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2016 (6) TMI 789 - AT - Income TaxAddition towards purchasing and upgrading software - revenue or capital expenditure - Held that - The impugned expenditure incurred by the assessee is revenue expenditure, because the same has been incurred towards the purchase of application software and upgradation charges which were required to run efficiently the existing software as well as license charges for using the existing software uninterruptly so as to run the business efficiently. We are, therefore, of the view that the ld. CIT(A) was not correct in confirming the disallowance and we accordingly delete this disallowance. See COMMISSIONER OF INCOME TAX Versus M/s ASAHI INDIA SAFETY GLASS LTD. 2011 (11) TMI 2 - DELHI HIGH COURT - Decided in favour of assessee
Issues Involved:
1. Treatment of software expenses as capital or revenue expenditure. 2. Penalty under Section 271(1)(c) of the Income Tax Act. Detailed Analysis: 1. Treatment of Software Expenses as Capital or Revenue Expenditure: The primary issue in ITA No.879/Ahd/2013 revolves around whether the software expenses incurred by the assessee amounting to ?35,30,328 should be treated as capital expenditure or revenue expenditure. The assessee argued that these expenses were for purchasing application software and upgrading existing software, which enhanced operational efficiency but did not result in the acquisition of any capital asset or enduring benefit due to the rapid obsolescence in the electronic industry. The assessee cited the "enduring benefit" and "functional test" to support their claim that these expenses should be treated as revenue expenditure. The Assessing Officer, however, treated the expenditure as capital in nature, allowing depreciation at 60%, leading to an addition of ?14,12,131. The CIT(A) upheld this decision, prompting the assessee to appeal to the Tribunal. In its analysis, the Tribunal noted that the expenditure was primarily for application software and upgrades necessary for the efficient operation of existing software, which did not create a new asset or enduring benefit. The Tribunal referred to its own decision in the assessee's case for the previous year (Assessment Year 2006-07) and the decision of the Hon'ble Delhi High Court in CIT vs. Asahi India Safety Glass Ltd., which held that software expenses aimed at improving operational efficiency should be treated as revenue expenditure. The Tribunal concluded that the software expenses incurred by the assessee were indeed revenue in nature and not capital expenditure. Consequently, the Tribunal deleted the disallowance of ?14,12,131 made by the CIT(A). 2. Penalty under Section 271(1)(c) of the Income Tax Act: The second issue in ITA No.3189/Ahd/2015 pertains to the penalty of ?4,78,355 imposed under Section 271(1)(c) of the Income Tax Act. This penalty was based on the disallowance of ?14,12,131 for software expenses treated as capital expenditure. Since the Tribunal, in its judgment on ITA No.879/Ahd/2013, deleted the quantum addition of ?14,12,131 by treating the software expenses as revenue expenditure, the basis for the penalty under Section 271(1)(c) was nullified. Consequently, the Tribunal also deleted the penalty imposed by the Assessing Officer. Conclusion: In summary, the Tribunal found that the software expenses incurred by the assessee were revenue in nature and should not be treated as capital expenditure. As a result, the disallowance of ?14,12,131 was deleted, and the penalty under Section 271(1)(c) based on this disallowance was also removed. Both appeals filed by the assessee were allowed.
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