Website is intangible Asset and not software

Assessee’s claim that travel website should be treated as software (and hence website development cost is eligible for 60% depreciation) is not justified. By approaching travel website of assessee, customers/people can approach assessee and conduct business;  therefore, website as such cannot be treated as software; it would fall under definition of intangible asset on which depreciation @ 25% is allowable.

INCOME TAX APPELLATE TRIBUNAL, DELHI

I.T.A. No. 3916/Del/2009 – Assessment Year : 2004- 05

Make my trip (India) Pvt. Ltd. Vs. Deputy Commissioner of Income Tax

I.T.A. No. 4087/Del/2009 -Assessment Year : 2004- 05

Dy. Commissioner of Income Tax Vs. M/s. Make My Trip India Pvt. Ltd.

O R D E R

PER K.D. RANJAN, ACCOUNTAT MEMBER:

These cross appeals by the assessee and Revenue for Assessment Year 2004-05 arise out of the order of the Commissioner of Income-tax  (Appeals)-IX, New Delhi. These appeals were heard together and for the sake of convenience, are disposed of by this consolidated order. The grounds of appeal raised by the assessee and Revenue are reproduced as under:-

ITA No. 3916/Del/2009 (By the assessee):

“1. Under the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not allowing the depreciation on website development cost as `software’ instead allowing the deprecation treating it as an intangible asset under Section 32 of the Income Tax Act, 1961 (`the Act’).

2. Under the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that the Website Development Cost qualifies as `software’ within the meaning of Section 32 of the Act read with Appendix 1 of the Rules and eligible for depreciation at the rate of 60 percent.

3. Under the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that Explanation 2 of Section 10A(9A) of the Act read with Notification number 890(E) dated March 29, 2000 issued by Central Board of Direct Taxes, defines software for the purpose of Section 10A of the Act to include Website.

4. Without prejudice to the above, under the facts and circumstances of the case and in law, the Ld. CIT(A) should have allowed the deduction of Rs. 1,540,000 incurred during the year on website development and its maintenance/up gradation as revenue expenditure, instead of treating it as capital expenditure instead of treating it as capital expenditure and allowing depreciation as intangible assets.

5. Under the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the jurisdictional high court decision in the case of Commissioner of Income-tax IV  Vs. India-visit.com Private Limited (219 CTR 603) wherein the expenditure on website have been allowed as revenue expenses under Section 37(1)of the Act.”

ITA No.4087/Del/2009(By Revenue):

“1. The Order of the learned CIT (APPEALS) is erroneous & contrary to facts and law.

2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of Rs. 24,00,777/- made by Assessing Officer disallowing the depreciation claimed on website development.

2.1 The CIT(A) did not appreciate the fact that in the assessment year 2001- 02 on the basis of relief has been granted, in fact the addition on this account has been confirmed by the Ld. CIT(A).”

2. The first issue for consideration in Revenue’s appeal relates to not allowing depreciation on website development cost as software instead of allowing depreciation treating it as an intangible asset. The facts of the case stated in brief are that the assessee claimed depreciation on website development expenses under the block of intangible assets. On a query to justify the claim, it was submitted that website is an intangible asset and is similar in nature to know-how, patents, copy rights, trade mark, license and franchise. The website is owned by the assessee and is used for the purpose of business or profession. Therefore, depreciation @ software is applicable.  However, the Assessing Officer observed that the expenditure incurred by the assessee on development of website was capital in nature. The assessee had not incurred expenditure towards any asset which is depreciable under the provisions of Income-tax Act. He placed reliance on the decision in the case of Hylam Ltd., 87 ITR 310 for the proposition that if the expenditure was incurred for initial outlay or acquiring or bringing into existence an asset of enduring nature for the business of the assessee or for expansion of assessee’ s business or for substantial replacement, it will be treated capital expenditure. Therefore, the expenses incurred on development of website was capital asset and depreciation claimed by the assessee was disallowed which resulted in addition of Rs. 24,00,777/-.

