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TMI Blog2011 (11) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... the captioned assessment years. Therefore, we have framed the following questions of law for assessment years 1996-97 and 1998-99, which, as would be evident, apart from the amounts involved are otherwise identical: Assessment year 1998-99 Whether ITAT was correct in law in holding that the expenditure of Rs 1,70,68,811/- incurred by the assessee on account of software and professional expenses was a revenue expenditure? Assessment year 1997-98 Whether ITAT was correct in law in holding that the expenditure of Rs 1,36,77,664/- incurred by the assessee on account of software and professional expenses was a revenue expenditure? 2. Given aforesaid circumstances, following facts are required to be noticed in order to adjudicate upon the issues culled out above: 2.1 The assessee it appears had installed a software in the financial year 1996-97, relevant for assessment year 1997-98. The software was installed by Arthur Anderson & Associates, which is an accounting and consulting firm, pursuant to an agreement dated 25.06.1996 executed with the assessee. The software was based on application software, commonly known as, oracle application. In respect of this, an agreement appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee; 3.2 The fact that the assessee had incurred an expenditure in the succeeding year as well weighed with the Assessing Officer in coming to the conclusion that the expenditure incurred had brought about enduring benefit to the assessee. 3.3 Towards this end, the Assessing Officer also observed that the expenditure incurred in the financial year 1997-98 (assessment year 1998-99) was towards a "project" and not for „upgradation of an existing project or for rectification of mistakes‟. 3.4 The Assessing Officer, broadly for the foregoing reasons, as indicated above, rejected the claim for deduction and, as a matter of fact also denied, it appears, the depreciation allowance to the assessee on the ground that there was no clarity as to whether in the relevant period the assessee had put the software to use. 3.5 In the assessment year 1998-99 the Assessing Officer followed the rationale adopted by his predecessors in the earlier assessment year, i.e., 1997-98 and for the reasons given therein (i.e., that the expenditure was incurred towards an ongoing project) disallowed the deduction claimed, by treating the expenditure incurred, in the sum of Rs 1,70,68, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Pvt. Ltd. The said agreement was titled as "Master Software Licence and Service Agreement". (iv) The software supplied to the assessee was not used as a part of any production process. The agreement with Oracle was a licence agreement which enabled the assessee to use the software. (v) The assessee did not acquire any ownership in the software application; all rights, title and interest in the application remained in Oracle. (vi) In return for a right to use the software application, the assessee paid licence fee and „not any purchase price‟. (vii) In addition to the above, the agreement with Oracle was also provided for extension of maintenance services, for which, the assessee was required to pay an additional fee over and above, the licence fee. (viii) The licence was terminable under the provisions of the agreement. (ix) The assessee did not acquire any tangible asset or an asset which created a new source of income or augmented the existing source of income. (x) The expenses incurred facilitated, management and the conduct of the assessee‟s business and, thus was not in the nature of a capital expenditure, and (xi) Lastly, the expenditure inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e results in an enduring benefit would not be a sufficient reason to treat the expenditure incurred as one expended on capital account. Mr Syali submitted that what had to be deciphered in the facts and circumstances of each case, the real intent and purpose of the expenditure, to ascertain as to whether it resulted in bringing into existence a capital asset. In support of his submissions learned counsel relied upon the following judgments: CIT vs Indian Visit.com (P) Ltd. (2009) 176 Taxman 164 (Del); CIT vs GE Capital Services ltd. (2008) 300 ITR 420(Del); CIT vs K & Co. (2003) 181 CTR (Del) 378; CIT vs Sumitomo Corporation India, ITA No. 48/2005 dated 28.07.2005; Khem Singh Sankhla vs UOI & Ors. (2003) 181 CTR 380 (Raj); CIT vs Varinder Agro Chemicals Ltd. (2009) 309 ITR 272 (P&H); CIT vs Southern Roadways Ltd. (2008) 304 ITR 84 (Mad); CIT vs Arawali Constructions Co. (P) Ltd. (2003) 259 ITR 30 (Raj.); CIT vs Raychem RPG Ltd. in ITA No. 4176/2009 dated 04.07.2011 of Bombay High Court; CIT vs Southern Roadways Ltd. (2007) 288 ITR 15 (Mad); Chief CIT vs O.K. Play India Ltd. passed in ITA No. 414/2006 dated 25.02.2011 by the Punjab & Haryana High Court; CIT vs Sundaram Clayton Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of enduring benefit is not a certain or a conclusive test which the courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever but whether the expense incurred does away with a recurring expense(s) defrayed towards running a business as against an expense undertaken for the benefit of the business as a whole. In other words, the expenditure which is incurred, which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched, would in our view be an expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably; leaving the fixed assets untouched would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would thus collapse in such like cases. It would in our view be only true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Secondly, the mere fact that the assessing officer records that the expenditure, in financial year 1997-98 (assessment year 1998-99), was incurred towards what he terms as an „on-going project‟ would not ipso facto give it a colour of capital expenditure. A careful reading of the Tribunal‟s judgment show that after noticing the submission of the assessee that the expenditure incurred in the said assessment year was for removing deficiencies which were found in the software installed in the earlier assessment year, and that, out of a sum of Rs 1.71 crores a sum of Rs 49 lacs was incurred to modify, customize and upgrade the software installed, while the balance expenditure was used for development and implementation - it returned a finding that the expenses were incurred to upgrade and run the system. In view of these findings we are of the opinion that assessing officer discovered an erroneous principle on the basis of which he denied the exemption to the assessee. 11. Software is nothing but another word for computer programmes, i.e., instructions, that make the hardware work. Software is broadly of two types, i.e., the systems software, which is also kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. The reason being: that the treatment of a particular expense or, a provision in the books of accounts can never be conclusively determinative of the nature of the expense. An assessee cannot be denied a claim for deduction which is otherwise tenable in law on the ground that the assessee had treated it differently in its books. The observation of the Supreme court in the case of Kedar Nath Jute Manufacturing Co. Ltd. vs CIT (1971) 82 ITR 363 puts this beyond doubt. The relevant observations of the Supreme court on this aspect of the matter are extracted hereinbelow: "......Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of accounts be decisive or conclusive in the matter"...... 13.2 Therefore, the aforesaid contention is of no avail to the revenue. 14. For the foregoing reasons, we are of the view that the questions of law for each of the aforementioned assessment years have to be answered in the affirmative and in favour of the assessee. Resultantly, the aforementioned appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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