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TMI Blog2013 (12) TMI 1160X X X X Extracts X X X X X X X X Extracts X X X X ..... Sanjiv Khanna And Sanjeev Sachdeva,JJ. For the Appellant : Mr. Abhishek Maratha, Sr. Standing Counsel Ms. Anshul Sharma, Advocate For the Respondent : Through Nemo JUDGMENT Sanjeev Sachdeva, J. 1. ITA No. 254/2013 pertains to Assessment Year 2003- 04 and impugns order of ITAT dated 28.08.2012 ITA No.313/2013 pertains to Assessment Year 2007-08 and impugns order of ITAT dated 19.10.2012. 2. These appeals have been filed by the Revenue under section 260A of the Income Tax Act, 1961 (for short the Act ) impugning the orders ITAT has accepted the appeals of the Assessee and deleted the additions made by the Assessing Officer with regard to product improvement expenses. The Assessing Officer had treated the product improvement expenses as capital expenditure and disallowed equivalent amount as revenue expenditure. ITAT has held to the contrary. 3. The Assessee is a company which is involved in the business of software development. The commercial operations started in the Financial Year 2002-03. The Assessee provides wireless solutions for mobile consumers and enterprises. The software development relates to the field of instant messaging (IM). It employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n release of a new version of the software with enhanced features over the earlier version. The CIT (Appeals) confirmed the findings of the Assessing Officer that the nature of activity undertaken by the software development team had resulted in creation of new products and assets which were having enhanced features of enduring benefit. 8. Aggrieved by the order dated 02.02.2012 of the CIT (Appeals), the Assessee filed an appeal before the ITAT, who vide the order dated 28.08.2012 have agreed with the contention of the Assessee. 9. The ITAT noticed that in the immediately preceding assessment year, total expenditure incurred by the Assessee was of Rs.10,68,788/-, which was allowed by the Assessing Officer and in the succeeding assessment year, expenditure of Rs.1,25,76,145/- was also allowed by the Assessing Officer. The ITAT further noticed that the claim of the Assessee of Rs.2,05,43,448/- towards product improvement expenses in the year 2006-07 was also not disallowed. In view of the fact that expenditure in the immediate preceding assessment year and in the immediate succeeding assessment year had been allowed and no disallowance had been made towards product improvement ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of INDO RAMA SYNTHETICS INDIA LTD., (2011) 333 ITR 18 (DEL.), wherein the Court has held that the expenditure incurred which was in the nature of salaries, wages, repairs, maintenance, design and engineering fee, etc. and incurred in the normal course of business towards the assignment given to consultants for the purposes of improving operational efficiency and was not towards acquiring any enduring benefit in the capital field but to carry on existing business more efficiently and profitably. It was allowable as business expenditure. 13. The ITAT held that no capital asset had been acquired by the Assessee and the major portion of the expenses on account of salary paid, rent, consultancy charges, electricity charges, etc. were not for creating any capital asset used for enduring benefit but were incurred in the normal course of business and were thus revenue in nature. 14. Having heard counsel for the revenue and considering the grounds of appeal, we find no merit in the appeal. The findings recorded by the ITAT are factual. The ITAT has held that in the immediately preceding assessment year, total expenditure incurred by the Assessee towards product improvement was of Rs.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ping in view the rapid changing requirements, every company in the field of software development specially in mobile phoning has to keep modifying and enhancing their products and provide updates on regular basis. Software upgradation is required to keep and ensure marketability of the said product. Saleability of a software or upgrade lasts only as long as a newer update or upgrade is not available. The period between one upgrade and the other is not substantial one and as such, there may be no enduring benefit of the software. This is clear and apparent from the amounts spent on software improvement. 19. To keep pace with the requirements and ensure product saleability, software development companies have to constantly incur expenditure to upgrade, improve and remove problem areas of the software. They have to employ professionals whose job is to continuously upgrade the software and provide newer features and updates on a regular basis. The shelf life of the software without constant improvement would be very small. 20. Expenditure which enables the profit making structure to work more efficiently leaving the source of profit making structure untouched, would be revenue in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure incurred was revenue in nature and not capital. 24. In case the expenditure is not incurred on the said capital asset the same would become unsalable and obsolete. Therefore to ensure marketability of the existing repeated and constant cost had to be incurred to upgrade and remove glitches etc. In such circumstances in ALEMBIC CHEMICAL WORKS CO. LTD. V. CIT [(1989) 177 ITR 377 (SC)] the Supreme Court of India has held as under :- The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the Assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and, profitability not removed from the area of the day-to-day business of the Assessee's established enterprise. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture is capital in nature. 28. In an appeal by the Assessee, the CIT (Appeals) vide order dated 05.01.2012 held the expenditure to be revenue in nature and deleted the disallowance by the Assessing Officer. The CIT (Appeals) followed the Rule of Consistency since the Assessing Officer had himself allowed this to be revenue in the preceding and succeeding assessment year. 29. The ITAT vide order dated 19.10.2012 has noticed that for the Assessment Years 2004-05 to 2006-07, the Assessing Officer has allowed similar expenditure and for the Assessment Years 2008-09 2009-10 also, the Assessing Officer has himself allowed the said expenditure. 30. In the present case, the ITAT had allowed the appeal of the Assessee and treated the said expenditure as revenue. The expenses were incurred in the course of day to day business operations of the Assessee and the operations being routine in nature by way of providing value added services of the customers. The ITAT noticed that the mobile services required continued upgradation and monitoring and the expenditure in question was incurred as a matter of routine for the business and commercial expediencies of the Assessee s business and as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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