2007 (6) TMI 193 - HC - Income Tax

Payments for application software are revenue expenditure, not capital asset, since they enhance productivity and aid manufacturing process

The HC held that payments for application software constitute revenue expenditure, not acquisition of a capital asset, because such software merely ... Nature of Expenditure incurred on the software package - Revenue Or Capital expenditure - expenditure incurred on construction of compound wall in the place of barbed wire fencing - revenue expenditure - HELD THAT:- The apex court in Empire Jute Co. Ltd. v. CIT [1980 (5) TMI 1 - SUPREME COURT], held that there is no embracing formula which can provide a ready solution to the problem ; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. It has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in the manufacturing process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as revenue expenditure. Thus, we hold that the Tribunal had rightly held that the expenditure incurred on software packages as a revenue expenditure. Accordingly, the appeals stands dismissed. Issues Involved:1. Expenditure on software packages2. Expenditure on construction of compound wall replacing barbed wire fencing3. Expenditure on replacement of UPS system4. Expenditure on replacement of printerIssue-wise Detailed Analysis:1. Expenditure on Software Packages:The primary issue was whether the expenditure incurred on software packages for the assessment years 1995-96 to 1997-98 should be classified as revenue expenditure. The Tribunal held that such expenditure is indeed revenue in nature. The court emphasized that in the modern business environment, software packages enhance the efficiency and productivity of business operations without resulting in the acquisition of a capital asset. The software aids in the manufacturing process rather than being a standalone tool. Thus, despite the enduring benefit, the expenditure does not create a capital asset and is rightly treated as revenue expenditure.2. Expenditure on Construction of Compound Wall:For the assessment years 1995-96 and 1996-97, the issue was whether the expenditure on constructing a compound wall in place of barbed wire fencing should be considered revenue expenditure. The Tribunal ruled in favor of the assessee, treating it as revenue expenditure. The court referred to various precedents, including decisions by the Karnataka High Court and the Bombay High Court, which supported the view that such expenditure, aimed at safeguarding business premises and facilitating business operations, is revenue in nature. The court concluded that the construction of a compound wall, replacing barbed wire fencing, does not alter the character of the business premises and is therefore revenue expenditure.3. Expenditure on Replacement of UPS System:The Tribunal also addressed whether the expenditure on replacing the UPS system for the assessment year 1995-96 is revenue expenditure. The court applied the same rationale as for the software packages, emphasizing that the replacement enhances operational efficiency without creating a new capital asset. The expenditure on the UPS system was thus correctly classified as revenue expenditure.4. Expenditure on Replacement of Printer:Similarly, for the assessment year 1996-97, the issue was whether the expenditure on replacing a printer should be treated as revenue expenditure. The Tribunal and the court applied the same principles used for the software packages and UPS system. The replacement of the printer was deemed to improve operational efficiency without resulting in a capital asset, thus classifying it as revenue expenditure.Conclusion:The court found no substantial question of law in the Revenue's appeals and dismissed them. The Tribunal's decisions on all issues were upheld, affirming that the expenditures on software packages, construction of the compound wall, replacement of the UPS system, and replacement of the printer were correctly treated as revenue expenditures.