2018 (12) TMI 700 - HC - Income Tax

Expenditure incurred on software - revenue expenditure OR capital expenditure - Held that - This Court has admitted the appeal of the Revenue which involves a somewhat similar question as has arisen in the present appeal. However, as noted, the learned counsel for the assessee has cited three judgments of this Court clearly holding that the expenditure for software development was a revenue expenditure. In case of Raychem RPG Ltd (2011 (7) TMI 953 - BOMBAY HIGH COURT) the Division Bench upheld the decision of the Tribunal allowing software expenditure as revenue expenditure.

Summary

Issues:
1. Whether expenditure incurred on software is revenue expenditure for the Assessment Year 2001-02?

Analysis:
The case involved an appeal by the Revenue regarding the classification of expenditure incurred for software development as revenue or capital expenditure for the Assessment Year 2001-02. The Assessing Officer initially rejected the claim, deeming it as capital expenditure. However, the CIT (A) allowed the assessee's appeal, leading the Revenue to approach the Tribunal. The Tribunal, relying on its previous decision in a similar case and a judgment of the High Court, concluded that the expenditure on software development was revenue expenditure and hence deductible.

In response to the Revenue's appeal, the High Court noted that while the Revenue had challenged a similar decision in another case, the assessee cited multiple judgments supporting the treatment of software development expenditure as revenue expenditure. The High Court referred to the Division Bench's decision in the case of Raychem RPG Ltd, where software expenditure was upheld as revenue expenditure. Additionally, the High Court mentioned the case of Geoffrey Manners & Co Ltd, where it was observed that technology advancements and market trends justify treating such expenses as revenue expenditure.

Considering the precedents and the evolving technological landscape, the High Court found no reason to entertain the Revenue's appeals as no substantial question of law arose. Therefore, both Tax Appeals were dismissed, upholding the treatment of software development expenditure as revenue expenditure for the Assessment Year 2001-02.