2018 (11) TMI 1632 - AT - Income Tax

Classification of expenditure - software licence fee - revenue or capital expenditure - Audit Wing of the Department examined the records of the assessee and found that the licence fee paid for software is not a revenue expenditure - whether the classification of income under the head Revenue expenditure or Capital expenditure could be decided by the Assessing Officer or by the Audit Wing of the Department? - HELD THAT - Classification of expenditure has to be decided only by the AO. At the best, the wrong classification can be brought to the notice of the AO by the Audit Wing of the Department. In this case, when the Audit Wing of the Department found that it has to be classified as capital expenditure, AO reiterated his view by way of a reply to the Audit Wing of the Department. Since the Audit Wing has not accepted the reply filed by the assessee, the Assessing Officer reopened the assessment by issuing notice under Section 148. Therefore, the Commissioner directed the AO to file an appeal. Tribunal is of the considered opinion that licence fee paid to obtain software is nothing but revenue expenditure. Moreover, the Assessing Officer has rightly reiterated that it has to be treated only as revenue expenditure. In those circumstances, this Tribunal do not find any merit in the Miscellaneous Petition filed by the Revenue. Accordingly, the same is dismissed.

Summary

Issues:
1. Appeal filed due to audit objection.
2. Classification of software license fee as revenue or capital expenditure.
3. Authority to decide classification of expenditure - Assessing Officer or Audit Wing.
4. Reopening of assessment under Section 148 of the Income-tax Act.

Analysis:
1. The Revenue filed a Miscellaneous Petition seeking the recall of the Tribunal's order dated 31.05.2017, contending that the appeal was filed due to an audit objection. The Departmental Representative argued that the appeal was initially decided based on the tax effect being less than 10 lakhs, but due to the audit objection regarding a software license fee claimed as revenue expenditure, an additional demand of &8377; 9,06,767 arose, necessitating a merit-based decision.

2. The assessee claimed &8377; 16,16,000 as revenue expenditure for software license fee during the relevant year, which the Assessing Officer initially allowed. However, the Audit Wing reclassified it as capital expenditure. The Tribunal held that the classification of expenditure should be determined by the Assessing Officer, with the Audit Wing having the role of highlighting any misclassifications. In this case, the Assessing Officer maintained the revenue expenditure classification, leading to the reopening of assessment under Section 148.

3. The Tribunal emphasized that the license fee paid for software should be considered revenue expenditure, as asserted by the Assessing Officer. Despite the Audit Wing's differing opinion, the Tribunal found no merit in the Revenue's Miscellaneous Petition, ultimately dismissing it.

4. The Tribunal dismissed the Revenue's Miscellaneous Petition, affirming the Assessing Officer's classification of the software license fee as revenue expenditure. The decision was pronounced on 2nd November 2018 in Chennai.