2012 (12) TMI 340 - AT - Income Tax

Nature of application software - Capital or revenue in nature Held that - The tests generally applied to decide the nature of expenditure as to whether it is capital or revenue, are the fact of enduring benefit, ownership test and functional test. Following the decision in case of Amway India Enterprises (2008 (2) TMI 454 - ITAT DELHI-C) held that examination of whether software expenditure incurred is capital or revenue in nature would require to be done in respect of each and every software independently having regard to the criteria / principles laid down. Issue remand back to AO

Summary

Issues involved:
1. Disallowance of donation
2. Treatment of software expenses as capital in nature
3. Addition of legal and professional charges
4. Upholding of interest under sections 234B and 234D

Disallowance of Donation:
The assessee filed a return for Assessment Year 2005-06, declaring a loss of Rs.82,28,850. The assessment was completed by an order under section 143(3) of the Income Tax Act, 1961, determining the income of the assessee at Rs.9,08,48,203, which included disallowances like donation of Rs.5,61,576. The CIT(Appeals) disposed the appeal, providing partial relief. The assessee appealed before the Tribunal challenging the disallowance of the donation. However, during the proceedings, the assessee decided not to press this ground, leading to its dismissal as not pressed.

Treatment of Software Expenses as Capital in Nature:
The main issue raised was regarding the treatment of software expenses of Rs.52,49,862 as capital in nature. The assessee contended that the software expenses were revenue in nature as they were incurred for application software, facilitating day-to-day operations without enduring benefits. The authorities below did not properly examine the issue, leading to the Tribunal's decision to re-examine the matter. The Tribunal referred to various judicial decisions and the principles laid down in the case of Amway India Enterprises to determine whether the software expenses should be considered capital or revenue expenditure. It was concluded that the matter required further examination by the Assessing Officer based on specific criteria and principles, directing a reevaluation of the nature of the software expenses.

Addition of Legal and Professional Charges:
The Assessing Officer added back Rs.3,94,061 incurred under the head 'Legal & Professional charges,' which was confirmed by the CIT(Appeals). However, during the appeal before the Tribunal, the assessee decided not to press this ground, leading to its dismissal as not pressed.

Upholding of Interest under Sections 234B and 234D:
One of the grounds raised was the upholding of interest under sections 234B and 234D of the Act. The Tribunal did not provide a detailed analysis of this issue in the judgment, as the grounds raised at S.Nos.1 and 6 were considered general and not adjudicated upon. Therefore, no specific decision or direction was provided regarding the interest upheld under these sections.

This detailed analysis of the judgment highlights the key issues involved, the arguments presented by the assessee, the examination of relevant legal principles, and the Tribunal's decision to re-examine the treatment of software expenses as capital or revenue expenditure. The judgment reflects a thorough consideration of the facts and legal aspects involved in the case, providing clarity on the decisions made by the authorities and the directions given for further assessment by the Assessing Officer.