2002 (7) TMI 41 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in treating the expenditure in the acquisition of software of ₹ 1,38,360 as of revenue nature? - The facts on record are that the payment of ₹ 1,38,360 was not paid for consultancy fee to Hindustan Computers Ltd., in fact, the payment was made for out-right sale of computer software which is used as technique in mining operations. The finding of the Commissioner of Income-tax (Appeals) is that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation why it should not be treated as a capital asset and expenditure on that is capital expenditure. - in our view, the acquisition of technical know-how is capital expenditure, therefore, the Assessing Officer has rightly treated the expenditure on acquiring the computer software as expenditure of capital nature and rightly allowed depreciation as per rules.

Summary

Issues:
1. Treatment of expenditure in the acquisition of software as revenue or capital nature.

Analysis:
The case involved a dispute regarding the nature of expenditure incurred by an assessee-company in acquiring computer software. The assessee claimed the expenditure of Rs. 1,38,360 as revenue expenditure, while the Assessing Officer treated it as a capital expenditure, allowing depreciation as per rules. The Commissioner of Income-tax (Appeals) supported the assessee's view that the expenditure on technical know-how is revenue in nature. However, the Tribunal ruled against the Revenue, relying on decisions from Delhi and Bombay High Courts.

During the proceedings, the Revenue's counsel argued that computer software used as technical know-how in mining operations should be considered capital expenditure, citing relevant court decisions. The Assessing Officer issued a notice to the assessee seeking an explanation for treating the expenditure as revenue nature. The assessee contended that the software purchase was akin to a consultancy fee and not an asset, emphasizing its limited lifespan and specific usage for mining purposes.

The Tribunal and Commissioner of Income-tax (Appeals) considered various court decisions, including those from the Delhi and Bombay High Courts, to support their stance that the expenditure should be treated as revenue. The Tribunal specifically noted that the provisions of section 35AB of the Income-tax Act, 1961, were not applicable in this case.

The High Court analyzed the facts and legal precedents presented, including the decisions in CIT v. Borosil Glass Works Ltd. and CIT v. Premier Automobiles Ltd. The court emphasized that the acquisition of technical know-how should be considered capital expenditure, as in the case of acquiring computer software for mining operations. Ultimately, the High Court ruled in favor of the Revenue, affirming the Assessing Officer's treatment of the expenditure as capital in nature and allowing depreciation as per rules.

In conclusion, the High Court answered the reference in the negative, supporting the Revenue's position and dismissing the assessee's claim. The judgment highlighted the distinction between revenue and capital expenditure in the context of acquiring technical know-how, emphasizing the applicability of relevant court decisions to determine the nature of such expenditures.