CHIEF COMMISSIONER OF INCOME TAX vs. M/S OK PLAY INDIA LTD

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ITA/414/2006HC Punjab & HaryanaPHHC01075133200625 February 2011Author: MR. JUSTICE ADARSH KUMAR GOEL,MR. JUSTICE AJAY KUMAR MITTAL4 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that Section 32 of the Income Tax Act, 1961, applies only to depreciation on capital assets, not revenue expenditure. The Tribunal had found that expenditure on software development was revenue expenditure, citing rapid technological changes and fast obsolescence, and that it was not on a physical asset with wear and tear. The Tribunal directed the AO to allow the full expenditure as claimed for the year and withdraw any depreciation allowed. The High Court agreed with the Tribunal's view, noting that the ITAT's finding was supported by the principle that in fast-changing areas of science, it is unrealistic to attribute enduring nature to technical know-how. The court also referred to its own decision in CIT vs. Varinder Agro Chemicals Limited, where a similar finding of the Tribunal was upheld, and the Supreme Court's decision in Alembic Chemical Works Co. Ltd. vs. CIT. Consequently, the substantial questions of law were decided against the revenue. The issue regarding 'put to use' of Plant & Machinery was not explicitly addressed in the final reasoning, but the overall dismissal implies it was not found to be a substantial question of law warranting interference.

What were the facts?

The assessee, M/s O.K. Play India Ltd., incurred expenses on computer software. The Assessing Officer (AO) treated these as capital expenditure and allowed depreciation. The CIT(A) upheld the AO's view. The Income Tax Appellate Tribunal (ITAT), Delhi Bench, in its order dated 23.9.2005 for assessment year 1995-96, reversed this, holding the expenditure to be revenue in nature. The revenue, represented by the Chief Commissioner of Income-Tax, Faridabad, appealed this decision to the High Court of Punjab and Haryana under Section 260A of the Income Tax Act, 1961. The High Court noted that the file was unavailable due to a fire and proceeded with a copy of the paper-book furnished by the revenue.

What were the issues?

1. Whether on the facts and in the circumstances of the case, the ITAT was right in treating the expenses incurred on purchase of computer software as revenue expenses, despite the assessee having capitalized them under 'office equipment' but claimed 100% depreciation? (Question of law) 2. Whether on the facts and in the circumstances of the case, the ITAT was right in treating the computer software expenses as revenue expenses despite the fact that the expenses were incurred in obtaining an advantage of enduring nature and the expenditure was capitalized by the assessee itself? (Question of law) 3. Whether on the facts and in the circumstances of the case, the ITAT was right in holding that the assessee had 'put to use' the Plant & Machinery during the year relevant to AY 1995-96, though the assessee had done only a trial run by 31.3.1995? (Question of law) Assessee's contentions: The ITAT upheld the assessee's plea that expenditure on software development should be treated as revenue expenditure due to rapid technological changes and fast obsolescence. The assessee also relied on the High Court's decision in CIT vs. Varinder Agro Chemicals Limited and the Supreme Court's decision in Alembic Chemical Works Co. Ltd. vs. CIT. Revenue's contentions: The revenue argued that the expenditure should have been treated as office equipment as per the proviso to Explanation 5 of Section 32. The revenue also argued that the expenditure was for an advantage of enduring nature and was capitalized by the assessee.

Which sections of the Income-tax Act were involved?

Section 260A,Section 32

AI-generated summary — verify with the full judgment below

of 2006

-1- *** IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income-tax Appeal No.414 of 2006 Date of decision: 25.2.2011 The Chief Commissioner of Income-Tax, (O ), Faridabad ...Appellant Versus M/s O.K. Play India Ltd. ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant. Mr. Kamal Sehgal, Advocate for the respondent

**** ADARSH KUMAR GOEL, J (

Oral)

.

1.

Since Registry has not been able to send the file on account of fire in the Court premises, learned counsel for the revenue has furnished copy of paper-book which is taken on record. We proceed to decide the matter after hearing learned counsel for the parties.

