2011 (2) TMI 454 - HC - Income Tax

Revenue expenses - Expenditure on purchase of computer software - finding of the Tribunal was upheld by this Court in Commissioner of Income-Tax Vs. Varinder Agro Chemicals Limited 2008 -TMI - 32483 - PUNJAB AND HARYANA HIGH COURT holding that no substantial question of law arose - Hence ubstantial question of law raised is decided against the revenue.

Summary

Issues:
- Treatment of computer software expenses as revenue or capital expenditure
- Application of Section 32 for depreciation
- Interpretation of technological changes in software development

Analysis:

Issue 1: Treatment of computer software expenses
The appeal was filed by the revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal regarding the treatment of expenses incurred on computer software. The Assessing Officer and CIT(A) considered the expenditure as capital expenditure, allowing depreciation, while the Tribunal viewed it as revenue expenditure due to rapid technological changes in software development. The Tribunal emphasized that software expenses are not on physical assets with wear and tear, leading to the conclusion that they should be treated as revenue expenditure. The Tribunal directed the Assessing Officer to allow the full expenditure claimed by the assessee for that year.

Issue 2: Application of Section 32
The revenue contended that the expenditure should be treated as office equipment under Section 32 for depreciation. However, the Court rejected this argument, stating that Section 32 applies only to depreciation on capital assets, not revenue expenditure. The Tribunal's finding that the software development expenditure was revenue expenditure was upheld, emphasizing the fast-paced technological changes in the software industry.

Issue 3: Interpretation of technological changes
The assessee cited precedents where similar findings were upheld by the Court, emphasizing the rapid advances in research and the impermanence of technical know-how in the software industry. The Court, considering these arguments and precedents, found no grounds to interfere with the Tribunal's view. The substantial question of law raised by the revenue was decided against them, leading to the dismissal of the appeal.

In conclusion, the Court upheld the Tribunal's decision to treat the computer software expenses as revenue expenditure due to technological advancements, dismissing the appeal filed by the revenue. The judgment emphasized the distinction between capital and revenue expenditure in the context of software development and the evolving nature of technology in the industry.