Rajendra, Member (A) -
(1.) CHALLENGING the order of the CIT(A) -20, Mumbai, dated 10/06/2011, Assessing Officer has raised following grounds of appeal.
I. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in holding that reopening of the assessment by the Assessing Officer is bad in law even though there was no assessment u/s. 143(3) and the return was merely processed u/s. 143(1)? II. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)'s decisions is bad in law without considering the decision of the Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers [ : 291 ITR 500 (SC)].
III. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in treating the software expenses of Rs. 96,00,000/ - as revenue in nature even though the assessee was deriving enduring benefit from the said expenditure.
IV. The appellant prays that the order of CIT(A) on the grounds be set aside and that of AO be restored.
V. That appellant craves leave to amend or alter any grounds or add a new ground which may be necessary. Though there are five grounds of appeal but the effective ground of appeal is about the reopening of assessment.
(2.) ASSESSEE -Company, engaged in the business of life insurance, filed its return of income on 29/10/2005 declaring total income at Rs. 31.19 lakhs. The return was processed u/s. 143(1) of the Act on 30/03/2007. Later on a notice u/s. 147 of the Act was issued by the AO. From the assessment records, the AO found that assessee had entered into an agreement with M/s. India Infoline Ltd. to pay software services amounting to Rs. 90 lakhs for information technology to be provided by it. As per the AO, same were of enduring in nature and therefore the expenditure incurred by it had to be treated as capital expenditure, that the software expenditure had to be added to total income, that non inclusion of that amount resulted in under assessment. As stated earlier a notice u/s. 148 was issued on 30/03/2010. Later on a notice u/s. 142(1) also issued. While going through the Profit & Loss Account, AO found that the assessee have shown sum of Rs. 90 Lakhs incurred under the head software development. He directed the assessee to explain as to why the expenditure incurred by it should not be treated as capital expenditure. Vide its letter dated 14/09/2010, assessee stated that during the year ended 31st March 2005, it had entered into an agreement to pay "software services" for information technology services, provided by the holding company for a period of three years, at the rate of Rs. 90 lakhs per year, that the assessee did not have right, title or interest in the computer software or hardware, that parent company was rendering information technology services to it, that it was not getting any enduring benefit for the said agreement, that it had to return all hardware/software to parent company on termination of the said agreement, that the parent company was rendering services to the assessee in connection with operating and maintaining of computer software and computerised data processing and system network. After explanation of the assessee, AO held that the computer software was an intangible asset and any expenditure incurred for software was a capital expenditure, that it included compute programme recorded on any disc/tape/perforated media or other information storage device. He held that expenditure incurred on software development of Rs. 90,00,000/ - was to be treated as capital expenditure. The AO allowed depreciation of @ 60% i.e. 54,00,000/ -. Finally, he made an addition of Rs. 36,00,000/ -(90,00,000 -54,00,000) to the income of the assessee. He also made the addition under the head of Business Promotion Expenses. Vide its order dated 29/10/2010, he determined the income of the assessee u/s. 143(2) r.w.s. 147 of the Act at Rs. 69.77 Lakhs.
(3.) AGGRIEVED by the order of the AO assessee filed an appeal before the First Appellate Authority (FAA).After considering the submission of the assessee and assessment Order the FAA held that there must be tangible material for reopening the assessment even with the period of four years. Referring to the judgment of the Hon'ble Supreme Court in the case of Kelvinator of India Ltd. ( : 320 ITR 561), he held that audited annual account of the assessee for the financial year 2004 -05 clearly disclosed the fact about the payment of software charges of Rs. 90,00,000/ -, that service -agreement under software charges were paid by the assessee was also filed before the AO, that no new facts/evidences came before her subsequently, that there was absence of tangible material, that the AO reopened the case on the basis of change of his opinion. He further held that the assessee had to return all the software/hardware services to the parent company on termination of the agreement, that it had not have any right, title interest in the computer software/hardware, that the assessee was not getting any enduring or permanent benefit, that expenditure incurred was revenue in nature, that the assessee did not own any fixed assets, that agreement with the parent company was like obtaining the requisite computer system's on lease. Finally, he allowed the appeal filed by the assessee.;