The Chief Commissioner Of Income-Tax, (Osd), Faridabad v. M/S O.k. Play India Ltd

of 2006-1- *** IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income-tax Appeal No.414 of 2006Date of decision: 25.2.2011 The Chief Commissioner of Income-Tax, (OSD), Faridabad ...Appellant Versus M/s O.K. Play India Ltd. ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant. Mr. Kamal Sehgal, Advocate for the respondent **** ADARSH KUMAR GOEL, J (Oral). 1.Since Registry has not been able to send the file on account offire in the Court premises, learned counsel for the revenue has furnishedcopy of paper-book which is taken on record. We proceed to decide thematter after hearing learned counsel for the parties. 2.This appeal has been preferred by the revenue under Section260A of the Income Tax Act, 1961 against order dated 23.9.2005passed by the Income Tax Appellate Tribunal, Delhi Bench 'SMC', in ITANo.1365/(DEL)/2004, for the assessment year 1995-96, claiming followingsubstantial questions of law:- “i).Whether on facts and in the circumstances of the case,the Hon'ble ITAT was right in treating the expensesincurred on purchase of computer software as Revenue expenses in nature despite the fact that the assesseehad capitalized the expenses under the head 'officeequipment' but claimed depreciation @ 100%? Whether on facts and in the circumstances of the case, the ITAT was right in treating the computer software expenses as revenue expenses despite the fact that the expenses were incurred in obtaining advantage ofenduring nature and the expenditure was capitalized bythe assessee itself? iii)Whether on facts and in the circumstances of the case,the Hon'ble ITAT was right in holding that the assesseehad 'put to use' the Plant & Machinery during the yearrelevant to A.Y. 1995-96 though the assessee had doneonly trial-run by 31.3.1995?” 3.The Assessing Officer did not accept the plea of the assessee for treating the computer software as revenue expenditure. It was held thatthe expenditure in question was capital expenditure and the assessee wasonly entitled to depreciation. The CIT(A) upheld the said view. On furtherappeal, the Tribunal upheld the plea of the assessee with the observationthat technological changes are taking place at fast pace on account ofwhich expenditure on software development had to be treated as revenueexpenditure. 4.We have heard learned counsel for the parties. 5.Learned counsel for the revenue submits that expenditureshould have been treated to be on office equipment as per proviso toExplanation 5 of Section Section 32. 6.We are unable to accept the submission. Section 32 applies only for depreciation in respect of capital asset and not to revenueexpenditure. In the present case, the Tribunal has recorded a finding thatexpenditure on the software development was revenue expenditure asunder:- 4.We have heard learned counsel for the parties. 5.Learned counsel for the revenue submits that expenditureshould have been treated to be on office equipment as per proviso toExplanation 5 of Section Section 32. 6.We are unable to accept the submission. Section 32 applies only for depreciation in respect of capital asset and not to revenueexpenditure. In the present case, the Tribunal has recorded a finding thatexpenditure on the software development was revenue expenditure asunder:- “Ground of appeal Nos.4 and 5 are directed againstdisallowance of Rs.8,98,000/- spent on computer software.The learned Assessing Officer has treated the expenditure tobe in the nature of capital expenditure. He has allowed theassessee depreciation @ 10% this year and @ 5% in thesubsequent years. The learned Assessing Officer has notdoubted the genuineness of the expenditure or the businesspurpose for the same. In our view, merely because theassessee had himself capitalized the expenditure in itsexpenditure in its books of accounts, the Assessing Officercould not conclude that it was capital expenditure. It is wellknown that in the area of software there are technologicalchanges taking place at fast pace and, therefore,obsolescence takes place very fast. Secondly, the expenditureis not on any physical asset having any wear and tear.Having regard to these aspects the courts tend to ordinarilytreat the expenditure on software development to be revenueexpenditure only. It is not the case of the revenue that theexpenditure incurred is exceptionally high or otherwise of veryspecial nature. I, therefore, hold that the expenditure hadbeen rightly claimed by the assessee to be revenueexpenditure for this year only. The learned Assessing Officeris, therefore, directed to allow the assessee full expenditure as claimed this year. At the same time he would be entitled towithdraw the depreciation allowed to the assessee in thisbehalf during this assessment year as well as subsequentassessment year.” 7.Learned counsel for the assessee points out that in identicalcircumstances, finding of the Tribunal was upheld by this Court inCommissioner of Income-Tax Vs. Varinder Agro Chemicals Limited[2009] 309 ITR 272 (P&H) holding that no substantial question of lawarose. Reference was also made to the judgment of Hon'ble SupremeCourt in Alembic Chemical Works Co. Ltd. Vs. CIT [1989] 177 ITR 377(SC) to the effect that it would be unrealistic to ignore rapid advances inresearch and to attribute a degree of endurability and permanence to thetechnical know how at any particular stage in fast changing area ofscience. 8.In view of above, we do not find any ground to interfere withthe view taken by the Tribunal. Substantial question of law raised isdecided against the revenue. 9.Accordingly, the appeal is dismissed. (Adarsh Kumar Goel) Judge February 25, 2011Pka (Ajay Kumar Mittal) Judge