Chief Commissioner of Income Tax vs O.K. Play India Ltd.

Adarsh Kumar Goel, J.—Since the registry has not been able to send the file on account of fire in the court premises, Learned Counsel for the Revenue has furnished a copy of the paper-book which is taken on record. We proceed to decide the matter after hearing Learned Counsel for the parties. This appeal has been preferred by the Revenue u/s 260A of the Act against the order dated September 23, 2005, passed by the income tax Appellate Tribunal, Delhi Bench "SMC", in I.T. A. No. 1365/(DEL)/2004, for the assessment year 1995-96, claiming the following substantial questions of law :

(i) Whether, on the facts and in the circumstances of the case, the hon''ble income tax Appellate Tribunal was right in treating the expenses incurred on purchase of computer software as revenue expenses in nature despite the fact that the assessee had capitalized the expenses under the head ''office equipment'' but claimed depreciation at 100 per cent. ?

(ii) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal 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 the facts and in the circumstances of the case, the hon''ble income tax Appellate Tribunal was right in holding that the assessee had ''put to use'' the plant and machinery during the year relevant to the assessment year 1995-96 though the assessee had done only trial-run by March 31, 1995 ?

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 Commissioner of income tax (Appeals) 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.

We have heard Learned Counsel for the parties.

Learned Counsel for the Revenue submits that the expenditure should have been treated to be on office equipment as per the proviso to Explanation 5 to section 32(1).

We are unable to accept the submission. Section 32 applies only for depreciation in respect of capital asset and not to revenue expenditure. In the present case, the Tribunal has recorded a finding that the expenditure on the software development was revenue expenditure as under :

Ground of appeals Nos. 4 and 5 are directed against the 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 at 10 per cent, this year and at 5 per cent, 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 account, 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 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.

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, holding that no substantial question of law arose. Reference was also made to the judgment of the hon''ble Supreme Court in Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income Tax, Gujarat, 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 the fast changing area of science.

In view of the above, we do not find any ground to interfere with the view taken by the Tribunal. The substantial question of law raised is decided against the Revenue. Accordingly, the appeal is dismissed.