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Income Tax Appellate Tribunal, “I”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A), Mumbai, for the assessment year 2005-2006, in the matter of imposition of penalty u/s.271(1)(c) of the I.T.Act.
In this appeal, the assessee is aggrieved for levying penalty with respect of disallowance of assessee’s claim for software expenses as revenue expenditure.
Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in the business of providing software development consultancy and IT support services. During the course of scrutiny assessment, the AO disallowed expenditure of 2 Rs.15,61,07,344/- incurred on development/upgradation of various software products. The CIT(A) confirmed the addition. After confirming the disallowance AO also levied penalty u/s.271(1)(c), against which assessee is in further appeal before us.
We have heard the rival contentions and found from the record that during the course of scrutiny assessment assessee’s claim of development/upgradation of software expenses was declined. For the said disallowance the AO has levied penalty u/s.271(1)(c) of the I.T. Act. We found that even in earlier years similar disallowance so made was confirmed by the CIT(A) and Tribunal. The Tribunal have observed that against the order of Tribunal for earlier years, the assessee has gone in the appeal before the Hon’ble High Court and Hon’ble High Court has admitted the substantial question of law.
From the record we found that similar claim of assessee was declined by the Tribunal vide its order dated 30-7-2010 for the assessment year 2002-03, against which the assessee preferred appeal before the Hon’ble Bombay High Court, which has been admitted by order dated 18-1-2012 in the Income Tax Appeal No.1013 of 2011 and following substantial questions of law have been admitted with the following observations :- “(1) whether on the facts and in the circumstances of the case and in law, the Tribunal erred in holding that expenditure of Rs.12,59,33,429/-, incurred by the appellant on development/upgradation of software is capital in nature ? (ii) whether on the facts and in the circumstances of the case and in law, the Tribunal erred in denying the appellant’s alternative 3 claim of deduction of Rs.12,59,33,429/-, as scientific research expenditure under Section 35 of the Act.? It is clear from the above that the Hon’ble High Court has accepted the substantial question of law against the said disallowance, therefore, assessee’s claim has become debatable. In view of the decision of jurisdictional High Court in the case of Nayan Builders and Developers, 368 ITR 722, it was held that when the substantial question of law has been admitted, no penalty should be imposed with respect to such disallowance/addition.
We also found from the quantum order of the Tribunal in earlier years that the Tribunal have held that expenditure incurred by the assessee and treated as work-in-progress, are capital expenditure and the assessee will be eligible for depreciation on these expenditure in the year when these have been capitalized.
It was contended by ld. AR that similar expenditure was treated by Hon’ble Delhi High Court in the case of G.E. Capital Service Ltd., 300 ITR 420 (Del) as revenue by observing that due to technical changes and need to upgrade the software on a regular basis, any expenditure incurred by assessee towards the upgradation of MS office cannot be said to be capital expenditure and it could not be said that the software was of an enduring nature. The ITAT Mumbai Bench in the case of Express Airotronics Pvt. Ltd. (2007) (ITA No.7105/Mum/2002) has held as under :- “it is held that purchase of accounting software in view of fast changing technology in the field of software, need for its replacement at short interval are essential and therefore, the same could not be disallowed merely on the ground of acquiring benefit of enduring nature.”
Similarly, the Bangalore Bench of the Tribunal in the case of IBM India Ltd. 105 ITD 1, has held as under :- “Where in the course of business, the assessee acquires an application software merely to carry out its business operation efficiently and smoothly, though there was an enduring benefit, it did not result into acquisition of any capital asset and therefore the said expenditure was to be treated as revenue expenditure.” The ITAT Jaipur Bench in the case of Business Information Processing Services 73 ITD 304 and Delhi High Court in the case of Media Video Ltd., 122 Taxmann 28 and Hon’ble Calcutta High Court in the case of ITC Classic Finance Ltd., 112 Taxman 155, have held that expenditure on software was allowable as revenue expenditure.
Further reliance was placed on the decision of Hon’ble Andhra Pradesh High Court in the case of Praga Tools Ltd., 123 ITR 773, wherein it was held that where the expenditure has a direct nexus, connection nor relation to the carrying on of or conducting the business of the assessee, it must be regarded as an integral part of the profit-making process. In such a case, it must be held to be a revenue expenditure. Reliance was also placed on the decision of Special Bench in the case of Amway Enterprises Ltd., 111 ITD 112.
It is clear from the above judicial pronouncements that allowing or disallowing software expenditure as revenue is a debatable issue, therefore, no penalty can be imposed merely for the disallowance of the assessee’s claim.
The Hon’ble Supreme Court in the case of Reliance Petroproducts Pvt. Ltd.(SLP(C) No.27161 of 2008 (SC), held as under :-