned CIT(A) ought not to have relied on mere paper books. 3. Ground Nos. 1 and 4 being general grounds do not require any adjudication. In ground No. 2 the Department has challenged deletion by the CIT(A) of an amount of Rs. 76,30,000 added by the Assessing Officer. 4. Briefly, the facts relevant to the issue in dispute are that the assessee is a private limited company engaged in the business of software development export of computer software and in-house training business consultancy. A survey u/s. 133A of the Act was conducted in assessee's own case on 23.1.2006. During the post survey proceedings, the assessee came forward to declare an additional income of Rs. 1 crore for the impugned assessment year. As a consequence of such declaration made, the assessee filed return of income for the assessment year under dispute on 22.6.2006 declaring total income of Rs. 2,46,57,980 after claiming deduction u/s. 10B of the Act of an amount of Rs. 1,37,44,264. The return of income filed by the assessee was initially processed u/s. 143(1) of the Act. Subsequently, however, the assessee's case was selected for scrutiny assessment. ....
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....on various judicial precedents. 6. The CIT(A) on considering the submissions made by the assessee, called for a Remand Report from the Assessing Officer. As can be seen from the discussion made by the CIT(A), in the Remand Report the Assessing Officer agreed with the contention of the assessee that the amount was spent for purchase of software. Hence, the provisions of section 40(a)(ia) of the Act are not applicable. However, the Assessing Officer was of the view that the expenditure incurred is in the nature of capital expenditure, hence cannot be allowed. The CIT(A), however, accepting the contention of the assessee came to a conclusion that since the amount was spent for purchase of application software which has a limited span of life, unlike system software, it has to be allowed as a revenue expenditure. 7. The learned DR submitted before us that the conclusion arrived at by the CIT(A) is bereft of any reason and without any basis, as he has arrived at the conclusion that the software is application software without considering any material or evidence. The learned DR further submitted that the issue is squarely covered by the decision of the ITAT Delhi Special Bench in ....
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....venue cannot be decided on the basis of ownership test alone but has to be seen from the point of its utility to businessman and to see how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of a computer software and its possible use in different areas of business teaching either capital or revenue field or its utility to a businessmen which may touch either capital or revenue field. The manner in which the computer software is used is again peculiar, General mode is to acquire computer software on a license. That by itself will not be sufficient to conclude that the said expenditure is revenue expenditure, if on application of the functional test, it is found that the expenditure operates to confer a benefit in the capital field. On the other hand, some computer software may have a very limited economic life so as to be treated as capital expenditure, though owned by an assesses. Whether expenditure on computer software gives an enduring benefit to an assessee: 56. For ascertaining as to whether expenditure on computer software gives an enduring b....
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.... the profit earning apparatus of the assessee (Functional Test): 57. The advantage which an assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account, however, if assets/advantage is part of profit earning apparatus, it is capital. 58. The following factors would be relevant to determine whether the advantage Operates in the capital field or revenue field. (i) Nature of Business of the assessee. It is necessary to obtain an understanding of the business function or effect of a concern's 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 centrality to the functions of the business will all bear on its treatment. ....
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....ware developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose. (iii) Degree of associated organisational change; Similarly the degree of change intended in the way operations are carried out as a result of the Computer software, for example, 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 expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerised. (iv) It has to be borne in mind that computer software industry is of a fast changing nature. Therefore whatever software purchased by an assesses would become outdated much earlier than expected. The assessee has therefore to upgrade his software. An clement of upgrading does not automatically make the expenditure capital. The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capit....
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....wn above after giving an opportunity of being heard to the assessees. ..." 10. As can be seen from the extracted portion above, the ITAT Special Bench has laid down certain criteria for deciding whether a particular expenditure incurred for acquiring computer software is revenue or capital. It is very much evident that the CIT(A) has not decided the issue keeping in view the aforesaid criteria laid down by the ITAT Delhi Special Bench. He has not mentioned what is the exact span of life of the software and whether it satisfies the functional test to be treated as revenue expenditure. We, therefore, considering the totality of the facts and circumstances in the light of the ratio laid down by the ITAT Delhi Special Bench in the case of M/s. Amway India Enterprises (supra), remit this issue back to the file of the Assessing Officer who shall decide the same keeping in view the criteria laid down by the ITAT Delhi Special Bench, as above. Needless to mention, the Assessing Officer shall afford a reasonable opportunity of being heard to the assessee. 11. In ground No. 3, the Department has assailed deletion of an amount of Rs. 48,95,925 by the CIT(A) which was added by the Assess....