TaxTMI 
TaxTMI 
2014 (1) TMI 873
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....venue expenditure and not capital in nature. 3. Whether on the facts and in the circumstances of the case, the Ld CIT(A) was right in treating the expenditure of Rs.1,14,86,291/- on purchase of software as revenue. Whereas computer software was introduced as a depreciable asset under Rule 5(1) read with appendix-1 of the IT Rules, 1962 with effect from assessment year 2003-04 and the assessee was eligible to claim only depreciation on such purchase of software. 4. That the appellant craves for the permission to add, alter, delete or amend the grounds of appeal before or at the time of hearing of the appeal. 2. The brief facts of the case are that the case of the assessee was reopened u/s 147 of the Income Tax Act, 1961. The reasons recorded for reopening the assessment are as under:- "It is seen from the record the assessee claimed the expenditure incurred on software purchased during the previous year amounting to Rs.1,14,86,291/- as revenue expenditure. Computer soft wares were included as depreciable assets u/s 32 of the Income Tax Act, 1961 read with Rule 5(1) and Appendix-1 of IT Rules w.e.f. assessment year 2003-04. The assessee should have treated the above expen....
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....d mainly for updating & rationalizing the existing system and the benefits derived there from were neither permanent nor enduring in nature. The expenditure incurred on software primarily was in the nature of annual renewal of software licenses. The said expenditure pertained to application software tools that were used in regular business of software development and testing. It was further submitted that this can be distinguished from software that may have enduring benefit such as operating platforms that are installed in IT systems and act as a backbone to the IT infrastructure. Applications tools are software that enhances the efficiency of the operations and aids the primary process. It is akin to consumables used for production in the manufacturing industries and did not have any enduring benefit. The expenditure incurred on software written off also included expenditure incurred towards upgrade of certain existing application software. Application software programme have a very short shelf live and have to be upgraded constantly from time to time by adding patches and modules that upgrade the base programme. This does not result in increasing the life of the software but mer....
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....er or there was any failure on the part of appellant to disclose truly and fully all material facts necessary for assessment. Xxxxxxxxxxxxx xxxxxxxxxxxxx Therefore, on the ground of change of opinion the assessment order under appeal is not legally sustainable and consequently annulled." 6. Regarding merits of the case, the Ld CIT(A) observed that assessee had purchased software for its various units and software purchased were to be utilized in the development of other software and were in the nature of application software license meant for smooth functioning of business and not for acquiring any new capital asset. Application software have a very short life and have to be upgraded constantly from time to time. With effect from 1.4.2003, computers software has been classified as tangible asset under the heading software in Appendix-1 of IT Rules entitled to depreciation @ 60%. The appellant has relied upon large number of decisions in this regard which pertain to the issue whether the expenditure on purchase of software constituted expenditure of capital or revenue in nature and allowable u/s 37 of the Income Tax Act, 1961. All the decisions relied upon pertain to ass....
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....herein break up of various software tool purchased during the year was placed. In view of the above, the Ld AR argued that payments were revenue in nature as was evident from the number of payments which were made for various software tools. He further argued that after completion of original assessment proceedings the assessee was issued rectification notice u/s 154 for rectification of mistake and for making disallowance of such software expenses and reply to that was submitted on 26.3.2008. Our attention was also invited to page 72 of paper book and it was argued that after assessee's reply nothing was heard from the Department and suddenly notice u/s 148 was issued. In view of the above arguments, it was submitted that Ld CIT(A) had rightly deleted the additions. 10. We have heard the rival submissions of both the parties and have gone through the material available on record. We observe that original assessment was completed u/s 143(3) and assessee at its own vide note No.2 attached with the return of income had explained the treatment of software expenses as revenue expenses and during assessment proceedings the assessee vide letter dated 3.3.2006 also had replied to the A....