2014 (1) TMI 873 - AT - Income Tax

Nature of expenses Capital or Revenue expenses Expenses incurred on purchase of software Held that - It is apparent that assessee had submitted complete information to Assessing Officer regarding software expenses claimed as revenue expenses and Assessing Officer after due application of mind had accepted the contentions of assessee - reopening after a period of four years without failure on the part of assessee was unjustified and illegal and therefore Ld CIT(A) has rightly held the assessment order as null and void - a number of payments has been made for purchase of software tools and amount ranged from Rs.10,000/- to Rs.75,000/- The number of entries for purchase of software tools is running into 170 - thus, the expenditure incurred by the assessee was revenue in nature Decided against Revenue.

Summary

Issues:
1. Reopening of assessment based on factual error
2. Treatment of expenditure on purchase of software as revenue or capital
3. Legality of re-assessment proceedings
4. Merits of the case regarding the nature of software expenses

1. Reopening of assessment based on factual error:
The revenue appealed against the Ld CIT(A)'s order annulling the assessment, citing the permissibility of re-opening assessment on factual error as held in CIT v. PVS Beedies Pvt. Ltd. The appellant contended that the software expenditure should be treated as capital expenditure for claiming depreciation. The Ld CIT(A) found the re-assessment proceedings illegal and deleted the addition, emphasizing that all relevant facts were disclosed during the original assessment, making the assessment order unsustainable.

2. Treatment of expenditure on purchase of software as revenue or capital:
The assessee argued that the software expenses were revenue in nature, used for business operations and not for acquiring capital assets. The Ld CIT(A) agreed, noting that the software purchased was for development and up-gradation of other software, akin to consumables used in manufacturing industries. The Ld CIT(A) observed that the software had a short life and was not a capital asset, leading to the deletion of the addition.

3. Legality of re-assessment proceedings:
The Ld CIT(A) held the re-assessment proceedings as unjustified and illegal, as the assessee had fully disclosed the software expenses as revenue during the original assessment. The Ld CIT(A) emphasized that the Assessing Officer had accepted the contentions of the assessee after thorough scrutiny, making the reopening after four years unwarranted. The appeal by the revenue was dismissed based on these grounds.

4. Merits of the case regarding the nature of software expenses:
The revenue contended that the software expenses should have been claimed as depreciation instead of revenue expenditure due to a change in law. However, the Ld CIT(A) and ITAT Delhi found that the expenses were rightly treated as revenue, considering the nature of the software purchases and their usage in business operations. The ITAT upheld the Ld CIT(A)'s decision, dismissing the appeal filed by the revenue.

In conclusion, the ITAT Delhi upheld the Ld CIT(A)'s decision, emphasizing the legality of the original assessment, the nature of software expenses as revenue, and the lack of justification for re-opening the assessment. The appeal by the revenue was dismissed, affirming the treatment of software expenses as revenue expenditure.