2018 (1) TMI 78 - AT - Income Tax

Nature of expenditure - technology upgradation expenses - capital or revenue expenses - Held that - Hon ble Supreme Court in the case of Empire Jute Co. vs CIT (1980 (5) TMI 1 - SUPREME Court), where their Lordships had duly distinguished the enduring benefit in the revenue field and enduring benefit in the capital field. They had held that pursuant to incurrence of expenses, if there is some enduring benefit in the revenue field, then the same would only amount to revenue expenditure. We hold that the expenditure incurred by the assessee towards technology upgradation charges which requires frequent replacement due to rapid change in technology and constant need for upgradation would only be revenue in nature. Hence we do not find any infirmity in the order of the ld CITA in this regard. Accordingly, the Ground No. 1 raised by the revenue is dismissed. Software expenses - revenue or capital expenditure - Held that - We find that the ld CITA had given a categorical finding on verification of the bills for these expenditure that software expenses were incurred by way of renewal of licence fees to the vendor on an annual bais which does not accrue any enduring benefit to the assessee and that the same were paid towards smooth functioning of business of the assessee and not paid for acquiring any capital assets. These findings were not controverted by the ld DR before us. Hence we do not find any infirmity in the order of the ld CITA in this regard. Accordingly, the Ground No. 2 raised by the revenue is dismissed. Optical fibre expenses - revenue or capital expenditure - Held that - Expenses towards the same towards replacement on a monthly basis, which itself goes to prove that the same is incurred on a recurring basis and there is no enduring value benefit to the assessee on the previously replaced cable wires. Moreover, we find that the assessee had incurred a sum of ₹ 14,56,604/- in the previous year ended 31.3.2009 relevant to Asst Year 2009-10, which the ld AR stated that the same was allowed by the ld AO as revenue expenditure. This was not controverted by the revenue before us. - Decided against revenue

Summary

Issues Involved:
1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the addition made by the Assessing Officer (AO) by treating technology upgradation expenses as capital expenditure.
2. Whether the CIT(A) was justified in deleting the addition made by the AO by treating software expenses as capital expenditure.
3. Whether the CIT(A) was justified in deleting the addition made by the AO by treating optical fibre expenses as capital expenditure.

Issue-wise Detailed Analysis:

1. Technology Upgradation Expenses:
The first issue pertains to whether the CIT(A) was justified in deleting the addition of ?19,31,097/- made by the AO by treating the technology upgradation expenses as capital expenditure. The assessee, engaged in broadband and cable services, had claimed these expenses as revenue in nature, arguing that they were incurred for the maintenance of the transmitting system. The AO, however, treated these as capital expenditure. The CIT(A) observed that the expenses were for frequent replacements due to rapid technological changes and environmental factors, thus not creating any enduring benefit. The CIT(A) relied on judicial precedents, including the Hon'ble Madras High Court and the Hon'ble Supreme Court in the case of Empire Jute Co. vs CIT, to conclude that these expenses were revenue in nature. The Tribunal upheld the CIT(A)'s decision, noting that the expenses facilitated the assessee’s trading operations without creating any new asset.

2. Software Expenses:
The second issue involves whether the CIT(A) was justified in deleting the addition of ?10,09,593/- made by the AO by treating software expenses as capital expenditure. The AO had disallowed the expenses, treating them as capital in nature but allowed depreciation. The assessee argued that these were annual license fees for various software, necessary for the smooth functioning of the business, and did not create any enduring benefit. The CIT(A) agreed with the assessee, noting that the expenses were for annual renewals and did not result in the acquisition of any capital assets. The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenses were for maintaining the existing system and were revenue in nature.

3. Optical Fibre Expenses:
The third issue addresses whether the CIT(A) was justified in deleting the addition of ?48,40,728/- made by the AO by treating optical fibre expenses as capital expenditure. The AO had treated these expenses as capital in nature but allowed depreciation. The assessee contended that the optical fibre cables, frequently replaced due to environmental damage, were necessary for maintaining proper internet speed and did not create any enduring benefit. The CIT(A) observed that the expenses were recurring and necessary for the business's smooth operation, thus revenue in nature. The Tribunal agreed, noting that the frequent replacement of cables did not result in any enduring benefit and were essential for the business's continuity. The Tribunal also referenced a similar judgment by the Hyderabad Tribunal in the case of DCIT vs Akash Cable TV Network, supporting the CIT(A)'s decision.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on all three issues, concluding that the expenses in question were revenue in nature and necessary for the business's smooth operation without creating any enduring benefit. The appeal by the revenue was dismissed.