Tca/291/2019 Of The Commissioner Of Income Tax v. Chona Financial Services Pvt Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 03.6.2019 CORAM : THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMAND THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No.291 of 2019 The Commissioner of Income Tax, Chennai. ...Appellant/Appellant -Vs- M/s.Chona Financial ServicesPvt. Ltd., Chennai-17...Respondent/Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 02.11.2018 in MP.No.383/Chny/2017 in ITANo.3039/Mds/2016 on the file of the Income Tax AppellateTribunal Chennai 'B' Bench for the assessment year 2000-01 andagainst the order of the Principal Commissioner of Income Tax,Appellate Tribunal, 'B'Bench, Chennai, dated 31.05.2017 made inITA No.3039/Mds/2016, Assessment Year, 200 -01, and the Order ofThe Commissioner of Income Tax, (A)-1, Chennai -1, dated12.08.2016 made in ITA No.237/07 -08/A-III, (New No.ITA.42/CIT(A)01/2007-08) and the order of The Assistant Commissioner ofIncome Tax, Company circle (3), Chennai -34, dated 26.11.2007,made in GIR No.AAACC 3031C. For Appellant : Mrs.R.Hemalatha, SSCJudgment was delivered by T.S.SIVAGNANAM,J We have heard the learned Senior Standing Counsel for theappellant. 2. This appeal, filed by the Revenue under Section 260A ofthe Income Tax Act, 1961 (for short, the Act), is directedagainst the order dated 02.11.2018 passed by the Income TaxAppellate Tribunal, Chennai 'B' Bench (for brevity, theTribunal) in MP.No.383/Chny/2017 in ITA No.3039/Mds/ 2016 forthe assessment year 2000-01. 3. The Revenue has filed this appeal by raising thefollowing substantial questions of law : “i. Whether, on the facts and in thecircumstances of the case, the Tribunal was https://hcservices.ecourts.gov.in/hcservices/ right in holding that the expenditureincurred for purchase of computer tocomputer link software is revenue in natureespecially when the software provides anenduring benefit over a period of time tothe assessee by performing integrated marketwatch, market depth analysis, order entry,trade book, historic trade, etc where theanalytical and historic data is gathered bythe software in the present case and can beused for maximizing the profits marketopportunity in future ? And ii. Is not the finding of the Tribunalbad by holding that the CTCL softwarepurchased is a revenue expenditure when,admittedly, the same was not incurred forthe maintaining of the existing software butfor a new client access software which wouldcome under the block of assets, plant andmachinery – computer including computersoftware at 60% depreciation under theIncome Tax Act, 1961 ?” 4. The appeal filed by the Revenue before the Tribunal wasdismissed by order dated 31.5.2017 on the ground that it was hitby low tax effect, as the demand was less than Rs.10 lakhs.Subsequently, the Revenue filed a miscellaneous petition torecall the order dated 31.5.2017 on the ground that the appealwas filed before the Tribunal due to audit objection.Thereafter, the Tribunal heard the appeal on merits and by theimpugned order, the Tribunal dismissed the appeal filed by theRevenue. 5. The short question, which falls for consideration, is asto whether the expenditure incurred by the assessee towardssoftware installed in their computer system to the tune ofRs.16.16 lakhs qualifies as a revenue expenditure or as acapital expenditure. 6. The Assessing Officer, vide order dated 26.11.2007, whichwas an assessment under Section 147 of the Act, held theexpenditure to be a capital expenditure. Aggrieved by the same,the assessee preferred an appeal before the Commissioner ofIncome Tax (Appeals)-1, Chennai-34 [for brevity, the CIT(A)] andit was allowed by order dated 12.8.2016. As against the same,the Revenue was on appeal before the Tribunal and it wasdismissed by the impugned order. Hence, the Revenue is nowbefore us. 5. The short question, which falls for consideration, is asto whether the expenditure incurred by the assessee towardssoftware installed in their computer system to the tune ofRs.16.16 lakhs qualifies as a revenue expenditure or as acapital expenditure. 6. The Assessing Officer, vide order dated 26.11.2007, whichwas an assessment under Section 147 of the Act, held theexpenditure to be a capital expenditure. Aggrieved by the same,the assessee preferred an appeal before the Commissioner ofIncome Tax (Appeals)-1, Chennai-34 [for brevity, the CIT(A)] andit was allowed by order dated 12.8.2016. As against the same,the Revenue was on appeal before the Tribunal and it wasdismissed by the impugned order. Hence, the Revenue is nowbefore us. 7. Mrs.R.Hemalatha, learned Senior Standing Counsel wouldvehemently contend that the software, which was licensed to theassessee, is not an upgradation software or a replacement of theexisting software, but it is a new software installed for thefirst time in the computer system and it definitely goes toenhance their business activities and their income earningcapacity. Thus, it has an enduring effect and qualifies ascapital in nature. 