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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: Shri Joginder Singh, & Shri Rajesh Kumar
Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order dated 25/02/2011 of the ld. First Appellate Authority, Mumbai. First ground raised by the assessee pertains to disallowing website registration expenses amounting to Rs.1,09,03,798/- as capital expenditure.
2 Bennett Coleman and Company Ltd.
During hearing, the crux of argument advanced on behalf of the assessee is that the impugned issue is covered by the decision from Hon’ble Delhi High Court in the case of CIT vs Indian Visit.com Pvt. Ltd. (2008-TIOL-448-HC-DEL- IT)(2008) 219 CTR 603 (Del.) and DCIT vs M/s Mahindra Reality and INF Developers Ltd. in order dated 28/01/2011. This factual matrix was not controverted by the ld. DR. 2.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order dated 28/01/2011 (ITA No.1160/Mum/2010) for ready reference:-
“This appeal by the Revenue is against the order of the CIT(A)-V, Mumbai dated 07.12.2009.
2. Revenue has raised the following grounds: - “1. The order of the CIT(A) is opposed to law and facts of the case.
2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition made by disallowing a software expenditure amounting to Rs.1,75,500/- for obtaining MS Office Licence and Marketing Data Management System which are capital in nature.
3 Bennett Coleman and Company Ltd.
3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition made by disallowing the expenses for website development amounting to Rs.8,02,139/- which are capital in nature.”
Briefly stated, the assessee company filed the return of income on 31.10.2001 declaring loss of Rs.26,95,86,068/-. The return was processed under section 143(1) and accepted the same. Subsequently the case was selected for scrutiny under section 143(3) and completed the assessment on 08.03.2004 making certain additions. In appeal before the CIT(A) the assessee challenged the additions and the CIT(A) has deleted the additions made on account of computer software expenses and website development charges. Aggrieved, Revenue is in appeal before us.
Ground No. 1 pertains to deletion of the addition made by disallowing the software expenditure of Rs.1,75,500/-. On noticing that the assessee has debited Rs.1,75,500/- to the P&L account,the A.O. asked the assessee why the same should not be treated as capital expenditure. It was submitted that the expenditure is in the revenue field as it only facilitates carrying on the existing business more profitably without altering the business structure of the company. The acquisition of software did not result in any advantage of enduring nature and it had not acquired the absolute ownership of the software but only the right to use the software. The A.O. did not accept the contention and treated the expenditure as capital expenditure and allowed depreciation @ 25%. Before the 4 Bennett Coleman and Company Ltd. CIT(A) it was submitted that the assessee has purchased licenses of two software, i.e. MS Office and Marketing Data Management System, the life span of which is very short due to fast technological obsolesces. Therefore, the expenditure is of revenue nature. He relied on the decision of the Special Bench in the case of Amway Enterprises 111ITD 112 (Del) (SB). After considering the facts and contentions of the assessee the CIT(A) deleted the addition stating as under:-
“5. I have carefully considered the above facts and find merit in the contentions of the appellant. From the very nature of the software, the payment of such expenses on such application software though enduring in nature, does not result in acquisition of any capital asset and merely enhances the productivity and has to be treated as revenue. The concept of enduring benefit must respond to the changing economic realities of the business. Apart from the case of Amway Enterprise (supra), case of the appellant is also supported by the recent decision in the case of CIT vs. Southern Roadways Ltd. (2009) 183 Taxman 234 (Mad) in which also, the assessee claimed expenditure incurred on software packages as revenue one. It was held that such expense which revolves on the modern communication technology enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. Such software does not work without fitting it on a compute rand it enhances the efficiency of its operation. It is an aid in the manufacturing process rather than the total tool itself. Accordingly, such expenditure is held to be revenue in nature and the addition made is deleted. The 5 Bennett Coleman and Company Ltd. AO is, however, directed to withdraw depreciation allowed to the appellant.”
After hearing the learned D.R. and the learned counsel for the assessee we do not see any reason to interfere with the findings of the CIT(A). Considering the nature of licences purchased by the assessee, being software of MS Office and Marketing Data Management System which facilitated the operations of the company and has no enduring benefit, the expenditure can only be considered as revenue in nature. The Hon'ble Special Bench of ITAT in the case of Amway Enterprises 111 ITD 112 (Del) (SB) inter alia held that for ascertaining as to whether the expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee acquires right to use the software becomes relevant. Having regard to the fact that software becomes obsolete with technological innovation and advancement and life of the software being less than two years, the expenditure is rightly treated as revenue expenditure. Accordingly order of the CIT(A) is confirmed.
Ground No. 2 is with reference to deleting the addition of Rs.8,02,139/- made on account of website development charges. The A.O. noticed that the assessee has debited an amount of Rs.8,02,139/- under the head ‘website development charges’. The A.O. asked why the same should not be treated as capital expenditure. It was submitted that the website offers the various details of the company’s business and products it offers. Hence it is essentially an advertisement expenses and 6 Bennett Coleman and Company Ltd. allowable as revenue in nature. The A.O. did not accept the contentions of the learned A.R. and treated the expenditure as capital in nature stating that the life span of the website is quite long and it is an asset in the cyber space. However, he allowed depreciation @ 25% on website development charges. Before the CIT(A) it was submitted that the website is a very cost effective tool of advertisement/marketing of the company’s business. It is a medium of corporate communication and offers advantages over traditional mode of advertisement. Therefore it is essentially an advertisement expenditure allowable as revenue expenditure. After hearing the learned A.R. and considering the facts the CIT(A) deleted the addition by holding as under: - “9. I have carefully considered the above fact and do not find any merit in the observations and findings of the AO. Expenditure incurred on website development is although enduring in nature, the intent and purposes behind the development is not to create an asset but only to provide a means for disseminating the information about the assessee among its clients. In the case of CIT vs. Indian Visit.com P. Ltd. (2008) 219 CTR 603 (Del), on identical facts, such expenditure was held to be revenue expenditure akin to printing of pamphlets etc. It was stated that mere enduring benefit, de hors any accretion to fixed capital would not make an expenditure a capital one. In the light of such facts and the legal position emerging from the cited decision, such expenditure is held to be revenue in nature and the addition
7 Bennett Coleman and Company Ltd. made is deleted. The AO is, however, directed to withdraw depreciation allowed to the appellant.”
