Commissioner of Income Tax vs Net 4 Nuts Ltd.

Akil Kureshi, J.—Since these appeals involve identical question, they are heard together and disposed of by this common order. Before adverting to single question debated before us at considerable length, we may notice that in Tax Appeal No. 311 of 2013, there is an additional question No. 2 regarding the disallowance of expenditure of Rs. 11,098 u/s 14A of the income tax Act, 1961 ("the Act" for short). Likewise, in Tax Appeal No. 312 of 2013, additional question No. 2 is with respect to similar disallowance of Rs. 3,152. Both amounts are extremely small. Such questions are, therefore, not considered only on that basis.

The sole surviving question in all these appeals raised by the Revenue is as follows:

(a) Whether, in the facts and in the circumstances of the case, the hon''ble income tax Appellate Tribunal has erred in law in confirming the order of the Commissioner of income tax (Appeals) in deleting the disallowance of depreciation on an intangible assets developed by the assessee called ''AVTAR TM''?

The issue pertains to the assessee''s claim of depreciation on development of a software called "AVTAR TM".

The case of the assessee is that it is engaged in the business of software development. It had, by expending a total sum of Rs. 1,87,81,830, developed a software with the special application and had also got the same registered as a trade mark. The Assessing Officer, for the assessment year 2006-07, disallowed the claim on the basis that the valuation of the intangible asset and the nature of such assets were not furnished by the assessee-company. He, however, observed that though the provision had been made under the Act for granting depreciation to intangible assets, the same is for particular class of assets such as know-how, patents, copyright, trade mark, etc. Under the circumstances, he disallowed the claim of depreciation.

The assessee carried the matter in appeal. The Commissioner of income tax (Appeals) allowed the appeal making observations:

2.4 I have considered the facts, the Assessing Officer''s observations and written submissions of the appellant. The facts relied on by the Assessing Officer were totally different. In the instant case, the appellant developed a software ''AVTAR TM'' during the period June, 2000, to March 2002, by incurring expenditure of Rs. 1,87,81,830. The said software was registered as trade mark under the Trade Marks Act, 1999. Intangible assets include trade mark, which is entitled to 25 per cent. depreciation under the income tax Act. In the assessment order dated January 9, 2004, for the assessment year 2001-02, my predecessor held that the expenditure or software was capital in nature. Depreciation was allowed to the appellant up to the assessment year 2005-06. In view of this, the Assessing Officer''s action is not in accordance with law. Disallowance or depreciation is unwarranted and deleted. This ground of appeal is allowed.

We may notice that before the Commissioner of income tax (Appeals), the assessee had, in the written submissions, outlined the details of the programme as also the nature of expenditure incurred in its development. Such averments of the assessee read as under:

Background and facts of the case

Net and Nuts Ltd. is engaged in the business of offering comprehensive solutions in different IT and IT enabled services with specific focus on IT technology, telecommunication system and services. The company also research, develops, markets and licenses proprietary technology in the field of mobile value added services, content aggregation services, integration applications and delivery mechanism. (As per paragraph 2 of the assessment order)

The company''s intangible assets comprise integration platform AVTAR TM and patent registration. Net 4 Nuts Ltd. has developed a proprietary online integration platform (AVTAAR TM) that allows existing services such as email news, portfolio, calendar, etc., to be leveraged is never, more productive ways. Having undergone extensive research and development, AVTAAR TM reached a stage where its economic benefits can be commercially exploited AVTAAR TM is the intellectual property essentially comprising software codes. AVTAAR TM allows seamless flow of information between constellations of digital resources and devises. The company has exploited the integration capabilities of AVTAAR TM for generating economic benefits.

The company''s research phase on AVTAAR TM was completed on May 31, 2000, with the help of Gujarat IT Fund of Gujarat Venture Finance Ltd. (GVFL). The research activities included are as under:

(a) Searching and evaluating concepts and products

(b) Acquiring requisite scientific or technical knowledge and prototypes

(c) Development of business plan and agreement with GVFL

All expenditure incurred during the research phase were expended out in the financial year 2001-02.

