2022 (7) TMI 258 - AT - Income Tax

Depreciation on intangible assets @ 25% - AO rejected the submissions of the assessee on the ground that the expenses are incurred by the assessee in obtaining support mostly by way of payment towards legal, technical and management fees for availing services, which cannot be termed as incurred for acquiring business or commercial rights falling under the definition of intangible assets - HELD THAT - This issue in the instant case is similar to the facts and circumstances in AY 2010-11 2016 (9) TMI 1435 - ITAT BANGALORE . Therefore, respectfully following the aforesaid decision of the Tribunal for AY 2010-11, we uphold the disallowance of depreciation on intangible assets. This ground is held against the assessee. Disallowance of software expenses - AO rejected the submissions of the assessee on the ground that the software acquired provides firstly, the right, and secondly, enduring benefit to the assessee and is of the view that the assessee has the right to exploit the software as per the requirement which is the commercial right in the nature of intangible asset - additional evidence is admitted taken on record for adjudication - HELD THAT - The description of the list of items submitted in the additional evidence shows that expenditure is incurred towards windows , Core call , and Auto cad which according to the ld AR have a very short span of life and requires periodic renewal and upgradation by payment of license fee. We notice that the jurisdictional High Court decision in the case of IBM India Ltd 2013 (10) TMI 1225 - KARNATAKA HIGH COURT as held that even if the application has an enduring benefit, it does not result in acquisition of capital asset. The decision cannot be applied generally to state that any software having a shelf life of more than two years is capital in nature since the decision in Toyota Kirloskar Motor (P) Ltd. ( 2013 (2) TMI 108 - KARNATAKA HIGH COURT ) was with respect to a particular software and that the nature of software whether it is a system software or application software needs to be analysed to decide the treatment under the Act. We remit the issue back to the AO to verify the facts afresh after considering the breakup of the software expenses submitted as additional evidence filed by the assessee and decide the issue after taking into consideration the ratio laid down by the jurisdictional High Court in the case of IBM India Ltd. (supra) . Needless to say that assessee shall be given reasonable opportunity of being heard. This ground of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of depreciation on intangible assets.
2. Disallowance of software expenses.

Detailed Analysis:

Disallowance of Depreciation on Intangible Assets:
The primary issue revolves around the disallowance of depreciation on intangible assets amounting to INR 22,500,657. The assessee claimed depreciation on intangible assets at 25%, arguing that the costs incurred for obtaining various agreements (e.g., concession agreement, communication, navigation, and surveillance management agreement, State support agreement, and land lease agreement) qualify for capitalization as intangible assets under Section 32 of the Income-tax Act, 1961. The assessee contended that these agreements provided exclusive rights and commercial benefits essential for their business operations.

The Assessing Officer (AO) rejected this claim, stating that the expenses were primarily for legal, technical, and management fees, which do not qualify as acquiring business or commercial rights. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, referencing a similar decision for the assessment year (AY) 2010-11.

The Tribunal, after considering the submissions and material on record, noted that a coordinate Bench had previously upheld the CIT(A)'s decision for AY 2010-11, disallowing depreciation on intangible assets. The Tribunal reiterated that the expenditure was revenue in nature, incurred during the pre-operative period, and did not result in acquiring any commercial rights. Consequently, the Tribunal upheld the disallowance of depreciation on intangible assets, ruling against the assessee.

Disallowance of Software Expenses:
The second issue pertains to the disallowance of software expenses amounting to INR 4,591,040 (net of depreciation). The assessee argued that the software expenses should be treated as revenue expenditure, as the software had a short life span and did not yield enduring benefits. The AO, however, classified these expenses as capital in nature, providing enduring benefits and allowing depreciation at 60%.

The CIT(A) upheld the AO's decision, citing the lack of detailed break-up of the software expenses to determine whether they were for software licenses or annual updates.

Before the Tribunal, the assessee submitted additional evidence, including a detailed break-up of software expenses, and argued that the software items had a short life span and required periodic renewal. The Tribunal admitted the additional evidence, noting that it was crucial for determining whether the software expenses were revenue or capital in nature.

The Tribunal referred to the jurisdictional High Court's decision in CIT v. IBM India Ltd., which held that software expenses, even if providing enduring benefits, do not result in acquiring a capital asset if they merely enhance productivity or efficiency. The Tribunal distinguished this from the decision in CIT v. Toyota Kirloskar Motor (P) Ltd., which was based on specific facts concerning a particular software.

The Tribunal remitted the issue back to the AO for fresh verification of the software expenses, considering the additional evidence and the High Court's ratio in IBM India Ltd. The AO was directed to provide the assessee with a reasonable opportunity of being heard.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the disallowance of depreciation on intangible assets but remitted the issue of software expenses back to the AO for fresh consideration, based on the additional evidence provided by the assessee.