2012 (5) TMI 662 - AT - Income Tax

Allowable software expenses - Held that - It is clear that the assessee has spent the amounts for running its software system and not for acquiring any new system. Consumables and others were purchased for servicing the existing net work. This is the same which goes with the servicing as well. Another item is internet charges and small expenditure expended on training. The major amount is spent for IT help desk. It is to be seen that none of these expenses was incurred for acquiring any new system or facility of enduring nature. By the nature of the expenditure itself, it is clear on the face of the records that the expenses incurred were in the nature of revenue expenditure. Therefore, we find that the AO has rightly allowed the claim of the assessee. As such, the finding of the Commissioner, is untenable. Accordingly, the revision order is set aside. - Assessee is allowed.

Summary

Issues:
Appeal against revision order under sec.263 of Income-tax Act, 1961 regarding deduction claimed as operating expenses under "software expenses."

Analysis:
The appeal was filed against the revision order passed by the Commissioner of Income-tax, Chennai-I under sec.263 of the Income-tax Act, 1961. The Commissioner found that the Assessing Officer allowed the deduction of &8377; 61,32,795/- towards operating expenses under "software expenses" without determining if it should be treated as revenue or capital expenses. The Commissioner held that if the expenses were capital in nature, only depreciation could be allowed. Consequently, the assessment order was set aside for reevaluation by the Assessing Officer in line with the law and observations made by the Commissioner.

During the hearing, it was noted that the Assessing Officer had evidence for the purchase of software expenses, which was not questioned. The total expenditure of &8377; 61,32,795/- included various components like Consumables & Others, IT Help Desk Charges, Internet, Servicing, Training fees, and Others. Analysis revealed that the expenses were for maintaining the existing software system, not for acquiring new systems. The nature of the expenditure indicated revenue expenditure, as it was for running the software system and not for acquiring enduring assets. Consequently, it was concluded that the Assessing Officer correctly allowed the claim, and the finding of the Commissioner was deemed untenable. Therefore, the revision order was set aside, and the appeal by the assessee was allowed.

In conclusion, the Appellate Tribunal, ITAT Chennai, ruled in favor of the assessee, setting aside the revision order that questioned the deduction claimed as operating expenses under "software expenses." The Tribunal found that the expenses were revenue in nature, incurred for maintaining the existing software system, and not for acquiring new assets. The decision highlighted the importance of correctly categorizing expenses as revenue or capital to determine the tax treatment applicable under the Income-tax Act, 1961.