Income Tax Appellate Tribunal - Pune
Sakal Paper Ltd.,, Pune vs Assessee on 4 March, 1999
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH " A", PUNE
BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER
AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER
I.T.A. No. 927/PN/08
(Asstt. Years: 2003-04)
Sakal Papers Ltd., .. Appellant
595 Budhwar Peth,
Pune 411 002
PAN AACCS7605Q
Vs.
Asstt. Commissioner of I.T. .. Respondent
Cir.6, Pune
Appellant by: Shri Ashok Kothary
Respondent by: Shri A.S. Singh
ORDER
PER I C SUDHIR, J.M
The assessee has questioned the first appellate order on the following grounds:
"On the facts and the circumstances, the ld AO and CIT (A) erred in::
1. In treating the software expenditure incurred Rs 2,92,37,387/- as capital expenditure. The acquisition being only license to use not for purchase of software and in the nature of revenue expenditure incurred wholly and exclusively for the purpose of the business, it is prayed that the expenses be allowed in full.
2. In disallowing on expenditure of Rs 13,83,403/- being legal expenditure on the ground that it is not wholly and exclusively for the purpose of business. The expenses being wholly and exclusively for business the same may be allowed as business expenses."
2. We have heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
Ground No.1:
3. The relevant facts are that the assessee company claimed expenditure of Rs 2,92,37,387/- incurred on purchase of software. The entire expenditure was debited to the Profit & Loss account and claimed as revenue expenditure. In support of its claim, the assessee submitted before the AO that the assessee had 2 ITA No 927/PN/08 Sakal Papers Ltd. Pune upgraded its accounting and financial software by introducing SAP based accounting system. The AO held that depreciation rate for computers including computer software was 60%. The amendment in the relevant Rule 5 was brought with effect from AY 2003-04. As per Note 7, 'computer software' meant any computer programme recorded on any disk, tape, perforated media or other information storage device. The AO noted further that before the AY 2003-04, only computers were entitled for depreciation at the rate of 60%. There was, therefore, no ambiguity regarding depreciation allowable on computer software from the year under consideration. The assessee was allowed depreciation at the rate of 60% as per provisions of section 32 of the income-tax Act, 1961 (in short "the Act").
4. The ld CIT(A) has upheld the action of the AO in not accepting the claimed expenditure as revenue in nature, but he has denied the depreciation allowed by the AO on the basis that software in question was ready for the use of the assessee on 2.3.2004 only. This action of the led CIT (A) has been questioned before us in the present Ground.
5. Reiterating the submissions made before the authorities below, the ld AR submitted that by introducing SAP based accounting system during the previous year, the assessee had upgraded its accounting and financial software. The up- gradation required introduction of licensed software along with purchase of necessary hardware needed for the purpose. It is very clear from the bills produced for software that the acquisition is only a license to use the software and not for complete purchase as owner of the software. No right is granted to the assessee to utilize copyright of computer programmes and Courts have held that right to use of a copyright is totally different from right to use software programme. The ld. AR submitted that acquisition cost of license to use the software is in the nature of revenue expenses and is accordingly charged to the Profit & Loss account by the company. He submitted further that the cost of the additional hardware purchased in addition to hardware that were already in use 3 ITA No 927/PN/08 Sakal Papers Ltd. Pune in the old system and now shifted to the new system, for running the new software, was capitalized by the company under the category "computers". Only the software purchased was charged to the revenue, as was decided by various Courts.
6. The ld AR submitted further that before amendment to Rule 5, Appendix - 1 with effect from AY 2003-04, he interpreted as justification enough for capitalization of software, it is necessary in the first place to confirm whether the software purchased is part of the computer without which the computer will not be operational. In the case of the assessee, the purchase was not of software embedded computers so as to take the entire purchase within 'capital' along with the software, but the purchases were hardware purchases and then payment for license to use the software. The ld. AR also referred to the Accounting Standard 26 on intangible assets issued by the Institute of Chartered Accountants of India made mandatory to assessee company. Appendix A to Accounting Standard 26 relating to "intangible assets" in para 10 states that the cost of software acquired for internal use should be recognized as an asset if it meets the recognition criteria prescribed in paragraphs 20 and 21 of the Statement. The learned AR placed reliance on the following decisions:
(i) Amway India Enterprises v. DCIT (2008) 4 DTR (Del) (SB) (Trib) 1;
(ii) CIT v Southern Roadways Ltd. (2007) 288 ITR 15 (Mad)
(iii) CIT v Sundaram Clayton Ltd. (2010) 321 ITR 69 (Mad)
7. The ld. DR, on the other hand, tried to justify the orders of the authorities below with the submission that the nature of the expenditure as to whether capital or revenue depends upon facts of each case.
