Income Tax Appellate Tribunal - Mumbai
Joint Commissioner Of Income Tax vs Citicrop Overseas Softwares Ltd. on 5 July, 2004
Equivalent citations: (2004)85TTJ(MUM)87
ORDER
R.P. Rajesh, A.M.
1. This appeal filed by the Revenue is directed against the order of the CIT(A)-I, Mumbai, pertaining to asst. yr. 1996-97. The following grounds are taken by the Revenue :
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A), Mumbai, erred in deleting the disallowance of Rs. 41,20,000 made by the AO holding that the software does not have any degree of endurability and permanence due to change of system and change of technology.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A), Mumbai, erred in directing the AO to recompute the deduction under Section 80HHE holding that the AO had erred in making the addition of Rs. 25,15,728 while computing the deduction.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A), Mumbai, erred in holding that the claim regarding depreciation of Rs. 15,32,824 is in accordance with law and therefore, should be accepted.
4. On the facts and in the circumstances of the case and in law, the learned CIT(A), Mumbai, erred in cancelling the disallowance of Rs. 3,41,000 towards software items."
2. The first ground of appeal pertains to the deletion of addition of Rs. 41.20 lakhs being software written off in the books as capital expenditure. The main reasons for the AO to disallow the claim were that--(i) The items written off are plant; (ii) The items are costly; (iii) Once the software is purchased, it is used over the years; and (iv) The Finance Act, 1999, specifically provides to allow expenses on Y2K software as revenue expenditure, which means that the same would not be allowable but for this amendment.
3. Before the CIT(A), the assessee contended that it is engaged in the business of export out of India of computer software or its transmission from India to a place outside the country, in addition to providing technical services outside India in connection with development of production of software. As per the practice, the assessee charged to the P&L a/c expenditure incurred on application software which had become obsolete, but the AO has treated it of capital nature and allowed only depreciation thereon. It argues that new versions of software programmes are coming out daily and the software technology is changing so rapidly that software of today becomes obsolete tomorrow. It was further contended that the state of the art in software technology has to be constantly updated so that no software package wears the requisite degree of durability to qualify as an enduring capital asset. The magnitude of expenditure is not important as what is relevant is its true nature and character. The software is a raw material which by no stretch of argument can be considered as a plant. With regard to the AO reference to the insertion of Clause (xi) in Section 6 by Finance Act, 1999, the assessee argued that it refers to computer system and not to software programme as stated by the AO. Reliance was placed on the following judgments :
1. Alembic Chemicals Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC)
2. CIT v. Western India State Motors (1993) 203 ITR 363 (Raj)
3. Praga Tools Ltd. v. CIT (1980) 123 ITR 773 (AP)
4. CIT v. Kusum Products (P) Ltd. (1984) 149 ITR 250 (Cal)
5. R.G.S. Industries v. CIT (1990) 183 ITR 31 (Gau)
6. Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC)
7. Hinton (Inspector of Taxes) v. Maden & Ireland Ltd. (1960) 39 ITR 357 (HL)
8. Bajaj Tempo Ltd. v. CIT (1994) 207 ITR 1017 (Bom)
9. Business Information Processing Services v. Asstt. CIT (2000) 67 TTJ (Jp) 131 : (1999) 239 ITR 19 (Jp)
10. Lubi Electrics (P) Ltd. ITA No. 163/Asd/1992, May Journal of BCAJ
4. The above submissions of the assessee found favour from the CIT(A), who allowed the ground with his following findings :
"1.3 I have considered the facts of the case as well as the submissions of the appellant that software technology is changing so rapidly that software of today becomes obsolete tomorrow. Even the state of the art technology requires constant update. The judgment of the apex Court of the country in the case of Alembic Chemicals Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC) is applicable on all fours to the facts of the case, ft would be useful to reproduce hereinbelow some of the observations of the Hon'ble Court at p. 378 :
'It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of the 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-ephmerality to share the requirements and qualifications of an enduring capital asset. The rapid stride in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this a capital.' The Jaipur Bench of Tribunal in the case of Business Information Processing Services v. Asstt. CIT (2000) 67 TTJ (Jp) 131 has held that expenses on development of computer software are revenue in nature. The times are fast changing and computer system has emerged as a very important component during this fast changing era when day-by-day the systems are developed in a new way and softwares are needed like a raw material for use. As regards the AO's reliance on the amendment inserted in Section 36 by the Finance Act, 1999, I am of the view that the said amendment has allowed the capital expenditure on hardware to make non-Y2K compliant system into compliant system, whereas software consists of programmes which a computer uses for the task on the basis of logic supplied by the user and the software programme also requires changes if the logic for the desired result is being changed. Respectfully following the judgment of their Lordships of the apex Court in the case of Alembic Chemicals Works Co. Ltd. (supra) and in conformity with the decision of Tribunal, Jaipur Bench (supra), it is held that software does not have any degree of endurability and permanence due to change of system or change of technology. The disallowance on this score is deleted."