The development phase of AVTAR TM commenced from June 1, 2000, and was concluded on March 31, 2002, which included the following activities:

(a) Technical feasibility of completing AVTAR TM

(b) Intention to complete and use AVTAR TM

(c) Ability to use AVTAR TM

(d) A business model (B2C) which demonstrated how AVTAR TM would generate future economic benefits

(e) Availability of adequate resources (funding from GVFL)

(f) Ability to measure the expenditure attributable to AVTAR TM, as all the expenditure incurred would be related to development of AVTAR TM only.

The total expenditure incurred during the development phase from June, 2000, to March, 2002, aggregated to Rs. 1,87,81,830 (detailed computation enclosed). This account was debited to intangible assets in the books of account of the company from the beginning and depreciation at the rate of 25 per cent. has been claimed from the assessment year 2003-04 onwards till today.

The above accounting treatment in respect of all expenditure during research phase and development phase on AVTAR TM are in accordance with Accounting Standard 26, namely, "Intangible assets" issued by the Institute of Chartered Accountants of India which of mandatorily applicable to the appellant company. Some of the relevant definitions given in paragraph 6 of Accounting Standard 26 are given hereunder:

6.1 An intangible asset is an identifiable non-monetary asset, without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

6.2 An asset is a resource:

(a) controlled by an enterprise as a result of the past events; and

(b) from which future economic benefits are expected to flow to the enterprises.

6.3 Monetary assets are money held and assets to be received in fixed or determinable amount of money.

6.4 Non-monetary assets are assets other than monetary assets.

6.5 Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

6.6 Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially imported materials, devices, products, processes, system or services prior to the commencement of commercial production or use.

6.7 Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life.

AVTAR TM has registered as trade mark in the name of Net and Nuts Limited under the Trade Marks Act, 1999.

Apart from Accounting Standard 26 on intangible assets issued by the ICAI, even the income tax Rules specify the rate of depreciation on intangible assets at 25 per cent. in Part B of New Appendix I (Table on Rates at which depreciation is admissible on intangible assets). Here the intangible asset are defined to include know-how, patents, copyright, trade marks, licenses, franchisees or any other business or commercial rights of similar nature. It is surprising that the learned income tax Officer in paragraph 3 of the assessment order states that "when the assets are totally invisible, how it is depreciable?

Such issue was carried in appeal by the Revenue before the Tribunal. The Tribunal rejected the Revenue''s appeal.

We may also record that on the basis of the assessment order passed by the Assessing Officer for the assessment year 2006-07, he also reopened the previous assessments of the assessee on this basis and in such reopened proceedings, he disallowed the claim on similar grounds. Such fresh orders gave rise to further appeals before the Commissioner of income tax (Appeals) and the Tribunal. For subsequent years also the Assessing Officer made similar disallowances. That is how we have multiple appeals before us.

Having heard learned counsel for the parties, we notice that undisputedly, the assessee had developed a software which had a special application. In fact, such software was also registered as trade mark. The Assessing Officer''s objection that, on mere development of a new software depreciation as an intangible asset cannot be granted, therefore, would not survive. The sole basis in the further proceedings, therefore, was that the expenditure incurred in development such software was not established by the assessee.

In this respect, the Commissioner of income tax (Appeals) as well as the Tribunal have not accepted the Assessing Officer''s version. It is true that such expenditure and the details thereof were placed by the assessee before the Commissioner of income tax (Appeals) in the original assessment for the assessment year 2006-07. The Revenue has not questioned such details supplied. More importantly, in the reopened proceedings, full facts were before the Assessing Officer. In the original assessment as well as in the fresh assessments, the accounts of the assessee would be available. The assessee has been contending at the outset that the software was developed in house and the expenditure incurred in development of such software was capitalized. If that be so, the same could have been verified by the Assessing Officer from the assessee''s profit and loss accounts. He, instead proceeded to reject the entire claim merely on the ground that the assessee did not furnish the details of expenditure incurred in development of such software.

Though the learned counsel for the Revenue pointed out that the decision of the Tribunal in the case of Deputy CIT v. Bhagwati Banquets and Hotels Ltd. [2013] 1 ITR (Trib)-OL 588 (Ahd) on which the Tribunal placed reliance in the impugned judgment is carried in appeal by the Revenue, the said decision pertained to the goodwill and the facts were different. Mere pendency of such issue, therefore, need not detain us. Equally, rejection of the Revenue''s present appeals would not affect the admitted appeal in the case of Bhagwati Banquets. In the facts of the case, we are not inclined to interfere. All tax appeals are, therefore, dismissed.