Commissioner Of Income Tax [- ]Ii v. Manupatra Information [Solutions]Through

.l !t IN TIIE HIGH COTTRT OF' DELHI AT NEW + ITA 318/2012 COMMISSIONER OF INCOME TAX [- ]II..... AppellantThrough Mr. N.P. Sahni, Sr. Standing [Counsel.] versus MANUPATRA INFORMATION Through ..... Respondent CORAM:HON'BLE MR. JUSTICE SANJIV KIIAIINAHON'BLE MR. JUSTICE R.V.EASWAR ORDER28.0s.2012 o Commissioner of lncome Tax-II [has ][filed ][this ][appeal assailing]the order dated 30ft September, [2011 ][passed ][by ][the ][Income ][Tax]Appellate Tribunal (for short, the tribunal) [in ][two ][cross appeals ][relating]to the assessment year 2006-07 in [the ][case ][of ][Manupatra ][Information]Solutions Pvt. Ltd. 2. Learned counsel for the Revenue [submits ][that the tribunal ][has]erred in relying upon the decision of [the ][High ][Court ][in ] [Vs. ][Indian] Visit.Com Pvt. Ltd. 176 [Taxman ][164. ][He ][states ][that the ][said decision]relates to a website, which was [created ][by the ][assessee ][therein, who]was engaged in travel business. [Through ][the ][website, internet ][users]had access to the business of the [assessee ][and ][could ][make ][booking ][for] Page 1 of9 tTA3t8/2072 rl "t hotel rooms, taxi services, air ticketing etc. 3. In the present case, the respondent-assessee is [providing ][legal]sofcware and has data base of legal [judgments and ][articles. ][These]judgments/articles can be used as a software in media or can beaccessed from the server as a website on [payment ][of ][charges ][to ][the]respondent-assessee. 4. The Assessing Officer in the assessment order dated [19tl']December, 2008 observed that the [assessee ][had ][amortized ][the]expenditure incurred on data base [and ][development cost ][in ][the ][books]of accounts, but for the income [tax ][purpose had ][claimed the ][same ][as a]revenue expense. He held that the said [expense cannot ][be allowed ][in]one year, as it would [give ][a ]very [distorted ][picture ][of ][the ][profits ][of ][a]particular year. For the sake of completeness, we [are ][reproducing ][the]exact reasoning given by the Assessing Ofhcer:- "As seen from the above, [the ][benefit of ][the above]expenditure claimed by the [assessee ][is ][for ][number ][of]years and accordingly amortized as [per ]the [books.]Hence the claim of above expenditure [in ][full ][for ][the]income tar purpose cannot [be ][allowed.] The submissions filed by the [assessee ][company ][were]considered and cannot be accepted. [The ][Hon'ble]Supreme Court in the case of [Madras ][Industrial]Investment Corporation Ltd. [Vs. ][Commissioner]of Income Tax Q55 ITR [S02) ][held that ][the]allowability of the expenditure [depends ][entirely ][on]the nature of the expenses [and ][stated ][that ][allowing] Page 2 of 9 rA3L8/2O72 a { the entire expenditure in one year misht give a very distorted picture of the profits of a particular year. Ithad further stated that although the assessee incurredthe entire liability in the current year, if the nature ofexpense is such that the benefit is for a number ofyears to the assessee company the huge expenditureincurred cannot be held exclusivelv for the currentyear." 5. In the fust appeal, the assessee partly succeeded as theCommissioner Income Tax (Appeals) held that the assessee wasentitled to depreciation @25%and accordingly relief to [the ][extent ]ofRs.15,43,618/- was granted [(there ]appeafs to be some elror in [the order]of the CIT (Appeals) as he has wrongly calculated [the ]relief in [the ][last]but one sentence). The CIT (Appeals) while substantially [dismissing] the appeal gave the following reasoning:- . *4.3 distorted picture of the profits of a particular year. Ithad further stated that although the assessee incurredthe entire liability in the current year, if the nature ofexpense is such that the benefit is for a number ofyears to the assessee company the huge expenditureincurred cannot be held exclusivelv for the currentyear." 