ITXA1276_17.doc IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (IT) NO.1276 OF 2017 Pr. Commissioner of Income Tax-15 Appellant Vs. M/s. Aker Powergas Pvt. Ltd. Respondent Mr. Suresh Kumar for Appellant. Mr. Girish Dave i/b. Mr. Sameer Dalal for Respondent. CORAM : UJJAL BHUYAN & MILIND N. JADHAV, JJ. DATE : JANUARY 20, 2020 P.C. : Heard learned counsel for parties. 2. This is appeal under Section 260-A of Income Tax Act, 1961 (briefly "the Act" hereinafter) assailing order of Income Tax Appellate Tribunal, Mumbai K Bench, Mumbai (briefly "the Tribunal" hereinafter) dated 06.04.2016 in Income Tax Appeal Nos.1766/Mum/ 2014 and 1355/Mum/2014 for assessment year 2009-10. 3. appeal has been filed on following three questions stated to be substantial questions of law:- (a) Whether on facts and circumstances of case and in law, Tribunal was justified in treating computer software expenses of Rs.5,82,62,091.00 to be revenue in nature without examining agreement between Aker Norway and assessee and terms regarding usage of software? (b) Whether on facts and circumstances of case and in law, Tribunal was justified in treating computer software expenses of Rs.5,82,62,091.00 to be revenue in nature without appreciating fact that usage of software is for more than two years being enduring in nature and also that license fees are not used up during year but over period of 1 to 3 years? (c) Whether on facts and circumstances of case 1/6 ::: Uploaded on - 27/01/2020 ::: Downloaded on - 01/02/2020 10:23:55 ::: ITXA1276_17.doc and in law, Tribunal was justified in allowing expenses of Rs.8,30,000/- incurred in connection with sale of capital assets without appreciating fact that said expenses are in nature of advisory fees incurred during course of business, for proposed sale of land, sold in subsequent year, which contributed to increase in capital? 4. In so far question Nos.(a) and (b) are concerned, issue is as to whether expenses of Rs.5,82,62,091.00 incurred in use of computer software is revenue expenditure or capital expenditure. This aspect was gone into by Tribunal in following manner: 18. In ground no. 5, assessee has raised following grievance: 5. Disallowance of software expenses 5.1 learned Addl. CIT/DRP erred in disallowing computer software expenses of Rs.5,82,62,091, which are revenue expenses, by treating same as capital in nature. 5.2 learned Addl. CIT erred in observing that since usage of software is for more than two years software expenses are to be regarded as intangible capital asset, without appreciating fact that software payments were for actual usage for period of less than one year. 5.3 Without prejudice to above, learned Addl. CIT erred in allowing depreciation at incorrect rate of 25%, instead of 60% for computer software allowable as per Income- tax Rules, 1962. 19. So far as this ground of appeal is concerned, relevant material facts are as follows. During course of assessment proceedings, Assessing Officer noticed that assessee has claimed deduction of Rs 5,82,62,091 as expenditure on software. Assessing Officer was of view that this software was used in certain projects, running for period of 1-3 years, it should be treated as capital expenditure. Assessing Officer extensively quoted from special bench decision in case of Amway India Enterprises Vs DCIT [(2008) 11ITD SB 112 (Del)] to justify this conclusion. assessee did raise objection before DRP but without any success. In very brief order, and based on rather vague and sweeping generalizations, learned DRP confirmed disallowance. While doing so, DRP observed as follows: We find that on facts of case as stated in assessment order, AO has correctly held this 2/6 ::: Uploaded on - 27/01/2020 ::: Downloaded on - 01/02/2020 10:23:55 ::: ITXA1276_17.doc amount to be capital in nature and has allowed depreciation thereon. We are of view that AO has correctly treated software expenditure as capital in nature, as it gave enduring benefit. It may be noted that from assessment year 2003-04, 'computer software' has been specially included in depreciation table, on which depreciation is to be allowed. Hence, this objection of assessee is rejected. 20. assessee is not satisfied and is in appeal before us. 21. We have heard rival contentions, perused material on record and duly considered facts of case in light of applicable legal position. 22. There is no dispute about genuineness of expenses and dispute before us is confined to question whether it should be treated as revenue expenditure or as capital expenditure. We have noted that out of total expense of Rs 5,88,62,091, amount of Rs 5,29,32,320 is aid to Aker Norway for actual use of software. Since amount is paid on basis of actual use of software, and not for acquisition of software, there cannot be any occasion for treating same as capital expenditure. As regards remaining amount also, as evident from copies of invoices before us, payment is for licence fees on annual basis, and not for entire project period. fact that licence is used in project which has life span of over one year does not mean that benefit from licence fees was more than one year. In our considered view, in light of these facts evident from material on record, it is unambiguous that authorities below have wrongly held software payment to be capital expenditure in nature. We, therefore, uphold grievance of assessee and direct Assessing Officer to treat software expenses as revenue expenditure in nature. 5. Thus, it is seen that Tribunal has held that only dispute before it was whether aforesaid amount should be treated as revenue expenditure or as capital expenditure. It has been held that since amount is paid on basis of actual use of software and not for acquisition of software, there was no question of treating said expenses as capital expenditure. Therefore, Tribunal held that authorities below had wrongly held software payment to be capital expenditure in nature and accordingly upheld stand taken by assessee directing Assessing Officer to treat software expenses as 3/6 ::: Uploaded on - 27/01/2020 ::: Downloaded on - 01/02/2020 10:23:55 ::: ITXA1276_17.doc revenue expenditure. 