2019 (7) TMI 439 - HC - Income Tax

Nature of expenses - Software License Fees and Maintenance Fees - revenue or capital expenditure - HELD THAT - Factual finding recorded by the CIT(A) clearly reveals that the expenditure incurred by the assessee is recurring in nature and has to be treated as revenue in nature. Though the Tribunal has referred to the decision of the Division Bench in Southern Roadways Ltd. 2007 (6) TMI 193 - MADRAS HIGH COURT yet it has gone through the findings recorded by the CIT(A) and affirmed the findings. Very recently, we had an occasion to consider somewhat a similar question in the case of CIT, Trichy vs. The Lakshmi Vilas Bank Ltd., 2018 (9) TMI 1094 - MADRAS HIGH COURT and dismissed the tax case appeals filed by the Revenue. This decision of ours has been confirmed by the Hon'ble Supreme Court in CIT vs. Lakshmi Vilas Bank Ltd., 2019 (4) TMI 839 - SC ORDER by which the special leave petitions were dismissed. - Decided in favour of assessee.

Summary

Issues:
1. Classification of Software License Fees and Maintenance Fees as Capital or Revenue Expenditure.

Analysis:
The High Court of Madras heard an appeal filed by the Revenue challenging the order of the Income-tax Appellate Tribunal regarding the assessment year 2006-07. The primary issue raised was whether the Software License Fees and Maintenance Fees paid by the Assessee should be classified as Capital or Revenue expenditure. The Revenue contended that the expenditure should be treated as capital based on the enduring benefit received from the software purchase. However, the CIT(A) had allowed the expenditure as revenue based on its recurring nature, which was affirmed by the Tribunal.

The Court examined the CIT(A)'s order, which highlighted that the expenditure was towards maintenance of software used for decision support solutions in optimizing production, paid on a yearly basis. The appellant argued that since the expenses were recurring and related to software maintenance, they should be treated as revenue expenditure. The Court noted that the factual findings supported the revenue's position, emphasizing the recurring nature of the expenditure.

In a similar case involving the Lakshmi Vilas Bank, the Court had previously dismissed the Revenue's appeals, a decision later confirmed by the Supreme Court. The Court distinguished another case cited by the Revenue, where the payment was for technical know-how acquisition, unlike the present scenario where the expenditure was for software maintenance. Additionally, a Delhi High Court case involving software expenses was found inapplicable to the current situation, as it involved different factual circumstances.

Ultimately, the Court dismissed the appeal, upholding the CIT(A)'s decision to treat the Software License Fees and Maintenance Fees as revenue expenditure. The substantial questions of law were answered against the Revenue, with no costs imposed on either party.