2011 (8) TMI 1235 - AT - Income Tax

Summary

Issues involved: Appeal against CIT(A)'s order sustaining disallowance of expenditure on application software as capital in nature.

Summary:
1. Issue 1 - Disallowance of application software cost:
The appeal was regarding the disallowance of Rs. 1,04,11,829 made by the Assessing Officer (AO) for acquiring intangible assets through application software. The appellant contended that the expenditure was revenue in nature and should be allowed u/s 37(1) of the IT Act. The AO treated the expenditure as capital, relying on specific provisions of section 32(1)(ii). The CIT(A) upheld the AO's decision, leading to the appeal before the ITAT.

2. Facts and Arguments:
The appellant, M/s.Progeon Ltd. (now M/s.Infosys BPO Ltd.), had debited the profit and loss account for the purchase of computer software under different heads totaling Rs. 1,04,11,829. The appellant claimed the software was for day-to-day functioning and should be treated as revenue expenditure. The AO disagreed, considering it an asset with enduring benefit and allowed 60% as depreciation. The CIT(A) upheld the capital nature of the expenditure, leading to the current appeal.

3. Decision and Rationale:
The ITAT considered the appellant's submissions and relevant case laws, including the decision of the Hon'ble Karnataka High Court and the Special Bench (Delhi) of the Tribunal. It was noted that neither the AO nor the CIT(A) discussed the period of the software licenses acquired. In line with the precedents, the ITAT directed the AO to examine the length of each software license acquired by the appellant during the assessment year. The AO was instructed to apply the principles laid down by the High Court and the Special Bench after verifying the period of each software. The appeal was allowed for statistical purposes.

Conclusion:
The ITAT directed a reevaluation by the AO regarding the length of software licenses acquired by the appellant, emphasizing the relevance of the duration of the license period in determining the nature of the expenditure. The decision highlighted the importance of considering the specific circumstances of each case in determining the tax treatment of software expenses.