2013 (8) TMI 185 - AT - Income Tax

Software development and upgradation charges - Revenue v/s Capital expenditure - Held that - As decided in Asahi India Safety Glass 2011 (11) TMI 2 - DELHI HIGH COURT 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:
1. Disallowance of software development and upgradation charges as capital expenditure without issuing show cause notice.
2. Disallowance of software development charges as capital expenditure.

Issue 1: Disallowance without show cause notice
The appeal was filed against the order of the Ld. CIT(A)-1 for the assessment year 2007-08. The Assessee, a company engaged in the business of brokers and consultants of financial products, electronically filed its return of income. The case was selected for scrutiny, and the assessment was framed under Section 143(3). The total income was determined, and the Assessee appealed before the CIT(A), who granted partial relief. The Assessee raised a ground regarding disallowance made without issuing a show cause notice. The disallowance of Rs. 55,18,150 was made by the Assessing Officer without providing an opportunity for the Assessee to explain. The Assessee contended that the assessment order should be quashed as it was passed in defiance of principles of natural justice and fairness.

Issue 2: Disallowance of software development charges
During the assessment proceedings, the Assessing Officer noted that the Assessee debited Rs. 55,18,150 towards software development and maintenance charges, including Rs. 54,50,000 for software development and upgradation. The Assessing Officer treated software development as a capital expenditure, disallowing it as revenue expenditure but allowing depreciation on it. The CIT(A) upheld this decision, stating that there are specific provisions for allowing depreciation on software expenses, and hence, the claim of the Assessee as revenue expenditure cannot be allowed. The Assessee appealed, citing a previous Tribunal order in its favor for a different assessment year. The Tribunal held that the software development charges did not result in the creation of fixed capital for the Assessee and allowed the appeal, following the precedent set in a similar case for the assessment year 2008-09.

In conclusion, the Appellate Tribunal allowed the Assessee's appeal regarding the disallowance of software development charges, following the precedent set in a similar case for a different assessment year. The Tribunal held that the software development charges did not create fixed capital for the Assessee, thus allowing the appeal and overturning the decision of the lower authorities.