Income Tax Appellate Tribunal - Ahmedabad
Rajan M Shah, Ahmedabad vs Assessee on 26 June, 2008
IN THE INCOME TAX APPELLLATE TRIBUNAL
AHMEDABAD BENCHES "C", AHMEDABAD
Before S/Shri Mahavir Singh, J.M.& Shri A.N.Pahuja, A.M,
M.A.No.99/Ahd/2009
(arising out ITA No.36/Ahd/2000
Asst.Year.1996-97
Shri Rajan Manilal Shah, 23, Vs. DCIT, Circle-3(1), U.C. Shah
Vasupujya Bungalows, Nr. Building, Ashram Road,
Ramdevnagar, Satellite Road, Ahmedabad
Ahmedabad 380015
PAN No.AFBP5182K
(Appellant) (Respondent)
(original Respondent) (original Appellant)
Appellant by : Shri Saurabh N Soparkar, AR
Respondent by: Shri Shelly Jindal, CIT-DR
ORDER
Per Mahavir Singh, J.M.
By way of this Miscellaneous Application (MA), the assessee has requested for amending/rectifying the order passed by the Tribunal in ITA NO.36 / Ahd/2000 dated 26-06-2008.
2. The brief facts are that the assessee is a Chartered Accountant and Bachelor of Law. The assessee derives the same under the heads - (i) salary from M/s. Virmati Banking Computer Services, (ii) income from proprietorship concern M/s. Soft Net Computers, and (iii) income from other sources. The proprietorship concern of the assessee namely Soft Net Computers, was engaged in the business of following activities:-
a) Data processing job work - between 1985 to 1994, its clients for date processing included various textile mills and manufacturing units;
b) Development of packages like pay-roll, share dividend, etc; and
c) Supply of financial accounting software.
The assessee appended a note in the return of income filed along with the computation of total income as under:-
"The assessee is a chartered accountant and bachelor of law, holding a rank in both the degrees. He started computer business in 1980. Between 1983 and 1987 he developed first version of computer software on banking sector as his sole intellectual property right. Between 1988 and 1991, he further kept on improving upon the said first version and finally developed a very highly sophisticated second and present version. During the above year, the assessee sold that intellectual property right - his self generated technical knowhow to M/s. Virmati Banking Computer Services, Ahmedabad. As the said asset does not fall within the definition of any of the four assets specified u/s.55(2) (a) of the I.T. Act, capital gains arising on transfer thereof has been treated as exempt from the levy of capital gains tax."
3. During the course of assessment, the A.O indicated that the assessee was in computer business and he had sold a software programme for a sum of Rs.80 lakh to VBCS which, in turn, had debited the purchase price of the software to its P&L A/c as revenue expenditure. The AO asked the assessee as to why this receipt should not be taxed as revenue receipt. The assessee preferred an application u/s.144A of the Act before JCIT requesting to issue directions on this issue. The JCIT directed the Assessing Officer to treat the sale receipts as revenue receipts as under:-
"BCS will take care to ensure its restricted supply, so that it does not jeopardize RMS's plans of such self-developed know-how in future, by making concepts of the software cheaply and commonly known to public. The foregoing would show that though the assessee has transferred his software to M/s. VBCS, yet he has imposed so many restriction on the sale and further use/alteration of the programme under reference. Interestingly, the alleged agreement is one sided in the sense that it imposes restrictions on the VBS, yet it does not restrict the assessee from making such programme or selling such type of programme to similar customers. In other words, the assessee is free to develop same programme and he could market it in whatever manner he may like. The other important aspect of the programme is that it is not patented and also the assessee has not claimed any copy right over it.
The close analysis of the whole transaction only reveal the fact that the assessee has sold a software programme to his sister concern namely VBCS which has debited the purchase price of the programme in its profit and loss account as revenue expenditure. The purchase also not have treated the programme as of enduring in nature.
