2014 (10) TMI 2 - HC - Income Tax

Classification of expenses capital or revenue - Expenses on software Held that - Following the decision in Commissioner of Income Tax V. Southern Roadways Ltd. 2007 (6) TMI 193 - MADRAS HIGH COURT The concept of enduring benefit must respond to the changing economic realities of the business - The expenses incurred by installation of software packages in the present computer world, which revolves on the modern communication technology, enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably - such software itself does not work on a standalone basis - It has to be fitted to a computer system to work - Such software enhances the efficiency of the operation - It is an aid in the manufacturing process rather than the tool itself - the payment for application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and has to be treated as revenue expenditure - the Tribunal had rightly held that the expenditure incurred on software packages as a revenue expenditure Decided against revenue.

Summary

Issues involved:
1. Whether the expenditure on software is capital or revenue in nature for the assessment year 2002-03.

Analysis:
The case involved two appeals filed by the Revenue against the order of the Income Tax Appellate Tribunal for the assessment year 2002-03. The main issue was whether the expenditure on software should be treated as capital or revenue expenditure. The assessee, a bank, claimed the cost of software as revenue expenditure in their income tax return. However, the Assessing Officer rejected this claim, considering the software as durable for at least four years and treated it as capital expenditure under Section 43(3) of the Income Tax Act. The Commissioner of Income Tax (Appeals) granted relief to the assessee by following a previous decision of the Court. The Revenue then appealed to the Tribunal, which upheld the decision of the Commissioner of Income Tax (Appeals). Consequently, the Revenue approached the High Court with the substantial question of law regarding the treatment of software expenditure.

Both the Revenue's standing counsel and the assessee's counsel acknowledged that the issue in the appeals was addressed in a previous decision of the Court. The Court referred to the earlier decision where it was held that software packages, despite providing enduring benefits, do not result in the acquisition of a capital asset. Instead, software enhances productivity and efficiency, making it a revenue expenditure. The Court concluded that based on the previous decision, there was no substantial question of law to consider in the current appeals. Therefore, the tax case appeals were dismissed, and related miscellaneous petitions were closed.