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TMI Blog2003 (3) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) DSS Enterprises (P) Ltd. 9 % 100 % 4. During the asst. yr. 1990-91, the assessee-company has incurred expenses of Rs. 60,33,981 on the development of computer software for the telecommunication industry. These expenses were capitalized in the books of account under the head 'miscellaneous expenditure' as part of capitalized software costs and written off as deferred revenue expense over five years in accounts. However, these expenses were claimed as a revenue expense in the income-tax return under s. 37 of the IT Act, 1961. During the course of assessment, alternative claim was made under s. 35 of the IT Act. 5. The AO did not accept the claim of the assessee in regard to this expense either as revenue under s. 37 or as scientific research expenditure under s. 35 on the following basis: (i) Business of the assessee is development and sale of software' and 'export of software services' and not that of research and development. (ii) Expenses incurred on software development is not revenue in nature as it creates a valuable asset in the hands of the assessee (iii) The assessee has adopted a tax treatment which is differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of capitalizing software cost in accounts was correct. She thereby agreed with the AO on the point that software cost could not be treated as revenue expenditure as a valuable asset had come into existence. The Expert Advisory Committee (EAC) had also recommended that entire expenditure on development of software whether revenue or capital was deductible under s. 35 of the IT Act. The main objection of AO was that AS8 did not deal with the issue as to whether development of software is research and development activity. CIT(A) found the description of the process of development of software too simplistic, not based on complete and deep knowledge of the development of sophisticated software package used in the line of telecommunication. CIT(A) observed that as per assessee such a system did not exist in the past and was developed with the help of highly paid technical experts and the whole process was beyond the scope of understanding of a non-technical person. The development of the software as per the assessee is not a one-time process but an ongoing process until the desired end result was achieved and like, any other research and development work it was possible that the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable. 8. Shri Anil Chopra and Shri B.S. Bedi, CAs, appeared on behalf of the assessee. The learned counsel gave a brief background of the assessee and its business which was primarily development and sale of software. It's objects included research and development related to it's business. The authorised representative elaborated the complex and highly technical aspects which were involved in the process of the development of the software. It was submitted that the research and development involved had to be seen in the context of the ever and rapidly changing high technology involved in the income-tax industry. It was further explained that research was the original and planned investigation undertaken with the hope of gaining new scientific or technical knowledge and understanding whereas development was the translation of the research findings or other knowledge into a plan or design for the production of new or substantially improved materials, devices, products, process, systems or services. It was categorically stated that it was totally out of the scope of a common man to develop such highly sophisticated and intellectually inclined computer softwares. The development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject-matter of the appeal was not restricted to the ground raised by the Revenue, as held in several oases including that of the jurisdictional High Court in the case of CIT vs. Edward Keventer (P) Ltd. (1980) 123 ITR 200 (Del). It has been held in the said case that "the subject-matter of an appeal should be understood not in a narrow and unrealistic manner but should be so comprehended as to encompass the entire controversy between the parties which is sought to be got adjudicated upon by the Tribunal. In a case where there are interconnected grounds of appeal and they have impact on the same subject-matter, the scope of the appeal should be broadly considered in the correct perspective". Our attention was also drawn to r. 27 of the Tribunal Rules. 12. The learned Departmental Representative opposed the submissions as made by the learned authorised representative and submitted that the activities of the assessee were not research and development. The learned Departmental Representative again reiterated that the expenditure was held as a valuable asset by the CIT(A). The learned Departmental Representative also submitted that the observation made by the CIT(A) regarding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter careful deliberation, alternatives are shortlisted. The third phase or design phase commences with the logical specification model as presented by system analyst The designer has to consider various factors such as objectives of the design, specification presented by analyst before finally producing a good workable physical design for the system. The systems designer then analyses techniques for designing systems; to meet the specified performance criteria and improves design wherever necessary. The system designer is also concerned with procedures required to handle and process data, user and main interface, screen layout and such other factors involved The fourth phase i.e., the programming phase is the point at which all the facts gathered through the application of the previously acquired skills and techniques are used for development of the whole system. Finally, the process of development is concluded by performing various tests, etc. for establishing good systems quality assurance. Thereafter a systems review process is undertaken to ensure that the original defined objectives were actually met There are always, however, endless possibilities of backtracking at any stage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f highly technical and other scientific factors involved. 18. In view of the above, it is clear that the activity of the assessee in developing the software would come into the ambit of the admissible provisions of s. 35 which is applicable in the instant case. We are of the view that the assessee is carrying on scientific research activity and the expenditure involved on development of software related to the business of the assessee is allowable under s. 35 of the IT Act, 1961. As the expenditure involved is admissible under s. 35 as scientific research, whether the same be considered to be revenue or capital expenditure, for the purposes of this decision, we are not expressing any further view whether the said expenditure is of capital or revenue nature. We have already held that expenditure in scientific research is eligible for deduction under s. 35. 19. We have also carefully considered the following rulings filed by the counsel of the assessee regarding the claim under s. 35 of the IT Act: (1) Ewac Alloys Ltd. vs. ITO (1982) 2 ITD 651 (Bom) Cost of laboratory equipment under transit and cost of building under construction Sec. 35 claim allowed though assets not put t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware is revenue and not capital, reliance has been placed on the following case law: (i) Empire Jute Co. Ltd vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) (ii) Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) (iii) Pragya Tools Ltd vs. CIT (1980) 16 CTR (AP)(FB) 356 : (1980) 123 ITR 773 (AP)(FB) (iv) CIT vs.British IndiaCorpn. Ltd. (1987) 60 CTR (SC) 54 : (1987) 165 ITR 51 (SC) It is, however, clarified that as the claim of the assessee is being allowed under s. 35, the above rulings are not considered in this case. The expenditure is allowable as a deduction under s. 35 whether the same be revenue or capital expense. 22. It is a well-settled proposition of law that entries in the books of accounts are not decisive or conclusive for computing the taxable income. The assessee has relied on the following case law in support of the said proposition with which there can be no dispute and with which we respectfully agree. (i) Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) (ii) Pullangode Rubber Produce Co. Ltd vs. State of Kerala Anr. 1972 CTR (SC) 253 : (1973) 91 ITR 18 (SC) (iii) India Cements Ltd vs. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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