Software acquisition, compound wall reconstruction and loyalty-scheme provision were treated under capital, revenue and liability principles.

Expenditure on acquiring application software was treated as capital in nature because the depreciation schedule specifically places computer software within the capital asset framework, so it could not be claimed as revenue expenditure. Expenditure on reconstructing a compound wall after demolition for road-widening was held to be revenue, as it merely preserved and protected the existing property without creating a new asset or enduring advantage. The provision for the Sheraton Preferred Guest Scheme required factual verification of payments, reversals, and later-year tax treatment before it could be accepted as an ascertained liability, so the matter was remitted for inquiry.

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Issues: (i) whether expenditure on purchase of application software was capital expenditure or revenue expenditure; (ii) whether expenditure on construction of a compound wall after demolition of the existing wall for road-widening purposes was allowable as revenue expenditure; (iii) whether the provision made towards the Sheraton Preferred Guest Scheme was an ascertained liability allowable as deduction.

Issue (i): whether expenditure on purchase of application software was capital expenditure or revenue expenditure.

Analysis: The relevant depreciation schedule treated computers including computer software as a depreciable asset and allowed depreciation at the prescribed higher rate. Once the statute specifically places computer software within the capital/depreciation framework, expenditure for acquiring such software cannot be claimed as revenue expenditure. The decisions relied upon for the contrary proposition were found to relate to periods prior to the amendment introducing software as a depreciable asset and were therefore inapplicable.

Conclusion: The expenditure on software was capital in nature and the disallowance was upheld, against the assessee.

Issue (ii): whether expenditure on construction of a compound wall after demolition of the existing wall for road-widening purposes was allowable as revenue expenditure.

Analysis: The wall had to be reconstructed because a portion of the land was affected by road-widening and the existing boundary wall was demolished in that process. The new wall was constructed only to preserve and protect the existing property and did not bring into existence a new asset or a fresh enduring advantage. Expenditure incurred for preservation and maintenance of an existing asset is revenue in character.

Conclusion: The expenditure on construction of the compound wall was allowable as revenue expenditure and the addition was deleted, in favour of the assessee.

Issue (iii): whether the provision made towards the Sheraton Preferred Guest Scheme was an ascertained liability allowable as deduction.

Analysis: The scheme operated on a points-based mechanism, and the record showed that part of the provision had been discharged and the balance was stated to have been reversed and offered to tax in later years. The question whether the liability was actually ascertained and whether the assessee had correctly accounted for the amount required factual verification from the books and subsequent-year treatment. The matter therefore required examination of the actual payments and reversals before a deduction could be finally granted or denied.

Conclusion: The issue was remitted to the Assessing Officer for verification, with the assessee obtaining partial relief.

Final Conclusion: The appeal was partly allowed for the assessee, the department's appeal failed, and the matter on the provision for the loyalty-scheme liability was sent back for factual verification.

Ratio Decidendi: Where a statute specifically treats software as a depreciable capital asset, its acquisition cost cannot be claimed as revenue expenditure; expenditure incurred to restore or preserve an existing asset remains revenue in nature; and an alleged liability under a scheme must be verified on facts before it can be allowed as an ascertained deduction.

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