2018 (9) TMI 220 - HC - Income Tax

Expenditures incurred by the assessee towards procuring license for software and routine maintenance - capital expenditure or revenue expenditure - Held that - In this appeal the actual agreement between the assessee and supplier of software packages is not before us. The Tribunal, however, opined that the expenditure incurred towards procuring license of software could not create new assets. The expression license itself denotes transfer of limited use to the acquirer thereof and there is no contrary evidence which could demonstrate that title of the software had been transferred or shifted to the assessee. The Tribunal, came to finding of fact while holding that expenditure incurred towards routine maintenance and procuring license of software could not be treated as capital assets. There is no perversity involved in such finding. No substantial question of law involved in this appeal.

Summary

Issues:
1. Classification of expenditures incurred for procuring software licenses and routine maintenance as capital or revenue expenditure.

Analysis:
The primary issue in this case was whether the expenditures incurred by the assessee towards procuring software licenses and routine maintenance should be classified as capital or revenue expenditure for the Assessment Year 2008-09. The Assessing Officer disallowed the entire expenditure claimed as revenue expenditure but allowed depreciation on the software packages as capital assets. The Commissioner of Income Tax (Appeals) segregated the expenses, directing the Assessing Officer to treat amounts paid for software licenses as capital expenditure and the remaining connected expenses as revenue expenditure.

The Commissioner relied on Section 32(1) of the Income Tax Act, which allows deductions for depreciation on tangible and intangible assets used for business purposes. The Commissioner specifically mentioned that the amounts paid for SAP and MS Office licenses fell within the purview of Section 32(1) and should be treated as capital expenditure, allowing depreciation benefits. The remaining expenses were to be treated as revenue expenditure. The Tribunal, however, allowed the assessee's appeal, stating that expenditures for routine maintenance and software licenses did not create new assets and, therefore, should not be treated as capital assets.

The Tribunal referred to a previous judgment by a coordinate Bench of the Court, which applied the endurance test laid down by the Supreme Court in a case involving know-how. The Tribunal found that the expenditure towards procuring software licenses could not create new assets as the term 'license' implies limited use without transferring title. The Tribunal's factual finding that such expenditures should not be treated as capital assets was upheld, with no substantial question of law identified in the appeal.

In conclusion, the Court dismissed the appeal, affirming the Tribunal's decision that the expenditures for procuring software licenses and routine maintenance should be treated as revenue expenditure, not capital assets. The judgment emphasized the nature of the expenses and the absence of evidence indicating the creation of new assets through the expenditures.