2013 (9) TMI 1127 - AT - Income Tax

Expenditure incurred by the assessee in the present case for product development expenses is a capital expenditure.

Summary

Issues Involved:
1. Delay in filing appeals
2. Classification of product development expenses as capital or revenue expenditure
3. Depreciation rate applicable to software development expenses

Detailed Analysis:

1. Delay in Filing Appeals:
The appeals filed by the assessee were delayed by 456 days. The reason provided for the delay was the transfer of the Assistant Vice President handling tax matters to Singapore and the subsequent delay in appointing a replacement. The Tribunal found the explanation satisfactory and cited the Hon'ble Supreme Court's decision in Vedabai alias Vaijayanthabai Baburao Patil v. Shantaram Baburao Patil and Others, which emphasized a pragmatic approach in condoning delays. The Tribunal condoned the delay and admitted the appeals for hearing.

2. Classification of Product Development Expenses:
The primary issue was whether the product development expenses incurred by the assessee should be classified as capital expenditure or revenue expenditure. The assessee argued that these expenses were routine and should be treated as revenue expenditure. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these expenses as capital expenditure, granting 15% depreciation. The AO relied on the Hon'ble Rajasthan High Court judgment in CIT v. Arawali Construction Co. Pvt. Ltd., which held that acquiring technical know-how is a capital expenditure, and the Hon'ble Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh, which recognized software development as a tangible asset. The Tribunal upheld this classification, noting that the assessee gained enduring benefits from the developed software, which justified treating the expenses as capital expenditure.

3. Depreciation Rate Applicable to Software Development Expenses:
The assessee alternatively argued for a higher depreciation rate of 60% on software development expenses. However, the Tribunal noted that in the assessment year 2003-04, only 15% depreciation was allowed. Consequently, the Tribunal rejected the alternative ground and maintained the 15% depreciation rate.

Conclusion:
The Tribunal dismissed all three appeals filed by the assessee for the assessment years 2006-07, 2007-08, and 2008-09, upholding the AO's and CIT(A)'s decisions to classify the product development expenses as capital expenditure and allowing only 15% depreciation. The Tribunal's decision was consistent with prior rulings in the assessee's case and relevant judicial precedents.