1985 (5) TMI 74 - AT - Income Tax

Summary

Issues:
1. Allowance of revenue expenditure by the Commissioner (Appeals) against the revenue's appeal.
2. Determination of the nature of technical services expenditure claimed by the assessee.
3. Capitalization of technical services expenditure related to computer purchase.
4. Classification of expenditure into revenue and capital nature.

Detailed Analysis:
1. The appeal before the Appellate Tribunal ITAT Bangalore was regarding the allowance of Rs. 94,976 as revenue expenditure by the Commissioner (Appeals) against the revenue's appeal. The assessee, a dealer for Hindustan Computers Ltd., claimed a deduction for technical services paid to the company. The revenue contested the allowance, arguing that the payment was part of the purchase price of the computer and should have been capitalized.

2. The nature of the technical services expenditure claimed by the assessee was scrutinized. The expenditure of Rs. 94,976 was detailed to include services such as developing the operational system of the computer, training programmers, testing hardware and software, and deputing a senior system analyst for software development. The revenue contended that such services should be treated as capital expenditure, while the assessee argued for their revenue nature based on case laws.

3. The issue of capitalization of the technical services expenditure related to the computer purchase was addressed by the Tribunal. It was established that software, being essential technical know-how for effective computer use, constitutes a capital expenditure. The Tribunal examined the breakdown of the expenditure provided by Hindustan Computers Ltd., confirming that the cost of software amounting to Rs. 20,000 should be capitalized.

4. The Tribunal classified the expenditure into revenue and capital nature based on the breakdown provided by Hindustan Computers Ltd. The expenditure related to training, testing, and deputing an analyst was deemed revenue in nature, while the cost of software was categorized as capital expenditure. The Tribunal disagreed with the assessee's argument that due to technological obsolescence, the purchase of software should be treated as revenue expenditure, emphasizing that the system in use was adequate for current operations.

In conclusion, the Tribunal partly allowed the revenue's appeal, restoring the addition made by the Income-tax Appellate Commissioner (IAC) for the cost of software to be capitalized.