8. In our considered view, the decision arrived at by theCIT(A) is just and proper. We say so for the following reasons : Even before the Assessing Officer, when the assessment wasreopened, the assessee filed an objection stating that theexpenditure was incurred by them for the purpose of facilitatingthe assessee company's day to day business activities, whichwould no way enhance the longevity of the hardware of thecomputer system and that the expenditure could not be consideredas a capital expenditure. However, this explanation did not findfavour with the Assessing Officer. The CIT(A), while consideringthe said issue, had taken into consideration the terms andconditions of the licence, which was granted to the assessee byM/s.Financial Technologies (India) Limited (FTIL). The CIT(A)referred to the relevant portions of he conditions of licenceand more particularly with regard to the copyright andownership. 9. At this juncture, it would be relevant to take note ofthe following written submissions made by the assessee beforethe CIT(A) : “During the subject assessment year, theappellant has purchased licenses forcomputer to computer link (CTCL) softwarefrom Financial Technologies (India) Limited(FTIL). The software is a multi exchange andmulti segment front office trading solution.Some of the features of the said softwareare integrated market watch, market depthanalysis, order entry, order and tradebook, historic trade, etc.The company has taken the licenses ofCTCL for use in their day to day sharebroking activities as per page 7 of softwarelicensing agreement with the vendor.Copyright and Ownership :The software is the intellectualproperty of FTIL and its suppliers and isprotected by local copyright law andinternational treaty provisions, whetherregistered or unregistered. Nothing in thisproposal shall be deemed to be a transfer of intellectualpropertyrights.ChonaFinancial Service Private Limited acquiresonly the non exclusive, non transferable,non assignable and limited right to use asoftware as permitted herein and do notacquire any rights of ownership in thesoftware. The title or ownership of thephysical carrier of the software as providedby FTIL hereunder is retained by FTIL and/oritssuppliers.Thecustomizations,modification, change request as carried outbecome an integral part of respective basepackages and the intellectual propertyrights as well as the rights to licensesubsequent copies of the softwareinitsthen current form will rest solely withFTIL. FTIL represents and warrants that itowns intellectual property rights to thebase package offered for licensing. Since the appellant has acquired onlyright to use the software, the licence feecannot be considered to be capital innature.” 10. After taking into consideration of the above conditions,the CIT(A) held that the assessee acquired only a right to usethe software (CTCL), that the software renewal expenditure wasincurred every year based on the number of licenses used andthat the intellectual property rights of the software were heldby the software vendor (FTIL). Therefore, it was held that thecontentions raised by the assessee merited acceptance and moreparticularly, when the assessee did not derive any enduringbenefit and that they were authorized to use the software onpayment of annual fee for the purpose of its business. 11. Mrs.R.Hemalatha, learned Senior Standing Counsel hasplaced reliance on the decision the Hon'ble Supreme Court in thecase of CIT, Madurai Vs. Saravana Spinning Mills (P) Ltd.[reported in (2007) 163 Taxman 201]. 12. We find that the said decision of the Hon'ble SupremeCourt would be of no assistance to the case of the Revenue, asit was a case of replacement of old machinery. 13. In the case on hand, we test the correctness of theorder passed by the Tribunal confirming the order passed by theCIT(A), who examined the terms and conditions of the license andon facts, recorded a finding that the assessee acquired only aright to use the software and that there was no enduring benefitacquired by the assessee on account of the license promoted by https://hcservices.ecourts.gov.in/hcservices/ them on payment of annual fee. Thus, in our considered opinion,no substantial question of law arises for consideration in thisappeal. 14. Accordingly, the above tax case appeal is dismissed. RsSd/-Assistant Registrar //True Copy// Sub Assistant RegistrarTo1. The Commissioner of Income Tax, Income Tax Appellate Tribunal, Madras 'B' Bench, Chennai.2. The Principal Commissioner of Income Tax, Appellate Tribunal, 'B' Bench, Chennai.3. The Commissioner of Income Tax, (A)-1, Chennai - 1.4. The Assistant Commissioner of Income Tax, Company Circle(3), Chennai - 34.+1cc to Mr.T.Ravikumar, Advocate, SR.No.44544TCA.No.291 of 2019Kak(17/07/2019)Kak(05/08/2019)