TMI Blog2009 (5) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting - the revenue earned by the assessee from software and consultancy services was recognized on delivery of goods/services – the assessee-company was following the AS-9 prescribed by the ICAI which was in conformity with the provisions of s. 145(2) of the Act. The assessee was regularly following the 'project completion method', which is a recognized method - Revenue's Appeal dismissed - I.T.A. No. 1954/Mds/2007 - - - Dated:- 26-5-2009 - Member(s) : U. B. S. BEDI., AHMAD FAREED. ORDER AHMAD FAREED, A.M.: This appeal by the Department is directed against the order of CIT(A), dt. 23rd April, 2007 for asst. yr. 2003-04. 2. The assessee-company (formerly Satyam Education Services Ltd.) was engaged in the business of offering education through internet. The return for asst. yr. 2003-04 was filed on 27th Nov., 2003 showing loss of ₹ 19,39,815. In the assessment order passed under s. 143(3) on 24th Feb., 2006, the total income was assessed at ₹ 55,90,506 as under: Particulars Amount (Rs.) Amount (Rs.) Returned Loss (-) 19, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-company (formerly Satyam Education Services Ltd.) entered into an agreement dt. 6th March, 2002 with Sun Microsystems (P) Ltd. (Sun for short) for hosting and distribution of their Learning Management System (LMS) Software for a period of three years as 'initial term'. The assessee paid a sum of ₹ 28,80,000 (US $ 60,000) to Sun, in April, 2000, as per cl. 7(b) of Sch. A of the said agreement dt. 6th March, 2002 as fees for 'initial installation and sun customization services' for the said LMS Software. The assessee amortized this expenditure over the period of the useful life of the license and accordingly debited ₹ 10,26,667 to the P L a/c. 6. The AO was of the view that the language of cl. 7(b) of the Sch. A of the said agreement suggested that the expenditure did not fall in the revenue field, and this was the reason why the assessee had resorted to amortization. He, therefore, disallowed the claim. The CIT(A) allowed the claim and his order has been challenged by the Department in the present appeal. 7. Shri Bharat Tripathi, the learned Departmental Representative, supported the order of the AO. He vehemently argued saying that the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that 'amortization' was the main reason why the AO refused to allow the impugned expenditure as 'revenue expenditure'. The AO says that only the expenses specified in ss. 35D, 35DD, and 35DDA can be amortized. His argument is that since the assessee-company could not claim the expenditure as 'revenue expenditure' it resorted to amortization. The AO does not say as to what is in the nature of the impugned expenditure which disqualifies it for being allowed as 'revenue expenditure'. 10. It is seen that the CIT(A) deleted the addition for the reasons given in para 4.1.3 of his order. He has, inter alia, observed that the assessee had entered into an agreement with M/s Sun for rendering consultancy services; that the agreement enabled the assessee-company to host and resell the LMS of Sun; that for this purpose the assessee needed to obtain the license for which payment of ₹ 28,80,000 was remitted in April, 2002, that the license was granted for a period of three years; that the AO did not give any cogent reason to say the expenditure was 'capital' in nature; that the only objection raised by the AO was that the concept of 'amorti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g part of circulating capital of business. 16. The concept of what is 'capital expenditure' and what is 'revenue expenditure' arises in infinite variety of situational diversities. Therefore, it is not possible to formulate sufficiently accurate and reasonably comprehensive rules to draw any clear line of demarcation. The question ultimately depends upon the facts and circumstances of each case. 17. The line that divides 'revenue expenditure' from 'capital expenditure' is, quite often, very thin and hazy, and the tests suggested by the Courts are broad and general and merely serve as guidelines. 18. In the case of K.T.M.T.M. Abdul Kayoom vs. CIT (1962) 44 ITR 689 (SC), Hidayatullah, J. (as his Lordship then was) administered a caution saying, What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of general principles, which are followed in such cases . 19. In the present case, the art. 10.1 of the agreement dt. 6th March, 2002 says that the agreement will be for three years ( initial term ) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly and exclusively for the purpose of business has to be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, sometimes allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures at a discount is an instance where, although the assessee incurs the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the assessee-company over the entire period. In such a case, the liability should be spread over the period of the debentures. 23. In the case of Taparia Tools Ltd., the assessee issued non-convertible debentures aggregating to ₹ 6 crores. The face value of the debenture was ₹ 100 each. It could be redeemed at a premium of ₹ 10 per debenture in one instalment, any time after the end of the fifth year from the date of allotment. The premium payable by the assessee at the end of five years was ₹ 60 lakhs and each year ₹ 12 lakh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the considered opinion that the order of the CIT(A) does not call for any interference. The ground No. 2 is, accordingly, rejected. 26. Before parting with this issue we need to mention that the 'matching principle' allowing amortization of expenses, in a situation where the Act is silent in this regard, is a 'Judge-made' law. Its application has to be restricted to cases where a revenue expenditure results in a continuing benefit to the business of the assessee over a number of years, and allowing the entire expenditure in the year in which it is incurred is likely to distort the profit of that particular year. In our opinion this principle cannot be applied by the AO in each and every case where the benefit of a particular expenditure spills over to subsequent years. It should be applied with great caution. Ground No. 3 3.1 The learned CIT(A) erred in deleting the disallowance of amortized development fee expenditure by adducing the same reasoning in respect of the issue of licence fee expenditure. 3.2 It is submitted that the grounds of appeal relating to the preceding issue of licence fee expenditure applies to this issue of amortized dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Madras Industrial Investment Corporation Ltd., I hold that the appellant company is entitled to claim the expenditure of ₹ 15,60,000. In other words, the disallowance of ₹ 5,60,000 is hereby deleted. The grounds of the appellant in this regard thus succeed. 30. We find that the facts with regard to the issues raised through ground Nos. 2 and 3 are identical and therefore, for the reasons given in the above paras in relation to the ground No. 2, the order of the CIT(A) is upheld. The ground No. 3 is accordingly rejected. Ground No. 4 4.1 The learned CIT(A) erred in directing the AO to delete the addition of ₹ 39,68,208 recorded in the assessee's books for the relevant previous year as 'unearned income'. 4.2 The learned CIT(A) ought to have noted that the impugned income had accrued to the assessee, as the assessee was following mercantile system of accounting. 4.3 The learned CIT(A) ought to have seen that the assessee adopted a device to postpone the income for the purpose of income-tax only. 4.4 The learned CIT(A) failed to appreciate that the Hon'ble Supreme Court in the case of CIT vs. Thanthi Trust ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al on record. It was explained by the learned Authorised Representative that the software development was the major source of income. In the written submission filed by the Authorised Representative before the CIT(A) the break-up of receipts was shown as under: S. No. Particulars Amount (Rs. in lacs) c. The major service income are as under:- Income from software development (IDC) LMNK 1175 Income from software development non LMNK 162 Income from IT training 48 Income from software services - LMS 3 Income from - LL 2 Miscellaneous others 4 Total 1394 35. The CIT(A) has deleted the addition for the reasons given in para 4.3 of his order. He has, inter alia, observed that the revenue earned by the assessee from software and consultancy services was recognized on delivery of goods/services; t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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