8. Considering the above submissions and having gone through the decisions relied upon, we find that the issue as to whether the claimed expenditure on software is revenue or capital in nature certainly depends upon facts and circumstances of each case. The Special Bench of the Tribunal in the case of Amway India Enterprises v DCIT (supra) have discussed the issue in detail. The Special Bench has opined that the question whether the expenditure 4 ITA No 927/PN/08 Sakal Papers Ltd. Pune is in capital or revenue field cannot be decided on the basis of ownership base alone and the fundamental test becomes more important and relevant. The general mode is to acquire computer software as owner, but that by itself will not be sufficient to conclude that the said expenditure is revenue expenditure, if on an application of the fundamental test, it is found that the expenditure operates to confer benefit in the capital field. Where the life of the computer software is shorter (say less than two years), it may be treated as revenue expenditure.
However that by itself will not make the expenditure incurred on software as capital in nature and the fundamental test also needs to be satisfied. The Special Bench held further that what is material to consider is the nature of the advantage in a commercial sense. If the advantage consists merely not facilitating assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The next factor to be considered is the degree of organizational changes. The more radical changes, the more likely the expenditure will be capital and the changes are likely to be most radical when operations previously carried on manually are computerized. Upgrading the software will not necessarily cause the expenditure in question to be capital. This criteria needs to be applied to determine the exact nature of expenditure incurred by the assessee for acquiring different software independently, held the Special Bench.
9. In the present case before us, the notable material facts are that (i) the license to use the software in question was taken for a period of 25 years, (ii) the software would have given and has given future economic benefit which are definitely attributable to the asset and the cost of the asset could be reliably measured. The fact that the license was taken for a period of 25 years itself is sufficient to show that future benefits attributable to the software license had not been correctly taken into account by the management. The ratio laid down in the 5 ITA No 927/PN/08 Sakal Papers Ltd. Pune decision of the Special Bench of the Tribunal in the case of Amway India Enterprises v DCIT (supra), in the facts and circumstances of the present case, rather supports the action of the revenue. We also find that while treating the claimed expenditure as capital in nature, the ld CIT (A) has placed reliance on the decision of Pune Bench of the Tribunal in the case of Sudarshan Chemical Industries Ltd. V ACIT 108 TTJ (Pune) 28, almost on similar facts and on identical issue as to whether the license fees paid on account of user of computer software programme was capital expenditure as laid down in section 32(1)(ii) of the Act. In that case also, a license agreement dated 4.3.1999 was entered with the same company (SAP) with which the assessee had entered into the agreement for installation of R-3 software for 25 years, which was claimed as revenue expenditure. The AO in that case treated the ERP package as a capital asset under the category of intangible assets in the form of license and allowed depreciation at the rate of 25%. The ld CIT (A) upheld the action of the AO. The Tribunal, after discussing several cases cited before it and the arguments advanced by the parties, came to the above conclusion that the expenditure was capital in nature. We thus do not find reason to interfere with the conclusion of the ld CIT(A) that the claimed expenditure in question is capital in nature, as the same is well supported by the above referred decision of the Pune Bench of the Tribunal and of the Special Bench of the Tribunal. The facts are different in the case of CIT v Southern Roadways Ltd. (supra), and CIT v. Sundaram Clayton Ltd (supra) relied upon by the ld. AR and the decisions are not helpful to the assessee. In the case of CIT v Southern Roadways Ltd (supra), up-gradation of computer was made by changing certain parts thereby enhancing the configuration of the computer for improving their efficiency, but without making any structural alteration. The Hon'ble Madras High Court held that the expenditure incurred by the assessee had, therefore, to be treated as revenue expenditure. Likewise in the case of CIT v Sundaram Clayton Ltd (supra), the expenditure was incurred on software for upgrading computers. The Hon'ble 6 ITA No 927/PN/08 Sakal Papers Ltd. Pune Madras High Court, after discussing the case of the assessee and reasons, came to the conclusion that the expenditure incurred was revenue in nature. In both of the cited decisions, no similar fact was there as in the present case before us that there was an agreement with the company of the software for installation of the software for 25 years. We, thus, find that the above cited decisions of the Hon'ble Madras High Court having distinguishable facts are not relevant and thus are not applicable in the present case. Ground No. 1 is accordingly rejected.