5. In the fust appeal, the assessee partly succeeded as theCommissioner Income Tax (Appeals) held that the assessee wasentitled to depreciation @25%and accordingly relief to [the ][extent ]ofRs.15,43,618/- was granted [(there ]appeafs to be some elror in [the order]of the CIT (Appeals) as he has wrongly calculated [the ]relief in [the ][last]but one sentence). The CIT (Appeals) while substantially [dismissing] the appeal gave the following reasoning:- . *4.3 Before proceeding to deal with the issue, itis essential to understand the business activities ofthe appellant. The company runs a web site on. [which ][legal ][decision ][of ][various courts, information]including statutories etc. is available on line on [the]click of a button. The access to the web site is limitedto the persons who have paid the necessary fees to [be]entitled to do so for a fixed period of time [upon ][the]expiry of which the period can be extended for [a]further limited duration. Such [persons (subscribers)]are issued a password to access the web site. [Once]the web site is accessed, whole lot of information [in]the form of court decisions, statutes, variousregulations, news bulletin etc. is available. [Thus, the]data once created and placed on the [net ][is ][available]trA3t8/20L2Page 3 of 9 , a for all the times to come unless withdrawn/removedby the site owner. In this case, the appellant. Thesaid data once created is permanent and is onlyrequired to be updated thereafter. 4.4.it is seen that the expenditure under the head [data].base and development cost has been incurred tocreate data base which includes decision of variouscourts including Supreme Court and High Courts,their head notes/case notes, parallel citations etc. Itis also seen that the said expenditure has beenincurred by the appellant for procuring variousdecisions, citing references, quality checks, for booksand periodicals and also as remuneration [to]editors/employees. Some of the heads of the [said]expenditure when seen in isolation may or may notappeal capital in nature but when they are seen intotality in conjunction with the object of incurringthem or the end product which is [generated, ]one. [can]come to know about their nature. The [expenditure ][so]incurred has resulted into the creation of [a data ][base,]the benefits of which the appellant is [going ]to enjoyfor all the times in future once the same [comes ][into]the existence. Therefore, the said data [base ][is]nothing but a capital assets of the appellant [as the]said expenditure has resulted into an [enhancement ][to]' the capacity of the income generating instrument inits hands. Since the expenditure [has ][resulted ][into ][the]creation of a capital asset, the same cannot [be ][treated]as a revenue expenditure but is actually a [capital]expenditure." 6. Before the CIT [(Appeals), ]the [assessee ][had ][filed ][written]submissions, which were taken on [record ][and ][mentioned ][in ][the ][order.]In the written submissions the [assessee ][had ][stated ][as ][under:-]In the written submissions the [assessee ][had ][stated ][as ][under:-] Page'4 of 9 tTA3L8/2012 t Deferred Expenditure in the books of account, for theshareholders. A portion of such expenditure hadbeen written off during the year under consideration.However iuch amount written has bee.n"tr disallowed in the computation of income. The entirebusiness expenditure on Database & Developmentincurred durtng the year had been claimed asdeduction in the computation of income. I 7. It is clear from the written submissions that the assessee is in the 6. Before the CIT [(Appeals), ]the [assessee ][had ][filed ][written]submissions, which were taken on [record ][and ][mentioned ][in ][the ][order.]In the written submissions the [assessee ][had ][stated ][as ][under:-]In the written submissions the [assessee ][had ][stated ][as ][under:-] Page'4 of 9 tTA3L8/2012 t Deferred Expenditure in the books of account, for theshareholders. A portion of such expenditure hadbeen written off during the year under consideration.However iuch amount written has bee.n"tr disallowed in the computation of income. The entirebusiness expenditure on Database & Developmentincurred durtng the year had been claimed asdeduction in the computation of income. I 7. It is clear from the written submissions that the assessee is in the business of providing legal software, which can be accessed from [the]website on payment of charges. Anyone familiar with legal software,knows that the said software requires constant up-gradation on [day ][to]day basis. Judgments and articles have to be uploaded and