We have considered the issue. In our view the CIT(A) has rightly considered the nature of expenditure as revenue in nature. Similar issue was considered by the Hon’ble Delhi High Court in the case of CIT vs. Indian Visit.com P. Ltd. (2008) 219 CTR 603 (Del), wherein it was held as under: - “Just because a particular expenditure may result in an enduring benefit would not make such an expenditure of a capital nature. What is to be seen is what is the real intent and purpose of the expenditure and as to whether there is any accretion to the fixed capital of the assessee. In the case of expenditure on a website, there is no change in the fixed capital of the assessee. Although the website may provide an enduring benefit to an assessee, the intent and purpose behind development of a website is not to create an asset but only to provide a means for disseminating the information about the assessee. The same could very well have been achieved and, indeed, in the past, it was achieved by printing travel brochures and other published materials and pamphlets. The advance of technology and the wide spread use of the internet has provided a very powerful medium to companies to publicize their activities to a larger spectrum of people at a much lower cost. Websites enable companies to do what the printed brochures did but, in a much more efficient manner as well as in a much shorter period of time and covering a much large set of people worldwide. The Tribunal has correctly
8 Bennett Coleman and Company Ltd. appreciated the facts as well as the law on the subject and has come to the conclusion that the expenditure on the website was of a revenue nature and not of a capital nature. No substantial question of law arises for consideration.”
Respectfully following the above decision we uphold the decision of the CIT(A). The expenditure is correctly allowed as revenue expenditure. Ground is rejected.
In the result, appeal of the Revenue is dismissed.”
2.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel and the aforesaid order of the Tribunal dated 28/01/2011, if kept in juxtaposition and analyzed, we note that while dismissing the appeal of the Revenue, the Tribunal has already considered the decision from Hon’ble Delhi High Court in the case of CIT vs Indian Visit.com Pvt. Ltd. (2008) 219 CTR 603 (Del.), wherein, it was held as under:-
“Just because a particular expenditure may result in an enduring benefit would not make such an expenditure of a capital nature. What is to be seen is what is the real intent and purpose of the expenditure and as to whether there is any accretion to the fixed capital of the assessee. In the case of expenditure on a website, there is no change in the fixed capital of the assessee. Although the website may provide an enduring benefit to an assessee, the intent and purpose behind
9 Bennett Coleman and Company Ltd. development of a website is not to create an asset but only to provide a means for disseminating the information about the assessee. The same could very well have been achieved and, indeed, in the past, it was achieved by printing travel brochures and other published materials and pamphlets. The advance of technology and the wide spread use of the internet has provided a very powerful medium to companies to publicize their activities to a larger spectrum of people at a much lower cost. Websites enable companies to do what the printed brochures did but, in a much more efficient manner as well as in a much shorter period of time and covering a much large set of people worldwide. The Tribunal has correctly appreciated the facts as well as the law on the subject and has come to the conclusion that the expenditure on the website was of a revenue nature and not of a capital nature. No substantial question of law arises for consideration.”
2.3. Respectfully, following the decision from Hon’ble Delhi High Court and also of the Coordinate Bench, holding that just because a particular expenditure may result in an enduring benefit would not make such an expenditure of capital nature and real intent and purpose of the expenditure has to be seen, thus, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals).
2.4. So far as ground no.2 with respect to deleting the disallowance of Rs.11,07,00,000/- u/s 14A read with Rule 8D of the Rules is concerned, the factual finding recorded by the 10 Bennett Coleman and Company Ltd. ld. Commissioner of Income Tax (Appeals) is reproduced hereunder:-
6.3. I have carefully considered the submissions of the ld. A/R and have gone through the assessment order and the other material available on record. The Hon’ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs Deputy CIT (328 ITR 81) has clearly laid down that the provisions of Rule 8D of the Rules shall apply only with effect from A.Y. 2008-09. Consequently, the addition of Rs.11,07,00,000/- made by the Assessing Officer u/s 14A of the I.T. Act, 1961 relying upon Rule 8D cannot stand and is hence deleted.
2.5. We are in agreement with the finding of the ld. Commissioner of Income Tax (Appeals) to the extent that Rule 8D of the Rules is not applicable being the assessment year involved is 2007-08. So far as, reasonableness of addition made u/s 14A of the Act is concerned, in view of the decision from Hon’ble jurisdictional High Court in Godrej & Boyce Mfg. Company Ltd. vs CIT 328 ITR 81 (Bom.), where their lordship while approving the theory of apportioning expenditure between taxable and nontaxable income speaks about reasonable and fair basis to be followed in making the disallowance u/s 14A of the Act, we note that there is uncontroverted finding in para 6.11 of the impugned order that there is no borrowing by the assessee during the year. The Assessing Officer is directed to make the disallowance in the light of the aforesaid decision from Hon’ble jurisdictional High Court. Thus, this ground is allowed for statistical purposes. The assessee be given opportunity of being heard.
11 Bennett Coleman and Company Ltd. Finally, the appeal of the Revenue is disposed off in terms indicated hereinabove and thus partly allowed for statistical purposes. This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 12/10/2015.