2015 (10) TMI 925 - AT - Income Tax

Validity of reopening of the assessment - expenditure incurred by the assessee under the head software charges was of enduring in nature - Held that - Issuing a notice under section 148 of the Act was not justified. Expenditure incurred on software cannot be held tangible material especially when it was an annual expenditure and said fact was disclosed by the assessee. We find that the assessee had made payment under the head software charges in subsequent years also and the Assessing Officer do not invoke the provisions of section 147/148. If it was a revenue expenditure for the year under appeal, same was for the subsequent years also. In our opinion there was no tangible material to reopen the assessment. Respectfully following the decision of Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT OF INDIA we decide the effective grounds of appeal against the Assessing Officer. In our opinion order of the first appellate authority does not suffer from any legal infirmity, so, upholding it we dismiss the grounds of appeal filed by the Assessing Officer. - Decided in favour of assessee.

Summary

Issues:
1. Reopening of assessment under section 147.
2. Treatment of software expenses as capital or revenue expenditure.

Analysis:
1. The primary issue in this case revolves around the reopening of the assessment by the Assessing Officer under section 147. The Assessing Officer contended that the software expenses incurred by the assessee were of enduring nature and hence should be treated as capital expenditure. The Assessing Officer issued a notice under section 148 based on this premise. However, the first appellate authority held that there was no tangible material for reopening the assessment. The authority referred to the Supreme Court judgment in the case of CIT v. Kelvinator of India Ltd., emphasizing the need for tangible material to justify reopening. The authority concluded that the expenditure was revenue in nature as the assessee did not have any enduring benefit from the software services and did not own any fixed assets related to the software. Therefore, the first appellate authority allowed the appeal filed by the assessee, stating that the reopening of the assessment lacked legal basis.

2. The second issue pertains to the treatment of software expenses amounting to &8377; 90 lakhs as either capital or revenue expenditure. The Assessing Officer argued that the expenditure should be considered capital as it involved an agreement with another company for software services. The Assessing Officer treated the software development expenditure as capital, allowing only 60% depreciation and making an addition to the assessee's income. However, the first appellate authority disagreed with this classification, stating that the assessee did not derive any enduring benefit from the software services and did not have ownership of the software or hardware. The authority held that the expenditure was revenue in nature and akin to obtaining computer systems on lease. The authority allowed the appeal, emphasizing that the software expenses should be treated as revenue expenditure.

In conclusion, the Appellate Tribunal upheld the decision of the first appellate authority, dismissing the grounds of appeal filed by the Assessing Officer. The Tribunal found that there was no tangible material to support the reopening of the assessment and that the software expenses should be treated as revenue expenditure due to the lack of enduring benefit to the assessee. The Tribunal's decision was based on legal principles outlined in the Supreme Court judgment and the distinction between capital and revenue expenditures in the context of the case.