2007 (6) TMI 193 - HC - Income Tax

Expenditure incurred on the software package is revenue expenditure - expenditure incurred on construction of compound wall in the place of barbed wire fencing is revenue expenditure - expenditure incurred on replacement on UPS system and on replacement of printer is revenue expenditure to decide whether any expenditure is capital expenditure or revenue expenditure, one should keep in mind the whole operation in respect of which the expenditure has been incurred

Summary

Issues Involved:
1. Expenditure on software packages
2. Expenditure on construction of compound wall replacing barbed wire fencing
3. Expenditure on replacement of UPS system
4. Expenditure on replacement of printer

Issue-wise Detailed Analysis:

1. Expenditure on Software Packages:
The primary issue was whether the expenditure incurred on software packages for the assessment years 1995-96 to 1997-98 should be classified as revenue expenditure. The Tribunal held that such expenditure is indeed revenue in nature. The court emphasized that in the modern business environment, software packages enhance the efficiency and productivity of business operations without resulting in the acquisition of a capital asset. The software aids in the manufacturing process rather than being a standalone tool. Thus, despite the enduring benefit, the expenditure does not create a capital asset and is rightly treated as revenue expenditure.

2. Expenditure on Construction of Compound Wall:
For the assessment years 1995-96 and 1996-97, the issue was whether the expenditure on constructing a compound wall in place of barbed wire fencing should be considered revenue expenditure. The Tribunal ruled in favor of the assessee, treating it as revenue expenditure. The court referred to various precedents, including decisions by the Karnataka High Court and the Bombay High Court, which supported the view that such expenditure, aimed at safeguarding business premises and facilitating business operations, is revenue in nature. The court concluded that the construction of a compound wall, replacing barbed wire fencing, does not alter the character of the business premises and is therefore revenue expenditure.

3. Expenditure on Replacement of UPS System:
The Tribunal also addressed whether the expenditure on replacing the UPS system for the assessment year 1995-96 is revenue expenditure. The court applied the same rationale as for the software packages, emphasizing that the replacement enhances operational efficiency without creating a new capital asset. The expenditure on the UPS system was thus correctly classified as revenue expenditure.

4. Expenditure on Replacement of Printer:
Similarly, for the assessment year 1996-97, the issue was whether the expenditure on replacing a printer should be treated as revenue expenditure. The Tribunal and the court applied the same principles used for the software packages and UPS system. The replacement of the printer was deemed to improve operational efficiency without resulting in a capital asset, thus classifying it as revenue expenditure.

Conclusion:
The court found no substantial question of law in the Revenue's appeals and dismissed them. The Tribunal's decisions on all issues were upheld, affirming that the expenditures on software packages, construction of the compound wall, replacement of the UPS system, and replacement of the printer were correctly treated as revenue expenditures.