2013 (8) TMI 835 - AT - Income Tax

Capital or Revenue expenditure - Expenditure on acquisition of software - CIT held it as Revenue expenditure - Held that - When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner - software becomes obsolete with technological innovation and advancement within a short span of time. It can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature - Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital, or revenue Held or its utility to a businessman which may touch either capital or revenue field - CIT has not mentioned what is the exact span of life of the software and whether it satisfies the functional test to be treated as revenue expenditure - Following decision of Amway India Enterprises Versus Deputy Commissioner of Income-tax, Circle 1(1), New Delhi 2008 (11) TMI 432 - ITAT DELHI - Matter remitted back - Decided in favour of Revenue. Disallowance of lab development charges - Held that - assessee has failed to reconcile before the Assessing Officer not only at the time of assessment but also during the remand whether actually the amount of Rs. 48,95,925 was included in the lab maintenance charges of Rs. 1,37,86,523 and has been included in the gross income of the impugned assessment year - Therefore, matter is remitted back to A.O. - Decided in favour of Revenue.

Summary

Issues Involved:
1. Whether the software development expenditure of Rs. 76,30,000 should be treated as capital expenditure.
2. Whether the disallowance of lab development charges of Rs. 48,95,925 was justified.

Issue-wise Detailed Analysis:

1. Software Development Expenditure:
The primary issue revolves around whether the software development expenditure of Rs. 76,30,000 should be classified as capital expenditure. The assessee, a private limited company engaged in software development, claimed this expenditure as revenue expenditure. The Assessing Officer (AO) disallowed this claim, arguing that the expenditure was capital in nature and that the assessee had not deducted tax at source, contravening the provisions of section 40(a)(ia) of the Act. The CIT(A) accepted the assessee's contention that the expenditure was for application software with a limited lifespan and thus should be treated as revenue expenditure. However, the ITAT found that the CIT(A) did not provide sufficient material or evidence to support this conclusion. The ITAT referred to the ITAT Delhi Special Bench decision in the case of M/s. Amway India Enterprises vs. DCIT, which laid down specific criteria for determining whether software expenditure is capital or revenue. The ITAT remitted the issue back to the AO to re-examine the nature of the expenditure based on these criteria, including the software's lifespan and its functional role in the business.

2. Lab Development Charges:
The second issue pertains to the disallowance of lab development charges amounting to Rs. 48,95,925. During the assessment proceedings, the AO noticed that this amount was not shown as income by the assessee and treated it as undisclosed income. The assessee contended before the CIT(A) that this amount was included under the head 'lab maintenance fee' and formed part of the gross income declared. The CIT(A) accepted this contention and deleted the addition. However, the ITAT found that the CIT(A) did not adequately verify whether the amount was indeed included in the gross income. The ITAT remitted the issue back to the AO for a fresh examination, instructing the AO to verify if the amount was included in the gross income and to afford a reasonable opportunity of hearing to the assessee.

Conclusion:
The ITAT allowed the appeal of the Revenue for statistical purposes, remitting both issues back to the AO for re-examination and fresh adjudication based on the criteria laid down by the ITAT Delhi Special Bench and the evidence provided by the assessee. The AO is directed to afford a reasonable opportunity of hearing to the assessee in both matters.