Commissioner of Income Tax-Iv v. M/S Dcm Technologies Ltd

MANMOHAN, J JULY 15, 2010 nm

* IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 861/2010 % Date of decision: 15th July, 2010 Commissioner of Income Tax-IV ..... Appellant Through: Mr.N.P. Sahni, Standing Counsel (Income Tax) versus M/s DCM Technologies Limited ..... Respondent Through: None CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE MANMOHAN 1. Whether reporters of the local papers be allowed to see the judgment? Yes 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes DIPAK MISRA, CJ In this appeal preferred by the revenue under Section 260A of the Income Tax Act, 1961 (for brevity "the Act"), the following substantial questions of law are proposed to be raised: 1. Whether the Income Tax Appellate Tribunal, was justified in law in allowing software expenses to the extent of 25% holding it to be of revenue nature? 2. Whether the order of Income Tax Appellate Tribunal, which is a final fact finding authority, is not perverse in law as it has not gone through the facts properly and merely relied upon the decision of Supreme Court in the case of Alembic Chemicals Work Co. v. CIT 177 ITR 377 without appreciating the material on record? 2. The facts which are essential to be stated are that the respondent – assessee is engaged in the business of software development and export. A return of income for the assessment year 2002-2003 was filed by it on 29th October, 2002 declaring a loss of Rs.2,85,25,407/-. The profit and loss account was filed along with the said return. Expenditure of Rs.2,93,20,242/- was claimed in respect of software development. It was contended before the assessing officer that the expenses incurred on the development of software were routine revenue expenses being in the nature of staff salary, travel expenses, etc. It was further explained that the said activity of development of software was being carried on a continuous basis and the revenue of the said business had been generated from marketing the developed software. The expenses incurred on software development were, thus, allowable as business expenditure keeping in view the nature of the expenses as well as the character of the business of the assessee-company. It was urged that the expenditure on software development was akin to the research and development activities conducted by the assessee-company in its ordinary course of business for sustaining and enlarging the business operations. The assessing officer accepted the stand of the assessee-company that the expenses on software development were incurred by it in connection with carrying on the business but opined that the softwares developed by the assessee-company were bound to have some value at the end of the previous year and keeping in view the same as well as the marketing potential of the softwares developed by the assessee-company in the subsequent years, the expenditure could be regarded to have enduring effect and, accordingly, treated 25% of the expenditure claimed by the assessee on software development to be of capital nature and made a disallowance to the extent of Rs.73,30,060/-. 3. Being dissatisfied with the aforesaid order, an appeal was preferred before the CIT(A) and the first appellate authority accepted the submissions urged by the assessee and deleted the addition out of the software development expenses. 4. Grieved by the aforesaid order, the revenue preferred an appeal before the tribunal wherein it was canvassed that the order passed by the assessing officer treating the said expenses of 25% as capital expenditure was quite reasonable and there was no justification on the part of the CIT(A) to interfere with the same. The tribunal, as is evincible from the order impugned, came to hold that the assessee was mainly engaged in the business of development of software and marketing the same and its business receipts mainly comprised of revenue generated from the marketing of software; that for the purpose of development of software, an amount of