2016 (10) TMI 992 - AT - Income Tax

Disallowance of expenses which were considered to be capital in nature by the AO - Held that - We find that the ld.CIT(A) while deciding the issue has given a finding that considering the nature of activities undertaken by assessee, there is lot of wear and tear to the building which necessitates incurring of expenditure and the expenses were normal repair expenditure. He has further noted that going by the nature of expenses incurred it cannot be stated that any new asset has come into existence and that similar expenses were incurred by the assessee in earlier years and have been allowed by the Revenue in scrutiny assessments and that AO has not brought any material which could prove of bringing any new asset into existence or that the expenditure was towards replacement of existing assets. Before us, Revenue has not brought any material on record to point out any fallacy in the finding of ld.CIT(A). Software expenses - revenue or capital expenses - Held that - Revenue has not placed on record any material to demonstrate that the expenditure incurred by assessee is for the purchase any new software nor has pointed out any distinguishing feature in the facts of the case in the year under consideration and the facts of the case for earlier years. Before us Revenue has also not placed any material to demonstrate that order of the Coordinate Bench of Tribunal in assessee s own case for earlier years has been set aside by higher judicial authorities. In view of the aforesaid facts and following the reasoning given by the Coordinate Bench while deciding the issue in earlier years, this ground of assessee is allowed.

Summary

Issues Involved:
1. Classification of capital expenses versus revenue expenses.
2. Deduction of software expenses as revenue expenditure.

Issue-wise Analysis:

1. Classification of Capital Expenses vs. Revenue Expenses:

The Revenue raised two interconnected grounds regarding the classification of expenses. The Assessing Officer (AO) determined that the expenses incurred by the Assessee for repairs and maintenance of buildings and other repairs were capital in nature, leading to a disallowance of ?2,27,84,281/-. The AO allowed depreciation at 10%, resulting in a net addition of ?2,05,05,853/-. The Assessee argued that these expenses were for regular repairs and maintenance due to wear and tear, and no new asset was created. The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the Assessee, noting that the expenses were recurring and necessary for maintaining the existing assets, thus classifying them as revenue expenses. The CIT(A) directed the AO to allow the expenditure claimed towards building and other repairs and withdraw the depreciation allowed in the assessment order. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not provide any material evidence to counter the CIT(A)'s findings.

2. Deduction of Software Expenses as Revenue Expenditure:

The Assessee incurred software expenses of ?45,60,530/- and claimed them as revenue expenditure. The AO treated these expenses as capital expenditure, allowing depreciation and making a net addition of ?18,24,172/-. The CIT(A) upheld the AO's decision, relying on the previous year's order where similar expenses were capitalized. However, the Assessee argued that the software expenses were for application software and upgrades necessary for the business, which should be treated as revenue expenditure. The Tribunal agreed with the Assessee, citing the decision in the Assessee's own case for the previous assessment year (2007-08), where the software expenses were treated as revenue expenditure. The Tribunal noted that the expenses were for upgrading existing software and not for acquiring new software, thus allowing the Assessee's claim for revenue expenditure.

Conclusion:

The Tribunal dismissed the Revenue's appeal regarding the classification of expenses as capital in nature and upheld the CIT(A)'s decision to treat them as revenue expenses. In the Assessee's appeal, the Tribunal allowed the deduction of software expenses as revenue expenditure, following the precedent set in the previous assessment year. The Tribunal emphasized the necessity of these expenses for the Assessee's business operations and the lack of evidence from the Revenue to prove otherwise.