3. Before the learned CIT(A) it was submitted that the Department had examined the issue in Assessment Year 2001- 02 at length and had allowed depreciation on website development as an intangible asset and never challenged the same in later assessment years i.e. Assessment Years 2002- 03 and 2003- 04. It was also submitted that the AO had erred in holding that the website development does not qualify as software eligible for depreciation @ 60% merely on the ground that the assessee did not claim so in its return of income. Referring to the provisions of sec. 32 of the Act, the learned counsel for the assessee submitted that intangible assets include know-how,  patents, copy rights, trade marks, licence, franchise and any other business or commercial right of similar nature. The learned AR of the assessee referring to the meaning as per Oxford Dictionary submitted that what intangible means “unable to be touched or grasped; not having physical presence; difficult or impossible to define or understand; vague and abstract”. Referring to AS-26 issued by the Institute of Chartered Accountants of India, an intangible asset is neither identifiable nor monetary asset without physical substance, held for use in the production or supply or goods or services, for rental to others or for administrative purposes. Website is a collection of web pages which are designed using computing languages such as HTML. As the websites are accessible through internet enable peripherals and cannot be touched or felt, it falls within the definition of intangible assets. The website like the one owned by the assessee is protected by specific legislation of know-how, patents, copyrights, trademarks, license and franchises which are all legally enforceable rights. It was also submitted that the assessee has used website for its business and therefore, eligible for depreciation at the rates which are applicable to software.

4. The learned CIT(A) considered the submissions made by the assessee. He observed that there was no doubt that the assessee was into the business  of travel services, customer handling and data management services through its website www.makemytrip.com. He further observed that website is definitely a copyright and therefore, he agreed with the view point of the assessee that the same was to be classified as intangible asset and entitled to grant of depreciation under clause (ii) of sub-sec.(1) of section 32 of the Act. The assessee was using the said website which is enduring in nature, for its business purposes and therefore, he was of the opinion that the Assessing Officer was not justified in disallowing depreciation on website development cost. He also noted that as per the definition of capital asset given in sec. 2(14) of the Act, is wide enough to include property of any kind except stock-in-trade, consumable stores or raw materials held for the purpose of business or profession and personal affairs. Since the website was not fitting into any of the exceptions provided in sec. 2(14) of the Act and therefore, the website was an asset which was required to be provided with an allowance on account of depreciation. He also observed that the website was used by the assessee for the purpose of its business and therefore, depreciation was allowable. The depreciation was allowable under Rule 5(1A) and Appendix-I of the Income-tax Rules, 1962, @ 25% applicable to the intangible assets which include know-how, patents, copy rights, trade marks, licenses, franchises or any other business or commercial rights of  similar nature. The learned CIT(A) further noted that in Assessment Year 2001-02 the assessee had claimed depreciation @ 25% on website development cost, which was allowed by the AO on the ground that capitalized amount of Rs.85,96,714/- on which depreciation was claimed, included expenses on salaries, recruitment, traveling expenses etc. and these expenses were incurred before the commencement of business having no relation to website development cost. The learned CIT(A) therefore, confirmed the addition made by the Assessing Officer. However, he allowed depreciation @ 25% on website development cost treating the same as intangible asset.

5. Aggrieved by the order of the CIT(A) the assessee is in appeal on the ground that depreciation on development of website cost has not been allowed as software whereas the Revenue is in appeal on the ground that deprecation @ 25% has been allowed treating the same as intangible asset.

6. Before us the learned AR of the assessee submitted that in Assessment Year 2001- 02 the assessee had claimed depreciation @ 25% on development cost of the website. For the year under consideration the assessee claimed depreciation @ 25% at Rs. 24,00,777/-. It was further submitted that total depreciation was claimed at Rs. 35,04,023/- which included depreciation on website development @ 25%, which has been disallowed by the Assessing Officer. He further submitted that as per old Appendix-I applicable for Assessment Years 2003- 04 to 2005- 06, intangible assets fall under Part-B and are eligible for depreciation @ 25%. In earlier Assessment Years i.e. upto Assessment Years 2001- 02 to 2003- 04 the Department has allowed depreciation. Therefore, the assessee is eligible for depreciation on website development cost. He placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs. India Visit.Com (P) Limited, 219 CTR 603 for the proposition that the expenditure incurred on development of website with a view to provide a means for disseminating the information about the assessee’ s business activities among st its clients, is revenue expenditure even though resulting in enduring benefit. In the case of assessee, depreciation has been claimed though assessee is entitled to entire claim as revenue expenditure. He also placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Oswal Agro Mills Ltd., 238 CTR 113, for the proposition that depreciation under sec. 32 is allowable on entire block of assets irrespective of the fact that a particular asset or assets of a closed unit were not put to use during the year. Since the asset has been used for the purpose of business, the assessee is eligible for depreciation. On the other hand, the learned Sr. DR submitted that website is not depreciable asset and therefore, depreciation cannot be allowed.