Ground No. 2:
10. The relevant facts are that the assessee claimed Rs 13,83,403/- as legal expenditure incurred in connection with the dispute with the wife and daughter of the founder of the company Dr N B Parulekar in the Hon'ble Supreme Court against the allotment of shares to someone-else. The AO denied the claimed expenditure after discussing the nature of dispute which as per him pertained to allotment of shares to one group to hold that the expenditure was incurred to settle the dispute between two groups of shareholders. In this regard, the AO relied upon the decision of Hon'ble Rajasthan High Court in the case of Udaipur Mineral 269 TR 263 (Raj.). It was held by the Hon'ble Rajasthan High Court in the case that the expenditure was not allowable since it was not incurred in the normal course of business or to protect its business by the assessee. The ld CIT(A) has upheld the same. In this regard, the ld CIT (A) has also followed his predecessor's first appellate order for the assessment year 2004-05 and 2005-06 on the issue.
11. In support of the ground, the ld. AR has basically reiterated the submissions made before the authorities below. First of all, he submitted that as the assessee company was also made respondent in the matter, it was necessary for the assessee company to defend its decision taken in the normal course of business and to protect its business. He referred to the following
7 ITA No 927/PN/08 Sakal Papers Ltd. Pune reasons for defending itself in Hon'ble Supreme Court, also mentioned by the ld CIT(A):
"1. Not to disturb the situation where the company would have taken several decisions, which course would be harmful to the company
2. Not to make the company dysfunctional
3. Not to affect the interest of the employees, customers and creditors.
12. The ld. DR, on the other hand, tried to justify the orders of the authorities below on the issue.
13. Considering the above submission, we are of the view that the assessee company was a party in the matter pending before the Hon'ble Supreme Court, but the dispute was basically between wife and daughter of the founder of the company Dr N V Parulekar on the question of allotment of shares to some other group. Thus, it cannot be said that the expenditure incurred was business expenditure, especially in view of the decision of the Hon'ble Supreme Court in the matter whereby compensation/damage of Rs 3 crores was directed to be paid to Parulekars, which was not wholly and exclusively for the purpose of the business of the assessee, but it was penal in nature. The Hon'ble Supreme Court in order to protect the business interests of the company ordered the assessee to pay compensation instead of disturbing the management and shareholding pattern thereby avoiding disturbance in the functioning of the company. The decision in the case of Shree Meenakshi Mills Ltd. v. CIT 63 ITR 207 (SC) and CIT v Benett Coleman & Co Ltd 116 ITR 297 (Bom) relied upon by the ld AR, are having distinguishable facts and thus are not helpful to the assessee. In the case of Shree Meenakshi Mills Ltd. v. CIT (supra), the assessee had to incur legal expenditure against the order prohibiting delivery of yarn to outsider for waving. Likewise in the case of CIT v Benett Coleman & Co. Ltd. (supra), the expenditure on litigation incurred was held bona fide to promote the interest of business. In these circumstances, we do not find any reason to interfere with the first appellate order on this issue, as the assessee has failed to establish that the
8 ITA No 927/PN/08 Sakal Papers Ltd. Pune claimed expenditure was incurred for promoting business interests of the assessee. The same is upheld. The Ground is accordingly rejected.
14. Consequently, the appeal is dismissed.
Decision pronounced in the open Court on this 21st Day of April, 2011.
Sd/- Sd/-
(D KARUNAKARA RAO) (I.C. SUDHIR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune: Dated: 21st xz April, 2011
B
Copy of the order is forwarded to :
1. Sakal Papers Ltd, Pune
2. ACIT, Cir. 6, Pune
3. The CIT(A)-II, Pune
4. The CIT-II Pune
5. The D.R, 'A' Bench, Pune
"True copy"
By order
Assistant Registrar
ITAT, Pune Benches, Pune