2018 (9) TMI 1094 - HC - Income Tax

Allowability of software expenditure - to be treated as a revenue expenditure OR capital expenditure - nature of the advantage in a commercial sense - Held that - As held in Empire Jute Co. Ltd. v. CIT, 1980 (5) TMI 1 - SUPREME COURT there may be cases where expenditure, even if incurred for obtaining advantage, of enduring benefit, may, none-the-less, be on revenue account and the test of enduring benefit may break down - what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. 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. We are inclined to accept the submission made by the assessee before the Tribunal that in view of the advanced technology software become obsolete within short intervals. Therefore, the Tribunal rightly applied the decision in the case of Southern Roadways Ltd. 2007 (6) TMI 193 - MADRAS HIGH COURT - tribunal was right in holding that software expenditure is to be treated as a revenue expenditure - Decided in favour of assessee

Summary

Issues:
1. Whether software expenditure is to be treated as a revenue expenditure or a capital expenditure?

Analysis:
The appeals before the Madras High Court were directed against the common order of the Income Tax Appellate Tribunal regarding the treatment of software expenditure for the Assessment Year 2000-01 and 2001-02. The substantial question of law framed in both appeals was whether software expenditure should be considered as a revenue expenditure or a capital expenditure. The assessee claimed that the software used was essential for their banking business and thus should be treated as revenue expenditure. However, the Assessing Officer argued that the expenditure provided an enduring benefit, making it capital in nature. The Tribunal considered the rapid obsolescence of software due to advanced technology, the off-the-shelf nature of the software, and the assessee's right to use it, ultimately deciding in favor of treating the expenditure as revenue. The Tribunal also noted that if the expenditure were treated as capital, depreciation similar to that applicable to computers should be granted.

In a comparative reference to a decision by the Delhi High Court in a similar case involving a telecom operator, the Madras High Court highlighted the importance of analyzing the specific facts and circumstances of each case. The Delhi High Court case involved the treatment of software expenses as revenue or capital based on the nature of the software and its integration with hardware in a lease agreement. The Madras High Court distinguished this case from the present one, emphasizing that the software in question was not customized and was necessary for various operational activities. Citing the principle laid down by the Supreme Court in Empire Jute Co. Ltd. v. CIT, the Madras High Court explained that not all enduring benefits lead to capital expenditure disallowance, especially if the advantage facilitates trading operations or enhances business efficiency without affecting fixed capital. The court agreed with the assessee's argument that software quickly becomes obsolete due to technological advancements, supporting the Tribunal's decision to treat the expenditure as revenue.

In conclusion, the Madras High Court dismissed the appeals, answering the substantial question of law in favor of the assessee and against the revenue. No costs were awarded, and connected miscellaneous petitions were closed.