2020 (7) TMI 648 - HC - Income Tax

Court affirms software expenses as revenue, legal expenses tied to asset sale. Nature over transaction.

Pr. Commissioner of Income Tax-15 Versus M/s. Aker Powergas Pvt. Ltd.

Pr. Commissioner of Income Tax-15 Versus M/s. Aker Powergas Pvt. Ltd. - [2020] 423 ITR 536 (Bom) Issues:1. Treatment of computer software expenses as revenue or capital expenditure.2. Allowance of expenses incurred in connection with the sale of capital assets.Analysis:Issue 1: Treatment of computer software expensesThe appeal raised questions regarding the treatment of computer software expenses amounting to &8377;5,82,62,091 as either revenue or capital expenditure. The Tribunal analyzed the nature of the expenses, emphasizing that the payment was for the actual use of software and not for its acquisition, leading to a conclusion that it should be considered revenue expenditure. The Tribunal highlighted that the software expenses were not for enduring benefit and were paid on an annual basis, refuting the capital expenditure argument made by the Assessing Officer. The Tribunal referred to the decision in the case of Amway India Enterprises Vs. DCIT to support its stance. Ultimately, the Tribunal directed the Assessing Officer to treat the software expenses as revenue expenditure, rejecting the capital expenditure classification.Issue 2: Allowance of expenses related to the sale of capital assetsRegarding the expenses of &8377;8,30,000 incurred in connection with the sale of capital assets, the Tribunal examined the details of the expenses, which were legal expenses related to the structuring of the transaction. The Tribunal held that merely because the transaction involved a capital asset, the legal expenses did not automatically become capital expenditure. Citing the decision of the Madras High Court in the case of CIT Vs. Bush Boake Allen India Ltd., the Tribunal emphasized that legal expenses should be judged based on their own character and not solely based on the nature of the transaction. The Tribunal referred to the Supreme Court decision in India Cements Ltd. Vs. CIT to support its conclusion that legal expenses incurred for borrowing money should be treated as revenue outgoing, irrespective of the purpose of borrowing. Consequently, the Tribunal allowed the grievance of the assessee regarding these expenses.In both issues, the Tribunal's decisions were upheld, with the Court finding no error or infirmity in the Tribunal's conclusions. The appeal filed by the Revenue was dismissed, and no costs were awarded.