2015 (6) TMI 1259 - AT - Income Tax

Nature of expenditure - software expenses - revenue or capital in nature - Expenses incurred on registration of domain was disallowed by the AO on the plea that same is capital in nature - HELD THAT - Hon ble Bombay High Court in the case of Raychem RPG Ltd. 2011 (7) TMI 953 - BOMBAY HIGH COURT has held that software did not form part of the profit-making apparatus, it facilitate the assessee s trading operations or enable the management to conduct the assessee s business more efficiently or more profitably but it was not in the nature of profit-making apparatus. Therefore, expenditure on software is to be allowed as revenue expenditure. Hon ble Delhi High Court in the case of Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT has held that software expenditure is incurred not to create new asset or a new source of income but to upgrade the system. Even the extent of expenditure is not a decisive factor in determining its nature. It was held that software expenditure so incurred is revenue in nature. We do not find any merit in the action of the lower authorities for treating software expenses as capital in nature. Accordingly, the AO is directed to allow software expenses as revenue expenditure. Disallowance of repairs and maintenance, renovation expenses by treating the same as capital - contention of AO was that the said expenses add on the cost of the system and in turn gives benefit of enduring nature to the assessee s business - HELD THAT - The amount incurred on purchase of Ram and hard disk drive is recurring in nature and no advantage of enduring benefit is achieved by the assessee. Accordingly, there is no justification for treating the same as capital expenditure. In regard to the expenditure incurred on interior work done at Bangalore office no new asset was created but expenditure was made to have a better look and facilitate efficient working in the office of the rented premises. Accordingly, we do not find any merit in the action of the lower authorities for treating these expenses as capital in nature.

Summary

Issues: Appeal against disallowance of software expenses, disallowance of repairs and maintenance expenses as capital expenditure.

Analysis:
1. Disallowance of Software Expenses:
The appeal was filed against the disallowance of software expenses by the CIT(A) as capital in nature. The ITAT Mumbai found that expenses incurred on registration of domain were dismissed since it was not pressed by the ld. AR. However, the expenditure towards development of software and purchase of cartridges was considered revenue in nature as they were recurring expenses. The Tribunal referred to previous decisions to support its view that software expenses are revenue expenditure, not capital, as they do not form part of the profit-making apparatus.

2. Judicial Precedents on Software Expenses:
The ITAT Mumbai cited the decisions of the Hon'ble Bombay High Court, Hon'ble Delhi High Court, and Hon'ble Punjab & Haryana High Court to establish that software expenses are revenue in nature. The courts held that software expenditure is incurred to upgrade the system, not to create new assets, and is essential for businesses due to fast-changing technology. Therefore, the lower authorities were directed to allow software expenses as revenue expenditure.

3. Disallowance of Repairs and Maintenance Expenses:
The assessee was aggrieved by the disallowance of repairs and maintenance expenses as capital expenditure. The AO contended that these expenses added to the cost of the system and provided enduring benefits to the business. However, the ITAT Mumbai analyzed the nature of the expenses and found that the amounts spent on RAM, hard disk drive, and interior work at the Bangalore office did not result in enduring benefits. The expenses were considered to be recurring or made for better aesthetics and efficient working, not creating new assets. Therefore, the Tribunal did not find merit in treating these expenses as capital in nature.

4. Outcome:
After considering the arguments and analyzing the nature of the expenses, the ITAT Mumbai allowed the appeal in part, directing the AO to treat software expenses as revenue expenditure and rejecting the disallowance of repairs and maintenance expenses as capital expenditure.

5. Conclusion:
The judgment highlights the distinction between revenue and capital expenditure concerning software expenses and repairs/maintenance expenses. It emphasizes the importance of legal precedents in determining the nature of expenses and provides clarity on the treatment of such expenditures for tax purposes.