Software maintenance and licence renewal costs held revenue expenditure, deductible as recurring period costs under tax law.

Software expenses incurred for annual maintenance, database support and licence renewal were treated as recurring period costs, not capital expenditure, because they only granted subscription or usage rights for fixed periods and did not transfer ownership or create any proprietary software asset or enduring benefit. Applying prior decisions on similar software and subscription payments, the expenditure was held deductible as revenue expenditure under Section 37(1) of the Income-tax Act, 1961. The Revenue's appeal was dismissed and the addition made by the Assessing Officer was deleted.

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Issues: Whether software expenses of Rs. 28,24,19,000/- incurred by the assessee for annual maintenance, database support and licence renewal are revenue in nature and deductible under Section 37(1) of the Income-tax Act, 1961, or are capital expenditure entitling the Assessing Officer to treat them as capital with depreciation.

Analysis: The expenditure comprises annual maintenance charges, fees for database support and licence renewal and has been characterized in the assessee's books as recurring period costs. The payments were for subscription/usage for fixed periods and did not transfer ownership or create any proprietary software asset or intellectual property in favour of the assessee. No cogent material was placed on record to demonstrate creation of a capital asset or enduring benefit beyond the annual period. Prior decisions of coordinate benches and some High Courts treating similar recurring software/subscription costs as revenue expenditure were applied to the facts.

Conclusion: The software expenses are revenue in nature, constitute period/recurring costs, and are deductible under Section 37(1) of the Income-tax Act, 1961. The appeal filed by the Revenue is dismissed and the addition made by the Assessing Officer is deleted.

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