2023 (7) TMI 1443 - AT - Income Tax

Nature of expenses - Disallowance made u/s 37(1) - expenses incurred towards software license expenses - HELD THAT - As decided in own case 2016 (6) TMI 592 - ITAT MUMBAI for assessment year 2005-06 we hold that since the expenditure was incurred for purchase of Windows XP Professional, an application software for its office use and becomes obsolete very fast, it cannot be treated as capital asset and therefore the same is to be treated and allowed as revenue expenditure. Decided against revenue.

Summary

Issues:
1. Disallowance of software license expenses under Section 37(1) of the Act.
2. Categorization of software license fee as revenue or capital expenditure.
3. Appreciation of software license as an asset for claiming depreciation under section 32 of the IT Act, 1961.
4. Condonation of delay in filing the appeal.

Analysis:
1. The appeal was filed by the revenue against the order passed by the ld. CIT(A) NFAC, challenging the deletion of disallowance made under Section 37(1) of the Act for software license expenses. The assessing officer disallowed the expenses as capital expenditure, but the assessee argued that no enduring benefit was received from the software. The AO disagreed and added the expenses to the total income.

2. The ld. CIT(A) allowed the claim of the assessee, considering similar decisions by ITAT in the assessee's previous cases. The ITAT reviewed previous decisions and held that the expenditure on software license was revenue in nature, following the principle that software expenses for office use, which become obsolete fast, should be treated as revenue expenditure. The expenditure was not considered a capital asset, and hence, should be allowed as revenue expenditure.

3. The issue of delay in filing the appeal was addressed, and the delay of 2 days was condoned due to valid reasons provided by the revenue. The ITAT dismissed the appeal of the revenue, upholding the decision of the ld. CIT(A) based on the consistent application of the principle that software license expenses for office use should be treated as revenue expenditure, not capital expenditure.

4. The judgment emphasized the importance of considering the nature of the expenditure, the purpose of the software, and its utility in determining whether it should be categorized as revenue or capital expenditure. The decision was based on precedents and established principles regarding software expenses and their treatment for tax purposes under the IT Act, 1961.