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TMI Blog2013 (11) TMI 1267X X X X Extracts X X X X X X X X Extracts X X X X ..... account of expenditure incurred by the assessee on product development. The assessee claimed the expenditure to be Revenue in nature. The stand of the assessee before the Assessing Officer was that since the expenditure relates to salary, travel, rentals, consumables, electricity charges etc. which primarily relates to day to day functioning of the organization, therefore, the same are to be allowed as revenue expenditure. As per the assessee, similar revenue expenditure is incurred by the company whenever it develops a new product or enhances an existing product to meet the emerging market demand. Since the expenditure is done in anticipation of future orders, these are classified as product development expenditure. In tune with the company's accounting policies, such product development expenses are treated as deferred expenditure in the books and written off equally over a period of three years commencing from the subsequent year. 3. The Assessing Officer was of the view that the alleged expenditure on product development results in creating of prototype which will be used to develop software again and again for different systems. The Assessing Officer further observed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal in ITA No. 1179, 1205 & 1206/PN/2009 and 466/PN/2011 in Opus Software Solutions P. Ltd. Vs. ACIT., wherein the Tribunal has held that the expenditure incurred on development of various software packages for being sold in the assessee's business of software development and selling is to be regarded as in the nature of revenue expenditure. 6. Shri Shaji P.Jacob appearing on behalf of the Revenue submitted that the order of CIT(A) is a well reasoned and the CIT(A) is absolutely correct in holding that nature of expenditure is capital in nature and that the assessee is entitled to claim depreciation on the same @ 25%, as in the case of copyrights or intangible assets. The DR submitted that the assessee is not entitled to claim depreciation @ 60% for the reasons recorded by the CIT(A) in his order. In order to support his contention that expenditure incurred by the assessee is capital in nature he relied on the order of the Chennai Bench of the Tribunal in the case of ITO Vs. M/s. Millennium Infocom Ltd. reported as. The Tribunal in the said order has categorically held that expenditure incurred by the assessee for acquiring software is capital expenditure. The DR in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, there-fore, not a certain or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. " The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.........." At times there is a thin line of distinction between the expenditure to be treated as revenue or capital in nature. These tests have to be applied in the facts and circumstances of each case to come to the final conclusion. In the present case, an expenditure has been incurred by the assessee to bring into existence an asset from which it would earn revenue. The life of the asset and the nature of expenditure viz. salary, staff welfa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce of generating revenue to the assessee. 10. From the facts of the case and documents on record, we are of the considered opinion that the expenditure incurred by the assessee in the development of software is capital in nature. Our view is further fortified by the order of the Chennai bench of the Tribunal in the case of M/s. Millennium Infocom Ltd. (supra). The assessee is enjoying benefits from the sale of software to different customers. The prototype of the software remains with the assessee. The assessee is only giving copy of the software without disclosing the intricate method of developing the same to its prospective customers. 11. It is an undisputed fact that software industry is highly volatile and there are frequent changes or upgradation in the existing softwares. On account of technological advancement and changing market conditions, the existing software becomes obsolete very fast. Keeping this fact in mind to keep pace with the ever changing software technology and to meet the changing market requirements, depreciation @ 60% has been provided on computer software and hardware. The CIT(A) on the one hand has given its findings that the assessee has not shown any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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