5. Before us, the learned Departmental Representative relied on the order of the AO whereas the learned counsel for the assessee placed reliance on the order of the CIT(A). The learned counsel for the assessee further emphasised on the reliance placed before the CIT(A) which are cited above. Upon hearing the parties and on perusal of the material available on record, we are in agreement with the findings of the learned CIT(A) that a software does not have any degree of endurability and permanence due to change of system and change of technology. The case law relied upon by the CIT(A) are squarely applicable to the case of the assessee. With regard to the reference by the AO to Clause (xi) in Section 36 by Finance Act, 1999, we agree with the assessee that it refers to computer system and not to software programme and, therefore, the same is misplaced. In this view of the matter, we uphold the order of the CIT(A) on this issue. This ground of the Revenue fails.
6. The second ground pertains to deduction under Section 80HHE of the Act. The assessee claimed the deduction at Rs. 8,14,53,422 whereas the AO granted a higher deduction at Rs. 9,25,78,447 in view of the additions made to the total income. In this the AO made an addition of Rs. 25,15,728 towards exchange gain although it does not represent surplus arising out of sales realisation. In fact, it is only an accounting entry made in consequence to implementation of Accounting Standard No. 11 (AS-11), issued by the Institute of Chartered Accountants of India (ICAI). The CIT(A) agreeing with the contention of the assessee that the exchange gain of Rs. 25,15,728 does not represent surplus arising out of sales realisation held that it should not form part of total turnover while computing deduction under Section 80HHE of the Act. He further found that the assessee on its own has included in the total turnover exchange gain of Rs. 97,74,381 towards difference in exchange actually realised. This factual finding of the learned CIT(A) was not specifically challenged before us, hence we do not see any merit in the ground of the Revenue. This ground also fails.
7. With regard to ground No. 3 pertaining to depreciation of Rs. 15,32,824 on certain old assets written off in the books on the premise that the assets had not been put to use during the year, the assessee contended before the CIT(A) that it had written off Rs. 61,31,294 in the books on 31st Dec., 1995, towards certain fixed assets such as xerox machines, UPS machines, computers, etc. as they had become unusable, but the depreciation was claimed on the same as they continue to form a part of block of fixed assets. It was further explained that it is the practice to write off computer related items in the books once they become obsolete as the extent of obsolescence in respect of these types of items is quite high in information technology industry. The assessee admitted to have actually used these assets. The assessee invited the attention of the CIT(A) to the provisions of Section 43(6)(c)(B) of the Act to state that the written down value in the case of any block of assets means the aggregate of the written down values of all assets falling within that block of assets at the beginning of the previous year as reduced by monies payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so however, that the amount of such reduction does not exceed the written down value. It was argued that since no monies have become payable in respect of write off of such assets, they continue to form a part of the block of assets.
8. The learned CIT(A) observed that the assessee had not received any money in wake of the discarding of the assets, therefore, the assets continue to form a part of the block. Therefore, the assessee was justified in claiming depreciation of Rs. 15,32,824 on the same. While arriving at this conclusion he placed reliance on the decision of the Tribunal, Ahmedabad Bench, in the case of Inductotherm (India) Ltd. v. Dy. CIT (2000) 69 TTJ (Ahd) 753 : (2000) 73 ITD 329 (Ahd), wherein it was held that the claim regarding depreciation is in accordance with law. We have considered the arguments from both sides and perused the material available on record. We do not find any infirmity in the order of the CIT(A). We uphold the same.
9. The last ground in the appeal pertains to disallowance of repairs and maintenance to software items amounting to Rs. 3,41,000. The arguments as have been taken in respect of grounds No. 1 above were made before the lower authorities as well as before us. The CIT(A) decided the issue on the basis of decision arrived at thereon in ground No. 1 discussed above, relying on the decision of Supreme Court in Alembic Chemicals Works Co. Ltd. (supra) and Tribunal, Jaipur Bench, decision in the case of Business Information Processing Services (supra) for the proposition that with speedy advances in technology, it would be wrong to attribute a degree of durability to software items in this fast changing era of information technology. We do not find any infirmity in the order of the CIT(A) so as to call for our interference. We uphold the order of the CIT(A). This ground of the Revenue fails.
10. In the result, appeal filed by the Revenue is dismissed.