2.

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 against order dated 23.9.2005 passed by the Income Tax Appellate Tribunal, Delhi Bench 'SMC', in ITA No.1365/(DEL)/2004, for the assessment year 1995-96, claiming following substantial questions of law:- “i). Whether on facts and in the circumstances of the case, the Hon'ble ITAT was right in treating the expenses incurred on purchase of computer software as Revenue of 2006

-2- *** expenses in nature despite the fact that the assessee had capitalized the expenses under the head 'office equipment' but claimed depreciation @ 100%? ii) Whether on facts and in the circumstances of the case, the ITAT was right in treating the computer software expenses as revenue expenses despite the fact that the expenses were incurred in obtaining advantage of enduring nature and the expenditure was capitalized by the assessee itself? iii) Whether on facts and in the circumstances of the case, the Hon'ble ITAT was right in holding that the assessee had 'put to use' the Plant & Machinery during the year relevant to A.Y. 1995-96 though the assessee had done only trial-run by 31.3.1995?”

3.

The Assessing Officer did not accept the plea of the assessee for treating the computer software as revenue expenditure. It was held that the expenditure in question was capital expenditure and the assessee was only entitled to depreciation. The CIT(A) upheld the said view. On further appeal, the Tribunal upheld the plea of the assessee with the observation that technological changes are taking place at fast pace on account of which expenditure on software development had to be treated as revenue expenditure.

4.

We have heard learned counsel for the parties.

5.

Learned counsel for the revenue submits that expenditure should have been treated to be on office equipment as per proviso to Explanation 5 of Section Section 32. 6. We are unable to accept the submission. Section 32 applies of 2006

-3- *** only for depreciation in respect of capital asset and not to revenue expenditure. In the present case, the Tribunal has recorded a finding that expenditure on the software development was revenue expenditure as under:- “Ground of appeal Nos.4 and 5 are directed against disallowance of Rs.8,98,000/- spent on computer software. The learned Assessing Officer has treated the expenditure to be in the nature of capital expenditure. He has allowed the assessee depreciation @ 10% this year and @ 5% in the subsequent years. The learned Assessing Officer has not doubted the genuineness of the expenditure or the business purpose for the same. In our view, merely because the assessee had himself capitalized the expenditure in its expenditure in its books of accounts, the Assessing Officer could not conclude that it was capital expenditure. It is well known that in the area of software there are technological changes taking place at fast pace and, therefore, obsolescence takes place very fast. Secondly, the expenditure is not on any physical asset having any wear and tear. Having regard to these aspects the courts tend to ordinarily treat the expenditure on software development to be revenue expenditure only. It is not the case of the revenue that the expenditure incurred is exceptionally high or otherwise of very special nature. I, therefore, hold that the expenditure had been rightly claimed by the assessee to be revenue expenditure for this year only. The learned Assessing Officer is, therefore, directed to allow the assessee full expenditure as of 2006

-4- *** claimed this year. At the same time he would be entitled to withdraw the depreciation allowed to the assessee in this behalf during this assessment year as well as subsequent assessment year.”

7.

Learned counsel for the assessee points out that in identical circumstances, finding of the Tribunal was upheld by this Court in Commissioner of Income-Tax Vs. Varinder Agro Chemicals Limited [2009] 309 ITR 272 (P&H) holding that no substantial question of law arose. Reference was also made to the judgment of Hon'ble Supreme Court in Alembic Chemical Works Co. Ltd. Vs. CIT [1989] 177 ITR 377 (SC) to the effect that it would be unrealistic to ignore rapid advances in research and to attribute a degree of endurability and permanence to the technical know how at any particular stage in fast changing area of science.

8.

In view of above, we do not find any ground to interfere with the view taken by the Tribunal. Substantial question of law raised is decided against the revenue.

9.

Accordingly, the appeal is dismissed.

(Adarsh Kumar Goel)

Judge February 25, 2011 (Ajay Kumar Mittal) Pka

Judge

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