7. We have heard both the parties and gone through the material available on record. It is a fact that the assessee in the books of accounts has treated the website development cost as separate block of assets on which depreciation @ 25% has been claimed from A.Y. 2001- 02 to 2003- 04. The Revenue has treated the website development cost as business asset and had allowed depreciation for Assessment Years 2001- 02 to 2003- 04. During the year under consideration the Revenue has taken a contrary view that website is not a depreciable asset and has disallowed depreciation claimed by the assessee at Rs. 24,00,777/-. The learned CIT(A) following the principle of consistency has allowed depreciation @ 25%. The assessee is in the business of tour and travel and for the purpose of its business, has developed a website on which information about the assessee is available. The assessee is also doing business through its website and therefore, the website development cost represents business asset falling under the block of intangible assets. Therefore, the learned CIT(A), in our considered opinion, has rightly allowed depreciation @ 25% treating the website as business asset. Accordingly, we do not find any infirmity in the order passed by the learned CIT(A) allowing the relief to the assessee.

8. In the result, the appeal filed by the Revenue is dismissed.

9. Now coming to the issue raised by the assessee in ground Nos. 1 to 3 which relates to treating the website as software. For this purpose, the assessee has placed reliance on Central Board of Direct Taxes Notification No. 890(E) dated 26.09.2000. The said Notification has been issued under clause (b) of item (i) of Explanation 2 to section 10A, clause (b) of item (i) of Explanation 2 of section 10B and clause (b) of Explanation to section 80HHE of the Income-tax Act, 1961. The said Notification has been issued for the purposes of sections 10A, 10B and 80HHE, which has been noted by the Board. For the purpose of these sections, website services are included in the computer software. Notified definition for the purposes of sections 10A, 10B and 80HHE is for the specific purpose of those sections and cannot be imported for the purposes of deprecation under sec. 32 or Old Appendix-I applicable for Assessment Years 2003- 04 to 2005- 06. Moreover, website cannot be treated as software. Website enables companies to do what the printed brochures did but, in a much more efficient manner as well as in a much shorter period of time and covering a much larger set of people worldwide. By approaching website of the assessee, the customers/ people can approach the assessee and conduct business. Therefore, the website as such cannot be treated as software. It would fall under the definition of intangible asset on which depreciation @ 25% is allowable. Therefore, in our considered opinion, the learned CIT(A) was justified in allowing the depreciation @ 25% and not @ 60% as applicable to software. In view of above, ground No.1 to 3 are dismissed. 10. In ground No.4 the assessee had claimed amount of Rs. 15,40,000/- incurred during the year on web site development as revenue expenditure relying on the decision of Hon’ble Delhi High Court in the case of India Visit.Com (P) Ltd. (supra). The assessee has treated the software development expenditure from very beginning as business asset and has claimed the same as block of assets on which depreciation @ 25% was claimed and allowed by the Assessing Officer upto assessment year 2003- 04. In the Assessment Year 2004- 05 also this amount has been taken as part of business asset and the assessee had claimed the same as block of assets added during the year under consideration. Since the assessee itself has claimed the website development expenses as part of block of assets on which depreciation eligible to intangible assets has been claimed and allowed, the same cannot be treated as revenue expenditure. The same treatment has been given in earlier years. Moreover, on perusal of grounds of appeal before the CIT(A), we find that the assessee has not taken this ground before the CIT(A) nor any claim of revenue expenditure was made before the CIT(A). Therefore, this ground of appeal does not arise from the  order of the CIT(A) and therefore, the same deserves to be dismissed. We order accordingly.

11. In the result, the appeal filed by the assessee is dismissed.

12. To sum up, the appeals filed by the Revenue as well as assessee are dismissed.

13. This decision is pronounced in the Open Court on 9th March, 2012.