2014 (1) TMI 23 - AT - Income Tax

Employee Stock Option Plan expenses - Held that - Following Biocon Limited Vs. DCIT(LTU), Bangalore 2013 (8) TMI 629 - ITAT BANGALORE - The issue was set aside for fresh adjudication. Whether expenses on software are capital or revenue - Held that - Following CIT Vs. Asahi India Safety Glass Ltd 2011 (11) TMI 2 - DELHI HIGH COURT - Either the extent of the expense or the expense being incurred in close proximity, in the subsequent years, would not be conclusively determinative of its nature - The application software would have to be updated from time to time based on the requirements of the assessee in the context of the advancement of its business and/or its diversification, if any; the changes brought about due to statutory amendments by law or by professional bodies, which are given the responsibility of conceiving and formulating the accounting standards from time to time, and perhaps also, by reason of the fact that expenses may have to be incurred on account of corruption of the software due to unintended or intended ingress into the system, ought not give a colour to the expenditure incurred as one expended on capital account - The treatment of a particular expense or a provision in the books of account can never be conclusively determinative of the nature of the expense - The expenditure incurred by the assessee on account of software expenses was a revenue expenditure - The issue was restored for fresh adjudication.

Summary

Issues Involved:
1. Disallowance of Employee Stock Option Plan expenses.
2. Treatment of software expenses as revenue or capital expenditure.

Issue 1: Disallowance of Employee Stock Option Plan expenses:
The appeal was against the disallowance of Rs. 12,52,71,933 claimed by the assessee for Employee Stock Option Plan expenses for the AY 2006-07. The Tribunal referred to a decision by the Special Bench of ITAT in the case of Biocon Limited, which led them to set aside the issue for readjudication by the Assessing Officer. The Tribunal directed the Assessing Officer to provide the assessee with an adequate opportunity to be heard.

Issue 2: Treatment of software expenses as revenue or capital expenditure:
The Revenue appealed against the allowance of Rs. 30,08,440 claimed by the assessee for software expenses, which the Assessing Officer treated as capital expenditure. The learned CIT(A) accepted the claim as revenue expenditure, leading to the Revenue's appeal. During the hearing, the Revenue relied on a Supreme Court judgment related to sales tax, which the Tribunal found not applicable to the current case. The Tribunal considered various decisions of the Jurisdictional High Court, including the case of Asahi India Safety Glass Ltd., which emphasized that software expenses are revenue expenditure. Citing precedents, the Tribunal upheld the order of the learned CIT(A) and dismissed the Revenue's appeal, deeming the assessee's appeal allowed for statistical purposes.

In conclusion, the judgment addressed the disallowance of Employee Stock Option Plan expenses and the treatment of software expenses as revenue or capital expenditure. The Tribunal set aside the first issue for readjudication based on a Special Bench decision and upheld the revenue treatment of software expenses as revenue expenditure, relying on decisions of the Jurisdictional High Court.