2008 (10) TMI 100 - HC - Income Tax

Computer software expenses - There is nothing to show that the software used by the assessee was of enduring nature and will not become outdated - Since technology is fast changing and day-by-day systems are being developed in a new way, software may be needed like raw material - view taken by the Tribunal that computer software expenses were revenue in nature, is correct revenue s appeal is dismissed

Summary

Issues:
1. Whether computer software expenses were revenue in nature disregarding the meaning of plant under section 43(3) and the fact that enduring advantage was derived by the assessee by incurring such expenditure.

Analysis:
The High Court dealt with an appeal under section 260A of the Income-tax Act, 1961 regarding the treatment of computer software expenses as revenue or capital expenditure for the assessment year 2002-03. The Revenue challenged the order of the Income-tax Appellate Tribunal, which allowed the deduction claimed by the assessee for software expenses disallowed by the Assessing Officer. The Tribunal relied on a previous decision in a similar case to support its finding that the software expenses were revenue in nature. The Court upheld the Tribunal's decision, emphasizing the distinction between capital and revenue expenditure based on the enduring nature of the advantage derived. The Court referred to various Supreme Court judgments to establish the principles governing the classification of expenditure as capital or revenue. It highlighted that if the advantage is for enduring nature, it may be capital expenditure, whereas if it is for running the business, it is revenue in nature.

The Court specifically cited the case of Alembic Chemical Works Co. Ltd., where it was held that technical know-how expenditure was revenue in nature due to the fast-changing nature of technology, making it impermanent. The Court also referred to the Empire Jute case to illustrate that expenditure for enduring benefit may still be revenue unless the advantage is in the capital field. Applying these principles to the case at hand, the Court found that there was no evidence to suggest that the software used by the assessee was of enduring nature and would not become outdated. Given the rapid advancements in technology, the Court reasoned that software could be likened to raw material, necessitating regular updates. Consequently, the Court concluded that the Tribunal's view, treating software expenses as revenue expenditure, was reasonable and dismissed the appeal.

In conclusion, the High Court's judgment reaffirmed the distinction between capital and revenue expenditure based on the enduring nature of the advantage derived. By analyzing relevant Supreme Court precedents and considering the evolving nature of technology, the Court upheld the Tribunal's decision regarding the treatment of software expenses as revenue expenditure, emphasizing the need for expenditure to be for running the business to qualify as revenue in nature.