updated.The [judgments ]require preparation of head notes, summaries,references, etc. . For both uploading [judgments ]and [articles ][and]preparation of head notes etc. expenditure has to be incurred virtuallyevery day. The said expenses are certainly business [expenses and ]willfall in the category of "revenue expenditure". This is what [has ][been]highlighted and pointed out in the written submissions, [which ][have]been reproduced by the first appellate authortty. In [case ][legal ][software]is not updated or latest [judgments ]and articles [are ][not ][available, ][the]service provider runs the risk of losing [business ][to o*rers. ][The]software has value only if it is [accurate ][and updated ][regularly. ][Old]soffware has no value and [takers ]in [the market.] Page 6 of 9 tTA3t8l20t2 I 4 '"Database and Development cost are incurred on aday to day basis on expenditure like salory, printing,commission and other expenditure on establishment.These expenses are only revenue in nature andhaving been incurred infurtherance of business, and' need to be allowed in their entirety. Appellant company has to continuously update andexpand content and provide online services on a realtime basis. Assessee company has continued toexpand content and online services and is also,adding [value ][enhancements ][to ][its ][online ][library,]i thereby increasing the scope of its contenthoriz o nt ally and v er ti c ally. Appellant company have expe4ded the coverage ofjudgments of High Courts and Supreme Court, whichwas used by lanyers and other professional to getrelevant information/judgments and increasing theirproductivity so that they, in turn can deliver betterservices to their customers Reporters of appellant company attached to variouscourts have to make continued gfforts to collectvarious information and landmark iudgments fro*Supreme/High Courts. These [judgments ]are then [to]be processed for making it usable for digital/onlinecontent usage. Assessee company has also incur [cost]on the development, editing, indexing summarizingand linking of data. ' In a new/ever growmg business, results in terms ofrevenue grow at a slow pace. However costs are [to]be incurred to get the business moving [and ][attracting]customers by exhibiting to customer the value of [an]appellant's products Following the accounting policy, certain [expenditure]on Database & Development Cost [was ][treated ][as]tTA3t8/20L2Page 5 of 9 3 8. In these circumstances, we do not think that in absence of the Reporters of appellant company attached to variouscourts have to make continued gfforts to collectvarious information and landmark iudgments fro*Supreme/High Courts. These [judgments ]are then [to]be processed for making it usable for digital/onlinecontent usage. Assessee company has also incur [cost]on the development, editing, indexing summarizingand linking of data. ' In a new/ever growmg business, results in terms ofrevenue grow at a slow pace. However costs are [to]be incurred to get the business moving [and ][attracting]customers by exhibiting to customer the value of [an]appellant's products Following the accounting policy, certain [expenditure]on Database & Development Cost [was ][treated ][as]tTA3t8/20L2Page 5 of 9 3 8. In these circumstances, we do not think that in absence of the material to the contrary the Assessing Offrcer and the CIT (Appeals)were [justified ]in holding and observing that the expenditure incunedwas capital expense and not revenue expense. The Assessing Officerand the CIT (Appeals) have not recorded any special feature orjustification to hold that the expenditure was capital in nature. It is notalleged or averred that the expense incurred was the initial expenditureby the assessee when it started the business and created the firstversion/copy of software with the earlier decisionsijudgments.g. The tribunal in the impugned order has referred to the [judgment]of this Court tn Indian Visit.Com Pvt. Ltd (supra). In the said case, [as]noticed above, the assessee was in travel business and had created [a]website for prospective customers. The assessee therein obviously [was]in existing business and to improve the business and turnover, it [had]setup a website. In the said [judgment, ]reference was made to [the]decisions