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N.V. Vasudevan, J.M.

1. This Special Bench has been constituted u/s. 255(3) to dispose of the appeals filed in the case of M/s. Amway India Enterprises and M/s. SQL Star International Ltd., as well as to dispose of the following important questions which are involved therein:

(i) Whether, in the facts and circumstances of the case, the expenditure incurred by the assessee on account of computer software is of revenue nature or capital nature?
(ii) If the expenditure incurred on computer software is held to be of capital nature, what would be the rate of depreciation applicable thereon?

2. The factual backdrop which has given rise to the constitution of this Special Bench can be briefly summarized as follows. In the case of M/s Amway India Enterprises, a deduction on account of software expenditure incurred amounting to Rs. 20,04,105/- was claimed by the assessee company in its return of income filed for A.Y. 2001-2002. The said expenditure was claimed to be incurred by the assessee company for acquiring the following software for use in its business:

1. MS Project 2000 Full Packaged Product (FPP): Rs. 19,700/-

8. Having taken note of the aforesaid decisions of the Tribunal relied upon by both the sides in support of their stand on the issue under consideration, it was found by the Division Bench that there were divergent views expressed on the issue relating to the exact nature of expenditure incurred on software being capital or revenue. It was also felt by the Division Bench that there are various aspects which are relevant and material and having a direct bearing on the issue which have not been specifically/elaborately considered in the said decisions rendered by the different Division Benches of the Tribunal while expressing divergent views on the said issue. Since the said issue was expected to occur regularly in many cases, it was felt by the Division Bench that the same may be referred to the Special Bench for decision after taking into consideration all the aspects referred to above as well as other contentions that might be put forth by the parties. Accordingly, this Special Bench has been constituted by the Hon'ble President for deciding the questions as referred to above at the instance of the Division Bench and also for disposing of the appeals filed in the case of M/s. Amway India Enterprises.

9. Before the Special Bench constituted by the Hon'ble President could sit and hear the appeals filed in the case of M/s. Amway Indian Enterprises, a similar issue relating to allowability of software expenditure arose for consideration before the Division Bench of Tribunal i.e. Delhi 'G' Bench, in the case of M/s. SQL Star International Ltd. The relevant facts involved in the said case were that the assessee company was engaged in the business of software development as well as running a training center to impart specialized training to the students in software technology. It purchased computer software and claimed the entire cost as depreciation. The assessee contended before the AO that the software which it purchased becomes obsolete in about six months time due to fast changes in technology in the IT Sector and therefore, such expenses are to be considered as revenue expenditure. The management of the assessee company, however, considered it appropriate to claim the expense under the head 'depreciation' because the company had intended to come out with a public issue and to show a healthy balance sheet. In the immediately preceding assessment year also, the assessee company had claimed 20% depreciation on computer software owning to absence of profits. According to the AO, it was not permissible for the assessee to take a different stand to suit its own need and to manipulate profits for taxation or for coming out with a public issue. The AO further held that the financial position of the company was healthy in the present assessment year and therefore, the management arbitrarily decided to claim 100% depreciation on computer software. The AO also rejected the plea of the assessee that software becomes obsolete in about six months time. The AO further noticed that the assessee had not taken computer software as part of the block of assets and treated them as revenue, expense in the books of account. He, therefore, held that the assessee cannot claim depreciation on the said software. On appeal by the assessee, the CIT (A) held that software becomes obsolete because of technological advancement in the IT sector and also becomes redundant with every project undertaken by the assessee for its software development program. He held that the claim of the assessee that it should be allowed as a revenue expenditure, therefore, deserves to be accepted. Accordingly, the claim of the assessee was allowed by the learned CIT (A) and this relief allowed to the assessee by the learned CIT (A) was challenged by the Revenue in an appeal filed before the Tribunal which came to be heard initially by the Division Bench. Having noted that a similar issue relating to allowability of software expenditure has already been referred to the Special Bench in the case of M/s. Amway India Enterprise, it was thought fit by the Division Bench to make a request to the Hon'ble President for referred the case of M/s. SQL Star International Ltd also to the Special bench which was duly acceded to.