In these circumstances, the sale receipts amounted to Rs.80.00 lakhs of the programme in question are required to be taxed as revenue receipts. The A.O may take action accordingly and as per law."
4. Accordingly, the A.O treated the sum of Rs.80 lakhs as revenue receipt Aggrieved, assessee preferred appeal before CIT(A), who allowed the appeal of the assessee, holding that the impugned software was capital asset and since 2 the cost of acquisition was not ascertainable as held by the Hon'ble Supreme Court in the case of CIT v. B.C. Shrinivas Shetty (1981) 128 ITR 294 (SC), the receipt was held to be not liable for capital gains tax by following observations:-
"18. I have carefully considered the facts of the case and the submissions made on behalf of both the sides. In my view, the questions which need to be answered for deciding the point in issu9e are as under:-
(a) whether what was sold by the appellant to VBCS was a capital asset or not; and
(b) If so, whether the transaction was one of transfer of such capital assets or merely of its exploitation.
To my mind, the observations of the Jt. CIT. regarding the Software having not been patented and the treatment of the cost of the Software in the accounts of the buyer are wholly irrelevant and are not germane to the issue at hand.
19. Section 2(14) of the Act defines "capital asset as property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession, personal effects, agricultural land of certain Ascription and certain specified Bonds. There can be no doubt on le facts and in the circumstances of the case that the appellant was the exclusive owner of the relevant Software along with its Source and Documentation. The Software which was sold by the appellant to VBCS cannot be said to be penalty proceedings stock-in- trade or raw material inasmuch as the appellant fad in the past never supplied Source Code of any Software - whether or nor connected with the banking industry - to any party. There is, therefore, no doubt in my mind that the subject matter of the agreement dated 25th December, 1995 constituted a capital asset in the hands of the appellant.
20. As stated above, the agreement describes the transaction in question as "transfer". The agreement also grants VBCS the right to further develop the programme, to modify and customize it and to compile and make copies thereof. VBCS has also been authorized to use the programme a model or concept for developing and customizing Software for its future customers. VBCS is also free to supply the programme to any Bank. On these facts, the transaction cannot be regarded as anything but a 'transfer' merely because the agreement lays down certain restrictive covenants in order to ensure that the components of the Software do not become public knowledge. Transfer of property with conditions attached are neither unknown nor uncommon. Board's instruction N.1964 referred to above also contemplates transfers with restrictive covenants and stipulates that this would not affect the taxability of the compensation. As the appellant has transferred to VBCS the rights to further develop the programme, to modify and customize it and to compile and make copies thereof to use it as a model or concept for its future customers and to sell it to any Bank, the transaction, in my view, cannot be regarded merely as one of exploitation of the Software.
3In view of the above, it has to be held that the subject matter of the agreement dated 25th December, 1995 was a capital asset which was transferred by the appellant for such transfer has, therefore, to be treated a capital receipt in his hands. In view of the Supreme Court decision income CIT v. B.C. Shrinivas Shetty referred to above, the transfer in question has to be held to be not liable to capital gains as the cost of the acquisition of the asset in question was nil and the time when it was acquired was not ascertainable. The applicability of the Supreme Court decision ic B.C. Shrinivas Shety (supra) on the facts and in the circumstances of the case remains unaffected by the subsequent amendments in the relevant provisions of law. This has also been clarified by the CBDT vide its instructions No.1694 dated 17.3.1999.
21. It may be clarified once again that the transaction in question did not take place in the course of appellant's proprietary business which consisted of data processing job work, development of packages like pay- roll and share dividend and supply of complied copies of financial accounting software. The appellant had not dealt in or supplied the source code of any software - whether or not connected with Banking industry to any party in the pat. However, even if it is presumed for the sake of argument that the transaction in question was linked to appellant's proprietary business, it would not make any difference as to the nature of the receipt in appellant's hands. As stated above, capital assets, by definition, mean property of any kind held by the assessee whether or not connected with his business or profession except properties of certain specified verities. Thus, unless the software sold by the appellant can be regarded as his stock in trade, it would have to be treated as a capital asset in his hand. This would also be clear from the fact that assets such as goodwill of business, loom hours, route permits etc., which spring directly from business are treated as capital assets and there is no dispute about the fact that their transfer gives rise to capital gains - whether taxable or not.