of the Supreme Court inAlembic Chemical l|torks CompanyLtd. h. CIT 177 ITR 377 and Empire Jute Company Ltd. Vs. CIT 124 ITR 01 and it was observed as under:- 5. In Empire Jute Company Ltd [(supra), ]the SupremeCourt observed that if the advantage consists [merely ][in]Court observed that if the advantage consists [merely ][in]. facilitating the assessee's trading operations or enablingthe management and conduct of the assessee's businessthe management and conduct of the assessee's business, to be carried on more efficiently or more [profitably]while leaving the fixed capital untouched, [the]while leaving the fixed capital untouched, [the] Page 7 of 9 trA378l2Dt2 / expendifure would be on revenue account, even thoughthe advantage may endure for an indefinite future. TheSupreme Court observed that in such cases the test ofenduring benefit is, therefore, not a certain orconclusive test and it cannot be applied blindly andmechanically without regard to the particular facts andcircumstances of a given case. 6. In Alembic Chemical Works Company Ltd [(supra),]the Supreme Court observed that the idea of ?once forall? payment and 'enduring benefit' are not to be teatedas something akin to statutory conditions: nor are thenotions of "capital" or "revenue" a [judicial ]fetish. TheSupreme Court also observed that the "once for all"payment test is also inconclusive. What is relevant is thepurpose of the outlay and its intended object and effect,considered in a commonsense way having regard to thebusiness realities. The Supreme Court also noted that ina given case, the test of %nduring benefitf might breakdown. 6. In Alembic Chemical Works Company Ltd [(supra),]the Supreme Court observed that the idea of ?once forall? payment and 'enduring benefit' are not to be teatedas something akin to statutory conditions: nor are thenotions of "capital" or "revenue" a [judicial ]fetish. TheSupreme Court also observed that the "once for all"payment test is also inconclusive. What is relevant is thepurpose of the outlay and its intended object and effect,considered in a commonsense way having regard to thebusiness realities. The Supreme Court also noted that ina given case, the test of %nduring benefitf might breakdown. 7. Considered in the light of these [principles ]enunciatedby the Supreme Court, it is clear that [just ]because [a]particular expenditure may result in an enduring benefitwould 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 anyaccretion to the fixed capital of the assessee. In the [case]of expenditure on a website, there is no change in thefixed capital of the assessee. Although the website mayprovide an enduring benefit to an assessee, the intent andpurpose behind the purpose for a website is not to createan asset but only to provide a means for disseminatingthe 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 technologyand the wide spread ude 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 larger set of people worldwide." 10. We have noticed the factual [difference, ][but ][the legal principle]lTAgL8l2O72 Page 8 of 9 { ,/tt:.-t u and issue involved to determine and decide whether anexpenditureincurred is capital .expenditure or a revenue expendifure, have beenrightly noticed and elucidated in the said decision. ['W.rnuy ]note thatexpenses in respect of software up-gradation in the form of the betteror more exhaustive search engine, up-gradation in [the ]source [software,]features offered etc have to be incurred from time to time to remaincompetive in business. Software improvement is a constant [process]and expenditure has to be incurred repeatedly. We do not agree thatthe software up-gradation expenses in the present case should betreated as a capital expense. The Assessing Ofhcer and the firstappellate authority have failed to bring on record necessary [features,]facets or factual matrix to [justify ]the claim that the expenditure [was]capital in nature. The factual assertions made by the assessee have notbeen [qontroverted ]or denied. 11. In view of the aforesaid position, we do not think that anysubstantial question of law arises in this appeal [and ][the ][same ][is]dismissed. /lt-/g I '' [Lr]SANJIV KIIAI\NA, J.tlt\lUr"-t^1 [..]R.V.EASWAR, J. MAY 28,2012NA.-lTA378/20L2 Page 9 of 9