2016 (7) TMI 256 - AT - Income Tax

Software expenditure - revenue or capital - Held that - It is mentioned in the bill itself that the business software customised expenditure is charged for providing services from April 1, 2007, to March 31, 2008. This bill itself clarifies that this expenditure is incurred for only the financial year 2007-08 and no defect has been pointed out in this bill by the Revenue and, we are, therefore, inclined to believe that the software expenditure is having enduring benefit of not more than a year and therefore has been rightly booked as revenue expenditure. Repair expenses of rotary machine - Held that - From going through the records, we observe that factory expenditure account which totals to ₹ 4,51,408, a cash payment of ₹ 25,000 has been shown to be paid vide voucher No. 537 and in the details of entry itself there is mention that this amount of ₹ 25,000 is the balance amount of rotary machine which valued at ₹ 12,75,000 and after paying of ₹ 12,50,000 the balance amount has been paid in cash. In our view this entry makes the fact very clear that ₹ 25,000 was part of the total value of the rotary machine at ₹ 12,75,000 and further no supporting evidence was placed on record by the assessee to prove that there were two separate bills one for the cost of the machine of ₹ 12,50,000 and the other for expenditure incurred for rotary machine for ₹ 25,000 relating to repair, etc., and, therefore, in these circumstances, we are unable to accept the contention of the learned authorised representative and inclined to believe that ₹ 25,000 was part of capital expenditure of ₹ 12,75,000 incurred for purchase of rotary machine and the learned Assessing Officer has rightly disallowed the same and allowed depreciation on ₹ 25,000. - Decided against assessee

Issues Involved:

1. Disallowance of ?15,08,000 out of software expenses.
2. Treatment of software expenses of ?1,82,300 as capital expenditure instead of revenue expenditure.
3. Treatment of repair expenses of rotary machine amounting to ?25,000 as capital expenditure instead of revenue expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of ?15,08,000 out of Software Expenses:

The assessee, a private limited company engaged in dyeing and printing of art silk grey cloth, filed a return declaring an income of ?1,12,26,788. The assessment was completed at an income of ?1,37,57,460 after making certain additions. The assessee appealed against the disallowance of ?15,08,000 out of software expenses, which was sustained by the learned Commissioner of Income-tax (Appeals). The Assessing Officer observed that the software purchase bill dated March 31, 2007, pertained to the financial year 2006-07 but was booked in the assessment year 2008-09. The assessee argued that the liability crystallized in May 2007 when the bill was received, and the software installation was completed. The Tribunal noted that the bill was received on May 1, 2007, and the expenditure was genuine. However, it required cross-verification with the issuing party to confirm if the liability crystallized in the assessment year 2008-09. The matter was set aside to the Assessing Officer for verification, allowing the ground for statistical purposes.

2. Treatment of Software Expenses of ?1,82,300 as Capital Expenditure:

The assessee challenged the treatment of software expenses of ?1,82,300 as capital expenditure. The Assessing Officer had disallowed this amount, treating it as capital expenditure. The Tribunal observed that the expenditure included minor amounts for software upgradation and services for the financial year 2007-08, which were of a revenue nature. The bill for ?1,56,000 from Dynamic Softlink Pvt. Ltd. clarified that the expenditure was for services provided during the financial year 2007-08. The Tribunal concluded that the expenditure had an enduring benefit of not more than a year and was rightly booked as revenue expenditure. The order of the learned Commissioner of Income-tax (Appeals) was set aside, and the ground was allowed.

3. Treatment of Repair Expenses of Rotary Machine Amounting to ?25,000:

The Assessing Officer treated the repair expenses of ?25,000 as capital expenditure, noting that it was part of the total value of the rotary machine. The assessee contended that the amount was part of factory expenses and of a revenue nature. The Tribunal found that the payment was indeed part of the total value of the rotary machine, and no separate evidence was provided to prove otherwise. Consequently, the Tribunal upheld the disallowance, treating the amount as capital expenditure and allowing depreciation. The ground was dismissed.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal setting aside the matter of ?15,08,000 for verification and allowing the software expenses of ?1,82,300 as revenue expenditure. The disallowance of ?25,000 towards factory expenses was upheld as capital expenditure. The order was pronounced on May 18, 2016.

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