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2019 (12) TMI 966 - AT - Income TaxExpenditure incurred on payment of License Fees on renewal of software license - Capital expenditure or Revenue expenditure - HELD THAT - DR was not able to controvert the factual and legal findings of the CIT (Appeals) wherein the disallowance has been deleted by holding that the CWIP is towards current business needs and same could not be considered as capital in nature. CIT (Appeals) has also held that the respondent/assessee has sufficient own funds and further that the net worth of the company is far more than the value of CWIP and as such there is no nexus between the borrowed funds and the CWIP. We also note that the assessing officer has accepted the claim of interest in AY 2011-12 wherein, on identical facts, no such disallowance was made. In these circumstances, the department cannot be allowed to agitate this issue in the year under reference. Disallowance of software expenses - HELD THAT - Following the decision of the Tribunal in assessee s own case, we hold that the AMC, consumables and the software expenses are revenue in nature. We, therefore, dismiss the ground raised by the revenue and allow the grounds raised by the assessee on this issue CIT(A) after obtaining a remand report from the Assessing Officer and the rejoinder to such remand report, deleted the addition by passing a detailed order the reasons for which have also been extracted in the preceding paragraphs. We find no infirmity in the order of the CIT(A). He has given justifiable reasons while deleting each and every disallowance made by the Assessing Officer. Even the complete documentary evidence filed before him which were forwarded to the Assessing Officer for his counter comments remained unattended by the Assessing Officer in the sense he did not give any adverse comment against the same. Since the ld.CIT(A) while deleting the disallowance has passed a speaking order by giving detailed reasons which could not be controverted by the ld. DR, therefore, we find no infirmity in the order of the CIT(A) deleting such addition. No distinguishable feature was brought to our notice by the Revenue so as to take a contrary view than the view taken by the CIT(A) on this issue. Accordingly, the order of the CIT(A) on this issue is upheld and the grounds raised by the Revenue are dismissed. Expenditure incurred on payment of licence fee on renewal of software licence is revenue in nature
Issues Involved:
1. Treatment of software license fees as capital or revenue expenditure. 2. Deletion of disallowance on account of interest attributable to Capital Work-in-Progress (CWIP). 3. Deletion of disallowances of various expenses and provisions. Detailed Analysis: Issue 1: Treatment of Software License Fees as Capital or Revenue Expenditure Facts and Arguments: - The assessee claimed software expenses amounting to ?97,64,993/- as revenue expenditure. The Assessing Officer (AO) treated these expenses as capital in nature, allowing only depreciation at 60%. - The assessee argued that the expenses were recurring in nature, like license fees, AMC, and other small routine computer expenses, which do not provide any enduring benefit. - The CIT(A) partially upheld the AO's decision, treating license fees as capital expenditure but allowing AMC and consumables as revenue expenditure. Tribunal's Decision: - The Tribunal referenced its decision in the assessee's own case for the preceding assessment year, where similar expenses were held to be revenue in nature. - It was noted that the software expenses, including AMC, consumables, and license fees, do not provide any enduring benefit and are required for the regular functioning of the business. - The Tribunal allowed the assessee's appeal, holding that the software expenses are revenue in nature. Issue 2: Deletion of Disallowance on Account of Interest Attributable to CWIP Facts and Arguments: - The AO disallowed interest of ?19,81,467/- attributable to CWIP, arguing that the interest should be capitalized. - The CIT(A) deleted the disallowance, noting that the funds used for CWIP were for ongoing business purposes and that the assessee had sufficient own funds. No nexus between borrowed funds and CWIP was established by the AO. Tribunal's Decision: - The Tribunal upheld the CIT(A)'s decision, referencing its earlier decision in the assessee's case for the preceding assessment year where similar disallowance was deleted. - It was emphasized that the AO failed to prove any nexus between borrowed funds and CWIP, and the assessee had sufficient own funds. Issue 3: Deletion of Disallowances of Various Expenses and Provisions Facts and Arguments: - The AO disallowed various expenses and provisions totaling ?5,35,66,402/-, arguing that these were not approved by the clients and lacked necessity. - The CIT(A) deleted the disallowances after considering detailed submissions and additional evidence provided by the assessee. The CIT(A) noted that the expenses were genuine and incurred for business purposes, and the disallowances were minimal compared to the total expenses. Tribunal's Decision: - The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) provided justifiable reasons for deleting each disallowance. - The Tribunal found no infirmity in the CIT(A)'s order, as the AO did not provide any adverse comments on the additional evidence submitted during the remand proceedings. Conclusion: The Tribunal allowed the assessee's appeals for assessment years 2010-11 and 2011-12, holding that the software expenses were revenue in nature and upholding the deletion of disallowances on account of interest attributable to CWIP and various other expenses. The Revenue's appeal for assessment year 2010-11 was dismissed.
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