2020 (7) TMI 648 - HC - Income Tax

Nature of expenditure - expenses on use of computer software - revenue or capital expenditure - HELD THAT - Since the amount is paid on the basis of actual use of software and not for acquisition of software, there was no question of treating the said expenses as capital expenditure. Therefore, Tribunal held that the authorities below had wrongly held the software payment to be capital expenditure in nature and accordingly upheld the stand taken by the assessee directing the Assessing Officer to treat the software expenses as revenue expenditure. While holding so, the Tribunal considered the views given by the Dispute Resolution Panel (DRP) as well as of the Special Bench decision of the Tribunal in the case of Amway India Enterprises Vs. DCIT 2008 (2) TMI 454 - ITAT DELHI-C . There is no error or infirmity in the conclusions reached by the Tribunal - No substantial question of law. Expenses pertains to legal expenses in connection with structuring of the transaction and related aspects - HELD THAT - Tribunal has taken the view that merely because the transaction in question is a capital asset, the legal expenses incurred for the same will not ipso facto become capital expenditure. While taking the above view, Tribunal referred to a decision of the Madras High Court in the case of CIT Vs. Bush Boake Allen India Ltd. 1981 (10) TMI 32 - MADRAS HIGH COURT in which followed the decision of India Cements Ltd. Vs. CIT 1965 (12) TMI 22 - SUPREME COURT . No error or infirmity in the view taken by the Tribunal and no question of law arises therefrom.

Summary

Issues:
1. Treatment of computer software expenses as revenue or capital expenditure.
2. Allowance of expenses incurred in connection with the sale of capital assets.

Analysis:

Issue 1: Treatment of computer software expenses
The appeal raised questions regarding the treatment of computer software expenses amounting to &8377;5,82,62,091 as either revenue or capital expenditure. The Tribunal analyzed the nature of the expenses, emphasizing that the payment was for the actual use of software and not for its acquisition, leading to a conclusion that it should be considered revenue expenditure. The Tribunal highlighted that the software expenses were not for enduring benefit and were paid on an annual basis, refuting the capital expenditure argument made by the Assessing Officer. The Tribunal referred to the decision in the case of Amway India Enterprises Vs. DCIT to support its stance. Ultimately, the Tribunal directed the Assessing Officer to treat the software expenses as revenue expenditure, rejecting the capital expenditure classification.

Issue 2: Allowance of expenses related to the sale of capital assets
Regarding the expenses of &8377;8,30,000 incurred in connection with the sale of capital assets, the Tribunal examined the details of the expenses, which were legal expenses related to the structuring of the transaction. The Tribunal held that merely because the transaction involved a capital asset, the legal expenses did not automatically become capital expenditure. Citing the decision of the Madras High Court in the case of CIT Vs. Bush Boake Allen India Ltd., the Tribunal emphasized that legal expenses should be judged based on their own character and not solely based on the nature of the transaction. The Tribunal referred to the Supreme Court decision in India Cements Ltd. Vs. CIT to support its conclusion that legal expenses incurred for borrowing money should be treated as revenue outgoing, irrespective of the purpose of borrowing. Consequently, the Tribunal allowed the grievance of the assessee regarding these expenses.

In both issues, the Tribunal's decisions were upheld, with the Court finding no error or infirmity in the Tribunal's conclusions. The appeal filed by the Revenue was dismissed, and no costs were awarded.