22. In view of the above, it is held that the sum of Rs.80,00,000/- received by the appellant for the transfer of his software along with its source code and documentation constituted a capital asset in his hands which was not liable to capital gains tax in view of the Supreme Court decision in the case of B.C. Shrinivas Shetty (supra). The addition made by the A.O is, therefore deleted."
5. Aggrieved, the Revenue is in appeal before Tribunal. The Tribunal reversed the order of CIT(A) and treated the receipts as revenue in nature by giving following findings in para-15, 16 & 18:-
15. We have heard both the parties and considered rival submissions.
`Following issues required to be addressed properly in order to resolve the controversy - (i) what is the real nature of assessee's business activities;
(ii) what is the modality of accounting adopted by the assessee to book its revenue and expenditure incurred for overall business activities; and (iii) whether the accounts reflects conscious choice of the assessee to segregated the software in question from rest of business activities 4 Addressing to these issues, as admitted by the assessee by its letter dated 12.8.1999 addressed to the CIT(A) the assessee was engaged in the business of following activities viz. (i) Data processing job work - between 1985 to 1994, its clients for date processing included various textile mills and manufacturing units; (ii) Development of packages like pay-0roll, share dividend, etc.; and (iii) Supply of financial accounting software.
16. Admittedly, the activity comprised of development of packages like pay-roll share dividend, etc. This clearly indicates that the activity of development of packages was not confined to one or two activities but the same was extensive one. Therefore, from the averments of the assessee himself, it is evident that one of the important areas of the assessee's activities was development of software packages. Coming to second issue, the modalities of accounting followed by the assessee is reflected from P & L A/c and balance-sheet annexed in the paper book. In the P & L a/c. assessee shows receipts of software charges and other activities. At the same timed, the entire expenditure is debited to P & L a/c. which clearly implies that no part of expenditure was capitalized. Perusal of balance-sheet reveals that none of the software is specifically shown as stock-in-trade. The analysis of this type of accounting modality will indicate that the assessee was claiming all the expenditure from consolidated receipts and, therefore, whatever software were developed become stock- in-trade of the assessee, though specifically not capitalized in balance- sheet. The analysis of balance-sheet does not give any indication that the assessee wanted to differentiate between the software in question and other software developed or otherwise by the assessee. Nowhere in the pleadings, it has been indicated that the assessee had any separate set- up to develop the impugned banking software which clearly implies that the assessee developed this banking software with the existing business facilities and utilizing the existing business machineries and assets. It shall be borne in mind that the assessee was the proprietor and developed all software is part of its business activities. As admitted by the assessee, it took several years and efforts to develop this exclusive software. In the absence of any other set-up or facility to develop the software, uneascapable conclusion is, that the impugned software is integral part of assessee's proprietorship business adventure of developing computer software. In the given facts and circumstances, we are unable to subscribe the plea of Ld. counsel for the assessee that the banking software in question amounts to a personal capital asset of the assessee. Besides, we are unable to agree that the software is a self-generating asset as the assessee took years of improvisation. All these software and the expenditure can be easily inferred to have been booked in the accounts book of the assessee. In the absence of any other facilities and the fact that all the expenses have been debited in P & L a/c. by no stretch of imagination, it can be held that the asst was self-generated. In our view, the software is a business asset developed by booking expenditure in the proprietorship business of the assessee, the same has been rightly held so and the receipt therefrom has been rightly treated as revenue receipt.
18. Since by intrinsic nature, as in the given facts and circumstances, we have held banking software in question to be part of business activity of the assessee of developing the software and essentially a business asset, the case laws cited by Ld. counsel for the assessee are of no avail as they 5 pertained to capital asset in contra distinction to assessee's business assets. In view of the above observations and findings, we uphold the order of AO and reverse that of the Ld. CIT(A)."
