2018 (5) TMI 1700 - HC - Income Tax

Disallowance of software expense treating it as capital expense - nature of expenditure - revenue or capital expenditure - Held that - If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite future - thus the test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly - fast changing technology, software has to be regularly updated so as to keep pace with the changing technology - view taken by the Tribunal that the expenditure is on Revenue account is an entirely possible view - Decided in favor of assessee. Whether the expenses towards consultancy fees, video shooting for training etc in respect of occupation, health and safety measure for the benefit of its employees are revenue in nature - Held that - The test of one time payment of payment or not is not the sole test to determine the nature of expenditure - the expense does not add to or expands the profit making apparatus of the assessee - thus revenue in nature - Decided in favor of assessee. Appeal admitted on the substantial question of law at No. (3) - Whether on the facts and circumstances of the case and in law the Tribunal is justified in upholding the decision of CIT (A) in deleting the disallowance u/ s 40a(ia) of the Act ?

Summary

Issues:
1. Disallowance of software expenses treated as capital expenditure.
2. Disallowance of miscellaneous expenses treated as capital expenditure.
3. Disallowance under section 40a(ia) of the Income Tax Act.

Analysis:

Issue 1: Disallowance of software expenses treated as capital expenditure
The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) that the software expenses of ?38.90 Lakhs were revenue in nature as they were incurred to upgrade software to solve specific user problems, enhancing business efficiency. The Revenue argued that since the software provided enduring benefits, it should be treated as capital expenditure. However, both the CIT (Appeals) and the Tribunal found that the software improved business efficiency and kept pace with changing technology, justifying the revenue nature of the expense. Referring to the case law, the Court emphasized that not every enduring benefit leads to capital expenditure, and the nature of the advantage in a commercial sense determines the categorization. Consequently, the Court held that the expenditure was on revenue account, dismissing the Revenue's appeal.

Issue 2: Disallowance of miscellaneous expenses treated as capital expenditure
The Tribunal determined that the expenditure of ?7.82 Lakhs on consultancy fees and safety measures for employees was revenue expenditure as it aimed to ensure a safe working environment and smooth business operations. The Revenue contended that the expense provided enduring benefits, making it capital in nature. However, both the CIT (Appeals) and the Tribunal found that the expenditure was crucial for maintaining a safe workplace and did not expand the profit-making apparatus, aligning with the revenue nature of the expense. Citing the Empire Jute Co. Ltd. case, the Court reiterated that enduring benefit alone does not dictate capital expenditure. Therefore, the Court concluded that the expenditure was revenue in nature and did not warrant a substantial question of law.

Issue 3: Disallowance under section 40a(ia) of the Income Tax Act
The Court admitted the appeal on the substantial question of law related to disallowance under section 40a(ia) of the Income Tax Act, indicating a separate analysis pending for this issue.

In summary, the High Court of Bombay dismissed the appeals related to the disallowance of software and miscellaneous expenses treated as capital expenditure, emphasizing the commercial nature of the advantages gained and the impact on business operations. The judgment highlighted the distinction between revenue and capital expenditure based on enduring benefits and profit-making apparatus expansion, aligning with established legal principles and precedents.