TaxTMI 
TaxTMI 
2016 (3) TMI 691
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....d funds used for acquisition of capital assets by a running concern can be disallowed as deduction under Section 36(1)(iii) of the Act? (III) Whether on the facts and in the circumstances of the case the Tribunal erred in law in confirming the disallowance of expenditure incurred for software development as capital expenditure? Mr. J.P. Khaitan, learned Senior Advocate appearing for the assessee, submitted that the question numbers (I) and (II) are covered by the judgments of the Supreme Court in the case of CIT -Vs.- Associated Fiber and Rubber Industries reported in (1999) 226 ITR 471. He added that the proviso to Section 36(1)(iii) was introduced with effect from 1st April, 2004 whereas we are concerned in this case with the assessment year 1997-98. He submitted that this proviso can have no application. In any case, he added that the Supreme Court in the case of Deputy Commissioner of Income Tax -Vs- Core Health Care Ltd. reported in (2008) 298 ITR 194, has held that the proviso has only prospective effect. Therefore, according to Mr. Khaitan, the question nos.(I) and (II) have to be answered in favour of the assessee. Mr. Bhowmik submitted that this Court had held that the ....
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....n made on behalf of the assessee, it is found that the amount spent on software development was not for the purpose of facilitating the assessee's existing trading or manufacturing operations or enabling management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched. As can be seen from the submission made on behalf of the assessee, software development was in connection with mining practices and study on verinculture on bio-degradable wastes on experimental basis. This clearly implies that the related expenses on software development were incurred with a view to decide whether an asset or advantage of a permanent nature and not deductible. However depreciation thereon to the extent of Rs. 5,13,570/- (being 12.5% on Rs. 41,08,556/-) is allowed. Consequently the addition therefore of Rs. 2,40,000/- being the amount amortised is deleted." Aggrieved by the order of the assessing officer the assessee appealed before the Commissioner of Income Tax (Appeals) (hereinafter referred to as the 'CIT(A)'). The CIT(A) by an order dated 30th October, 2002 held in favour of the assessee and deleted the disallowanc....
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....nd control of the assessee's business to be carried on more efficiently or more profitably. As such the decision of the Supreme Court reported in 124 ITR 1 in the case of Empire Jute Co. Ltd. -Vs.- CIT squarely applies in this case. I, therefore, hold that the Assessing Officer was not correct in disallowing the claim towards software development expenditure. In view of this addition made by the Assessing Officer of an amount .of Rs. 41,08,556/- is deleted. The Assessing Officer is also directed to withdraw depreciation allowed on this item. Further, the amortized amount of Rs. 2,40,000/- is to be added to the income." The revenue appealed against the order of the CIT(A) before the Tribunal. The Tribunal by an order dated 15th December, 2002 reversing the order of the CIT(A) held that the expenditure on software development was capital in nature and should be disallowed. To be precise the Tribunal held as follows:- "At the time of hearing before us, it is submitted by the Ld. D.R. that during the year under consideration the assessee developed new software by incurring the huge expenditure of Rs. 41,08,556/- in connection with the mining practices and study of bio-degradable w....
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....T (A) and ITAT held the expenditure to be revenue expenditure. On reference Their Lordships of Hon'ble Rajasthan High Court answered the reference in favour of the revenue and against the assessee with the following finding:- "The facts on record are that the payment of Rs. 1,38,360/- was not paid for consultancy fee to Hindustan Computers Ltd. in fact, the payment was made for out-right sale of computer software which is used as technique in mining operations. The finding of the Commissioner of Income Tax (Appeals) is that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation why it should not be treated as a capital asset and expenditure on that is capital expenditure. Considering. these facts and the decision of their Lordships and a later decision of the Bombay High Court, in our view, the acquisition technical know-how-how is capital expenditure, therefore, the Assessing Officer has rightly treated the expenditure on acquiring the computer software as expenditure of capital nature and rightly allowed depreciation as per rules. In the result, we answer the reference in negative, i....
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....an operating system and a software meant for an use as a software for application. Mr. Khaitan contended that since this was an application software as was contended before the assessing officer at page 51, this should have been allowed as a revenue expenditure. Mr. Bhowmik submitted that this is an addition to the capital asset of the assessee and, therefore, is a capital expenditure. He relied on a judgment of the Rajasthan High Court in the case of CIT Vs. Arawali Constructions Co. (P.) Ltd. reported in (2003) 259 ITR 30 following a judgment of the Bombay High Court in the case of CIT Vs. Premier Automobiles Ltd. reported in (1994) 206 ITR 1. Mr. Khaitan also drew our attention to a judgment in the case of CIT Vs. Southern Roadways Ltd. reported in (2008) 304 ITR 84 (Mad), wherein such expenditure was treated as a revenue expenditure. Identical view, according to him, was taken in CIT Vs. IBM India Ltd. reported in (2013) 357 ITR 88(Karn.) Mr. Bhowmik submitted that in the case of CIT Vs. Southern Roadways Ltd., Madras High Court has accepted the proposition that the expenditure on account of software provides benefit of an enduring nature. He contended that in that view of t....