6. Aggrieved, against the order of Tribunal, the assessee preferred this MA and the Ld. counsel for the assessee, Shri S.N.Soparkar emphasized only one issue that the source code of software is a capital asset and he further stated that Why Source code of Software & "Right to Modify, Alter, Customize, Copy & Sell"
is not a Capital Asset & how it is a Business Asset =Stock-in-Trade. According to the Ld. counsel, the apparent mistake is regarding the subject-matter taken "software" as revenue receipts, whereas the assessee has sold "software with source code & documentation and right of manufacture (Modify & Copy) and sell". The Ld. counsel stated that the Tribunal could have examined the facts whether it is self generated or not whether there was finity of time of development & finity of cost of development or not. According to the Ld. counsel - what is source code - & hence, the apparent mistake therefore deserves a review. He further stated that the Tribunal has overlooked and not taken any cognizance of the fact that there was not a single rupee sale of banking software called Banker 123 by the assessee any time prior to or subsequent to this one off transaction. He further referred to Section 2(14) of the Act, which already defines the capital assets as including the assets connected with the business: "whether connected with Assessee's business or not". He further narrated that this point has been referred to in the submissions to CIT (Appeals) and in the order CIT(Appeals) and also in the submissions to the Tribunal and it has not been replied at all. He argued that the chapter dealing with capital gain specifically provides for various clauses dealing with business assets, referred to example of Loom Hours, which get generated in course of business only.. not self-generated as self- happening... not without spending on Looms... then why they are assessed as capital asset and why specifically, section 55(2) applies to it? He argued that introduction of the "Right to Manufacture" in clause 55(2) with subsequent effect, is clearly to include such business assets as capital assets. The intent of statute is so clear and the Tribunal has apparently overlooked and not examined this submission of the assessee and has not replied the matter. Hon'ble Tribunal has gone against the clear intent of the Statute/Parliament and also CBDT. The Ld.counsel for the assessee stated that the observation of the Tribunal, that if the 6 asset is developed in course of business it is a business asset and it is a revenue receipt, is pre-set. He referred the example of Loom hour, route permit etc.
7. On the other hand, the Ld. CIT-DR, Shri Shelly Jindal stated that source code is nothing but a locking system and it work like 'password'. He stated that the assessee is seeking review of the Tribunal's order and not rectification of mistake. Even otherwise, according to the CIT-DR, the view of the Tribunal is perfectly alright and deserves to be upheld.
8. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the Tribunal has taken a view that the banking software in question is part of the business activity of the assessee of developing the software and essentially this is a business asset. Even developing a source code is also part of banking software, which is part of the assessee's business activity and accordingly related sale is revenue receipt as held by the Tribunal. Even otherwise, it is well-settled that the Tribunal has no inherent power of reviewing its order on merits but the Tribunal has limited power, acting u/s.254(2) of the Act i.e just to rectify the mistake apparent from record. It has not been vested with the review jurisdiction by the statute creating it. Accordingly, Sec. 254(2), only empowers the Tribunal to amend any order passed by it u/s.254(1), with a view to rectify a mistake apparent from records and not otherwise. Accordingly, we find no mistake apparent from records in the order of the Tribunal and accordingly this MA of the assessee is dismissed.
9. In the result, assessee's MA is dismissed.
Order pronounced in the open court on 30/04/2010.
Sd/- Sd/-
(A.N.Pahuja) (Mahavir Singh)
Accountant Member Judicial Member
Place: Ahmedabad.
Date : 30-04-2010
Dkp*
Copy of the order forwarded to :-
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A)-VI, Baroda
5. The DR, ITAT, Ahmedabad
6. Guard File (in duplicate)
/True copy/ By Order,
DR / AR, ITAT, Ahmedabad
7