2011 (11) TMI 2 - HC - Income Tax

Capital or revenue expenditure - The expenditure incurred by the assessee on account of software and professional expenses was a revenue expenditure or not. - Held that - The treatment of a particular expense or a provision in the books of accounts can never be conclusively determinative of the nature of the expense. An assessee cannot be denied a claim for deduction which is otherwise tenable in law on the ground that the assessee had treated it differently in its books. decided in favour of Assessee.

Summary

Issues Involved:
1. Whether the expenditure on software and professional expenses for assessment years 1997-98 and 1998-99 was a revenue expenditure or a capital expenditure.

Detailed Analysis:

Assessment Year 1997-98:

1. Nature of Expenditure:
The assessee installed software in the financial year 1996-97, relevant for assessment year 1997-98, through Arthur Anderson & Associates. The software was based on Oracle applications. The assessee amortized an expenditure of Rs 1,36,77,664/- towards software and professional expenses under "deferred revenue expenditure." However, the entire amount was claimed as revenue expenditure while computing taxable income.

2. Assessing Officer's Findings:
The Assessing Officer disallowed the deduction, reasoning that the expenditure was part of an "intensive project" to overhaul the accounting method and train the accounting staff, spanning 18-24 months. The expenditure was seen as providing long-term benefits, thus categorized as capital expenditure. Depreciation was also denied due to lack of clarity on the software's usage in the relevant period.

3. CIT(A) and Tribunal's Findings:
The CIT(A) allowed the assessee's claim, noting the terms of the agreement and relevant judgments. The Tribunal upheld this, stating the software was used for business efficiency, not creating a new asset or source of income. The expenses were recurring, including licence fees, professional charges, and training, thus classified as revenue expenditure.

Assessment Year 1998-99:

1. Nature of Expenditure:
An additional expenditure of Rs 1.71 crores was claimed for software and professional expenses. The assessee argued that the expenditure was for upgrading the existing software due to deficiencies.

2. Assessing Officer's Findings:
Following the rationale from the previous year, the Assessing Officer disallowed the deduction, treating the expenditure as capital expenditure and denying depreciation due to insufficient evidence of software usage.

3. CIT(A) and Tribunal's Findings:
The CIT(A) and Tribunal maintained their stance from the previous year, concluding the expenses were for system upgrades and recurring in nature, thus revenue expenditure.

High Court's Analysis:

1. Enduring Benefit Test:
The court emphasized that the test of enduring benefit is not conclusive. The real intent and purpose of the expenditure must be examined to determine if it results in creating fixed capital. Expenses that enable efficient business operations without affecting the profit-making structure are revenue expenditures.

2. Nature of Software Expenditure:
The court noted that software expenses, including licence fees and maintenance, facilitate business management and are thus revenue expenditures. The expenditure did not create a new asset or source of income but allowed the business to run more efficiently.

3. Treatment in Books of Accounts:
The court rejected the revenue's argument that the treatment of the expense in the books of accounts as deferred expenditure indicated it was capital expenditure. The Supreme Court's precedent established that entries in books of accounts are not conclusive.

Conclusion:
The court answered the questions of law in the affirmative, holding that the expenditure on software and professional expenses for both assessment years was revenue expenditure. The appeals were dismissed.