Gujarat H.C : The Hon’ble ITAT has erred in law in confirming the order of CIT(A) in deleting disallowance of depreciation on an intangible assets developed by assessee called ‘AVTAR TM’

High Court Of Gujarat

CIT vs. Net 4 Nuts Ltd.

Section : 32

Akil Kureshi And Ms. Sonia Gokani, JJ.

Tax Appeal Nos. 311, 313, 319 & 321 Of 2013

April  30, 2013


Akil Kureshi, J. – Since these appeals involve identical question, they are heard together and disposed of by this common order.

2. 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 disallowance of expenditure of Rs. 11,098/-under Section 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.

3. Sole surviving question in all these appeals raised by the revenue is as follows:

“(a)Whether in the facts and circumstances of the case, the Hon’ble ITAT has erred in law in confirming the order of CIT(A) in deleting disallowance of depreciation on an intangible assets developed by assessee called ‘AVTAR TM’?

4. The issue pertains to the assessee’s claim of depreciation on development of a software called ‘AVTAR TM’.

5. The case of the assessee is that it is engaged in the business of software development. It had, by expanding 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 trademark. The Assessing Officer, for the assessment year 2006-07, disallowed the claim on the basis that the valuation of the intangible asset and 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, trademark etc. Under the circumstances, he disallowed the claim of depreciation.

6. Assessee carried the matter in appeal. CIT(A) allowed the appeal making observations:

“2.4 I have considered the facts, AO’s observations and written submissions of the appellant. The facts of the relied on by the A.O. were totally different. In the instant case, the appellant developed 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% depreciation under the I.T Act. In the appellant order dated 09/01/2004 for A.Y. 2001-02, my predecessor held that the expenditure or software was capital in nature. Depreciation was allowed to the appellant upto A.Y. 2005-06. In view of this A.O’s action is not in accordance with law. Disallowance or depreciation is unwarranted and deleted. This ground of appeal is allowed.”

7. We may notice that before the CIT(A), 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

1. Net & Nuts Limited is engaged in the business of offering comprehensive solutions in different IT and IT enabled services with specific focus on interest 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 para 2 of the Assessment Order)

2. The company’s intangible assets comprise of Integration Platform AVTAAR 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 of software codes. AVTAAR TM allows seamless flow of information between constellations of digital resources and devises. Company has exploited the integration capabilities of AVTAAR TM for generating economic benefits.

3.The company’s Research phase on AVTAAR TM was completed on 31.05.2000 with the help of Gujarat IT Fund of Gujarat Venture Finance Limited (GVFL). The research activities included are as under:

(a) Searching & Evaluating concepts and products

(b) Acquiring requisite scientific or technical knowledge and prototypes

(c) Development of Business Plan & Agreement with GVFL

All expenditure incurred during the Research phase were expended out in F.Y. 2001-02.

The Development phase of AVTAR TM commenced from 01-06-2000 and was concluded on 31.03.2002 which included 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% has been claimed from A.Y. 2003-04 onwards till today.

1. 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 Para 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 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.”

2. AVTAR TM has registered as Trade Mark in the name of NET & NUTS LIMITED under the Trade Marks Act, 1999.

3. Apart from Accounting Standard 26 on Intangible Assets issued by ICAI, even the income tax Rules specify rate of depreciation on Intangible Assets at 25% 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, trademarks, licenses, franchises or any other business or commercial rights of similar nature. It is surprising that the Ld. ITO in para 3 of the Assessment Order states that “When the assets are totally invisible, how it is depreciable?”

8. Such issue was carried in appeal by the revenue before the Tribunal. The Tribunal rejected revenue’s appeal.

9. 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 CIT(A) and the Tribunal. For subsequent years also the Assessing Officer made similar disallowances. That is how we have multiple appeals before us.

10. 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 trademark. 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.

11. In this respect, the CIT(A) 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 CIT(A) in the original assessment for the assessment year 2006-07. The revenue has not questioned such details supplied. More importantly, in the reopened proceeding, 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.

12. Though learned counsel for the revenue pointed out that decision of Tribunal in case of M/s. Bhagwati Banquets and Hotels Ltd. 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 facts were different. Mere pendency of such issue therefore need not detained us. Equally, rejection of Revenue’s present appeals would not affect the admitted appeal in case of Bhagwati Banquets.

13. In facts of the case, we are not inclined to interfere. All tax appeals are therefore dismissed.

[Citation : 358 ITR 535]

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