TMI Blog2013 (11) TMI 1267X X X X Extracts X X X X X X X X Extracts X X X X ..... essee treating it as copy right or intangible asset - Once it is held that the expenditure incurred by the assessee for the development of the software is capital in nature, the software developed by the assessee is an asset of the assessee. Relying upon Tata Consultancy Services Vs. State of Andhra Pradesh [2004 (11) TMI 11 - Supreme Court ] - computer software is a tangible asset - As per clause III (5) of New Appendix I read with Rule 5 of the Income Tax Rules, 1962, rate of depreciation as applicable to computer software is 60% - thus the assessee is entitled to claim depreciation @ 60% on expenditure incurred in the development of computer software being capital in nature – Decided partly in favour of Assessee. - ITA No.107/Mds/2012 - - - Dated:- 31-1-2013 - N. S. Saini And Shri Vikas Awasthy,JJ. For the Appellant : Mr. Vikram Vijayaraghavan, Advocate For the Respondent : Mr. Shaji P.Jacob, Addl. CIT ORDER Per Vikas Awasthy, JM:- This appeal has been preferred by the assessee impugning the order of the CIT(A)-IV, Chennai dated 1.11.2011 relevant to the assessment year 2007-08. The only issue involved in the appeal is whether the product development co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct development is purely revenue in nature and is related to business activities of the assessee company and the treatment given in books would not affect the claim of deduction under the provisions of the Income Tax Act. The assessee claimed that the expenditure is allowable under section 37 of the Act. The assessee made an alternate prayer that in case the expenditure is to be treated as capital in nature, the assessee is entitled to claim depreciation @ 60% as applicable to computer software based on clause III(5) of New Appendix I read with Rule 5 of the Income Tax Rules, 1962. The CIT(A) dismissed both the pleas of the assessee and upheld the findings of the Assessing Officer. The CIT(A) held that the expenditure incurred on software development is capital expenditure and the assessee is entitled to claim depreciation @ 25% as in the case of intangible asset or copy right. Aggrieved against the order of the CIT(A), the assessee has come in second appeal before the Tribunal. 5. Mr. Vikram Vijayaraghavan appearing on behalf of the assessee reiterated his stand taken before the authorities below. The learned counsel submitted that both the Assessing Officer and CIT(A) have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in the landmark case of Empire Jute Co. Ltd. Vs.CIT reported as 124 ITR 001 has laid down various test to determine the nature of expenditure. The said judgement has been followed year after year by the Hon'ble Supreme Court and the various High Courts as well as the Tribunal in deciding such issue. In the said judgement, the Hon'ble Apex Court while considering various earlier judgements observed as under:- "The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192(HL), where the learned Law Lord state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keeping it in his own possession; circulating capital as what he makes profit of by parting with it and letting it change masters." Now so long as the expenditure in question can be clearly referred to the acquisition of an asset which falls within one or the other of these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made " out of "assets and profit that is made " upon " assets or " with " assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is, therefore, clearly not one of universal application. But even if we were to apply this test, it would not be possible to characteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner of Income Tax (Appeals) shows that the A.R. for the assessee has furnished information relating to the income that is being received out of the product developed. The relevant extract of the finding of the Commissioner of Income Tax (Appeals) are reproduced herein below:- " During the appeal proceedings, the ld. A.R. was asked to furnish information relating to income that is being received out of this and in pursuance of the same, the ld. AR has filed written submission dated 13.10.2011 and in the Annexure enclosed to it clearly shows that income arose to the assessee company in the subsequent years because of this product development expenses and hence these expenditure are to be treated as capital asset which gives rise to income." The information furnished by the assessee shows that it is generating revenue from the sale of the product developed by it, this gives imputes to our view that the product developed is asset of the assessee and the expenditure incurred on its development has to be capitalized. 9. The CIT(A) has further observed that "the product development expenditure was treated as capital asset by the assessee company itself in the books of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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