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....on of all the authorities below with the exception of the CIT(A). The assessing officer in the assessment order u/s.143(3) of the Act erroneously came to the following conclusion:- "...As can be seen from the submission made on behalf of the assessee, software development was in connection with mining practices and study on verinculture on bio-degradable wastes on experimental basis." This was rightly pointed out by the CIT(A) in his order dated 30th October, 2002 wherein he held as follows:- "...On consideration of the facts it reveals that nowhere the assessee states that the software development expenditure was on experimental basis." In Asahi Safety Glass (supra) the assessee was engaged in the business of manufacturing safety glass used in automobiles. The assessee entered into an agreement with Arthur Anderson & Associates for installation of a software application for assistance in areas related to financial accounting, inventory and purchase. According to the said agreement the assessee was also required to enter into a back to back agreement with Oracle Software India Pvt. Ltd., since the software application supplied by Arthur Anderson & Associates worked on Oracle ....
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....ding 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 forth 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 expendi....
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....venue expenditure. During the course of assessment proceedings the assessing officer issued notice to the assessee to explain why the expenditure incurred on computer software should not be treated as capital nature. The assessee contended that the software was required for data analysis for purpose of mining activity and the expenditure incurred was debited to Profit and Loss Account. The assessee also made the following submission:- ""This is not an asset, as stated by you during the course of discussion, as the life of this is restricted to shorter period, for a particular time only this thing is required and again they have to get the programme when get another nature of work.... whereas software is just a programme and it cannot be called a capital expenditure."" The assessing officer rejected the assessee's contention and held it to be a capital expenditure and allowed depreciation as per rules. In appeal both the CIT and Tribunal held in favor of the assessee and opined that the expenditure incurred on technical know-how is revenue expenditure. The Rajasthan High Court allowed the Revenue's appeal and held as follows:- ""We have seen the aforesaid explanation. The assess....
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....and expenses incurred on technical know-how are entitled for depreciation under section 32 of the Income-tax Act, 1961. In CIT v. Elecon Engineering Co. Ltd., [1987] 166 ITR 66 (SC), their Lordships have considered the issue that in an agreement in collaboration if the assessee acquired drawings and patterns for the manufacture of worm reduction gear units and conveyor idlers they were treated as plant or machinery and held that depreciation is allowable in relation to drawings and patterns. The Department has preferred an appeal, the appeal has been dismissed by the Supreme Court. The facts on record are that the payment of Rs. 1,38,360 was not paid for consultancy fee to Hindustan Computers Ltd., in fact, the payment was made for outright sale of "computer software" which is used as technique in mining operations. The finding of the Commissioner of Income-tax (Appeals) is that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation why it should not be treated as a capital asset and expenditure on that is capital expenditure. Considering these facts and the decision of their Lordships a....
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.... is, the assessee is not entitled to depreciation on the price paid by him on acquisition of drawings, blue prints, process sheets and technical data from Henry Meadows Ltd. of England for the assessment years 1970-71, 1971-72 and 1972-73. This question is, therefore, answered in the negative and in favour of the Revenue and against the assessee... As regards question No. 3, which is referred to at the instance of the Revenue, it is agreed by counsel for the parties that in view of the decisions of the Supreme Court in Scientific Engineering House P. Ltd. v. CIT, [1986] 157 ITR 86 and CIT v. Elecon Engineering Co. Ltd., [1987] 166 ITR 66, this question has to be answered in the affirmative, that is, in favour of the assessee and against the Revenue. We answer this question accordingly." The Rajasthan High Court in Arawali Construction (supra) has not considered the difference between application software and system software which has been duly emphasized by the Delhi High Court in Asahi Safety Glass (supra). In the instant case the software developed by the assessee is application software which allows it to efficiently carry out mining activity for the extraction of Bauxite. A....
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.... to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and, therefore, it has to be treated as revenue expenditure. In that view of the matter, the finding recorded by the Tribunal is in accordance with law and does not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue." In the instant case the revenue has relied on the principle of enduring nature to contend that the expenditure incurred by the assessee was of Capital nature. However there are a plethora of judicial pronouncements which go to show that the test of enduring nature is not to be applied m....
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....view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.[(1965) 58 ITR 241 (PC) : 1964 AC 948] it would be misleading to suppose that in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature, acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the a....
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....ssessee's appeal. The Supreme Court while allowing the assessee's appeal held as follows:- "It would, in our opinion, be unrealistic to ignore the rapid advances in researches in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical knowhow at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this as capital. The circumstance that the agreement insofar as it placed limitations on the right of the assessee in dealing with the knowhow and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. * * * The improvisation in the process and technolog....