6. While holding so, Tribunal considered views given by Dispute Resolution Panel (DRP) as well as of Special Bench decision of Tribunal in case of Amway India Enterprises Vs. DCIT, (2008) 11 ITD SB 112 (Del). 7. On due consideration, we are of view that there is no error or infirmity in conclusions reached by Tribunal and no question of law arises therefrom, much less any substantial question of law. 8. In so far question No.(c) as extracted above is concerned, Tribunal held as under: 27. On perusal of details of expenses, as placed on page 743 of paperbook, we find that expenses pertains to legal expenses in connection with structuring of transaction and related aspects. These expenses were incurred in course of business and for its operations, though specific issue on which advice was sought pertained to sale transaction. Merely because transaction in question is capital asset, legal expenses will not also become capital expenditure. As we deal with this aspect of matter, we are reminded of very well articulated views of Hon'ble Madras High Court, in case of CIT vs Bush Boake Allen India Ltd [(1982) 135 ITR 306 (Mad)], wherein Their Lordships had observed as follows: We think that only merit of this argument is apparent logical simplicity of it. But abstract logic has seldom conditioned evolution of principles in tax law, as in other laws. Recent judgments of Courts have tended to regard nature and allowability of legal expenses not as derivative expense taking colour from transactions to which they relate, but as items which are entitled to be judged in their own character. This line of approach may be said to have been firmly established as part of law relating to allowance of expenditure, by decision which Supreme Court rendered in India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC). In that case, company went in for substantial loan of Rs. 40 lakhs from financial house for major expansion of its undertaking. loan was secured by charge on company's fixed assets. amount was advanced by financial house on certain terms as to interest. For 4/6 ::: Uploaded on - 27/01/2020 ::: Downloaded on - 01/02/2020 10:23:55 ::: ITXA1276_17.doc putting through this transaction company had to incur vakil's fees for drafting mortgage bond, other legal expenses, charges for stamps, registration charges, for obtaining certified copy of mortgage deed, charges for preparing indemnity bond and like. expenses incurred for legal charges amounted to Rs. 84,633. question in relevant assessment of company was whether expenses can be allowed I.T.A. No. 1355 and 1766/Mum/2014 Assessment year: 2009-10 as revenue items. stand taken by IT Department. was that since sum of Rs. 40 lakhs was obtained as loan for expansion of company's business, expense by way of legal fees, stamps and like must also be similarly regarded as on capital account, not allowable in computation of company's business profits. This contention, however, was negatived by Supreme Court. They referred to express provision in IT Act under which interest on capital borrowed for, purpose of assessee's business was allowable as item of deduction in computation of profits under head "Business". On same analogy they held that any legal expenses incurred by assessee for borrowing money, irrespective of whether borrowing went in for revenue purpose or for capital purpose, must be necessarily regarded as item of revenue outgoing. In coming to that conclusion Supreme Court stated principle thus : "On facts of this case, money secured by loan was things for use of which this expenditure was made. In principle, apart from any statutory provisions, we see no distinction between interest in respect of loan and expenditure incurred for obtaining loan." 7. This decision of Supreme Court has been followed in innumerable decisions of Courts since then. As example may be cited decision of Bench of this Court in CIT vs. Kisenchand Chellaram (India) (P) Ltd. (1980) 16 CTR (Mad) 248 : (1981) 130 ITR 385. That case too related to claim of assessee-company for allowance of legal charges representing fees paid to Registrar of Companies for increasing company's capital. argument addressed before Court on behalf of IT Department. in that case was that legal expenditure contributed to increase in capital of company and, therefore, it could not be allowed as revenue item. This Court rejected that contention, following decision of Supreme 5/6 ::: Uploaded on - 27/01/2020 ::: Downloaded on - 01/02/2020 10:23:55 ::: ITXA1276_17.doc Court in India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC). Court held that money was spent only for purpose of business and there was no capital element in expenditure. They took view that merely because fees paid to Registrar of Companies related to raising of company's capital, amount could not be classified as capital expenditure. 28. In view of above discussions, as also bearing in mind entirety of case, we uphold this grievance of assessee as well. Ground no. 6 is thus allowed. 9. Thus, Tribunal has taken view that merely because transaction in question is capital asset, legal expenses incurred for same will not ipso facto become capital expenditure. While taking above view, Tribunal referred to decision of Madras High Court in case of CIT Vs. Bush Boake Allen India Ltd., (1982) 135 ITR 306 in which decision Madras High Court followed decision of Supreme Court in India Cements Ltd. Vs. CIT, (1966) 60 ITR 52. 10. On due consideration, we are of view that there is no error or infirmity in view taken by Tribunal and no question of law arises therefrom. 11. Consequently, this appeal filed at stance of Revenue is dismissed. However, there shall be no order as to costs. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.) Minal Parab 6/6 ::: Uploaded on - 27/01/2020 ::: Downloaded on - 01/02/2020 10:23:55 ::: Pr. Commissioner of Income-tax-15 v. Aker Powergas Pvt. Ltd