ACL WIRELESS LTD. ..... Respondent Through Nemo HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA SANJEEV SACHDEVA, J. 1. ITA No. 254/2013 pertains to Assessment Year 2003 04 and impugns order of ITAT dated 28.08.2012 & ITA No.313/2013 pertains to Assessment Year 200708 and impugns order of ITAT dated 19.10.2012. 2. These appeals have been filed by the Revenue under section 260A of the Income Tax Act, 1961 (for short ITA 254/2013 & 313/2013 Page 1 of 23 "the Act") impugning the orders ITAT has accepted the appeals of the Assessee and deleted the additions made by the Assessing Officer with regard to product improvement expenses. The Assessing Officer had treated the product improvement expenses as capital expenditure and disallowed equivalent amount as revenue expenditure. ITAT has held to the contrary. 3. The Assessee is a company which is involved in the business of software development. The commercial operations started in the Financial Year 200203. The Assessee provides wireless solutions for mobile consumers and enterprises. The software development relates to the field of instant messaging (IM). It employed and functioned with a team of software professionals. They developed new software and were also involved in continuous improvement in the existing software in terms of improvements, speed, usage, storage and providing enhanced features. The Assessee had signed revenue sharing agreements ITA 254/2013 & 313/2013 Page 2 of 23 with mobile service providers like Airtel, Vodafone, etc. ITA 254 of 2013 4. During the Assessment Year 200304, the Assessee had capitalized the product development expenses for the new product (software) launched in the relevant assessment year. However, under the head „Product Improvement Expenses‟, the Assessee has claimed Rs.90,37,605/ as revenue expenditure. 5. The Assessee was asked by the Assessing Officer to explain as to why the expenses incurred on product improvement should not be capitalized. In response, it was submitted that the improvement of the software was a regular feature and since the technology of mobile phoning was one of the fastest changing technologies and to keep pace, the Assessee was required to upgrade/improve/modify its product on constant basis. Product improvement was part and parcel of the business of the Assessee. ITA 254/2013 & 313/2013 Page 3 of 23 The expenses incurred by the Assessee for product improvement did not result in any new product, however modified and new features were added to the existing product depending on market/technology requirements. The Assessee claimed these expenses to be revenue in nature as the same were being incurred in the ordinary course of business. The said expenses were essential to stay in the business of rapidly changing technological world of mobile communications. 6. The Assessing Officer, vide his assessment order dated 23.01.2006, treated the said expenses as capital expenditure on the ground that the software had been capitalized by the Assessee and there was a dedicated team of professionals whose job was to carry out further improvement in the software and the expenses incurred were to enhance the value of the capital asset resultin