Commissioner of Income Tax vs Varinder Agro Chemicals Limited

Adarsh Kumar Goel, J.—The Revenue has preferred this appeal u/s 260A of the Income Tax Act, 1961 (in short, "the Act"), against the order of the Income Tax Appellate Tribunal, Chandigarh Bench "B", Chandigarh, passed in I. T. A. No. 138/Chandi/2006, dated April 24, 2007, for the assessment year 2002-03, proposing to raise the following substantial question of law:

Whether, on the facts and in law, the hon''ble Income Tax Appellate Tribunal was justified in holding that computer software expenses were revenue in nature, disregarding the meaning of plant u/s 43(3) and the fact that enduring advantage was derived by the assessee by incurring such expenditure?

The assessee claimed deduction in respect of amounts spent on software, which was disallowed by the Assessing Officer. The Commissioner of Income Tax (Appeals) upheld the claim of the assessee, which has been affirmed by the Income Tax Appellate Tribunal.

The finding recorded by the Tribunal on the question proposed to be raised is as under:

In regard to the third ground of appeal, it is stated that the issue is covered in favour of the assessee by the decision of the Tribunal in the case of M/s. Abhishek Industries Limited, I.T.A. No. 395/Chandi/2006, assessment year 2001-02. The relevant discussion relating to this issue is in paragraph 4, which is reproduced here-under:

The next issue raised by the Revenue pertains to deleting the addition of Rs. 4,00,936 on account of depreciation on computer software expenses. The contention of the learned Departmental representative is that the expenditure on acquisition of software is a capital expenditure. However, the learned authorised representative contended that this issue is covered in favour of the assessee by the decision of the Tribunal in the case of Bank of Punjab Limited v. Joint CIT I.T.A. No. 340 Chd 2001. We have considered the rival submissions. The conclusion of the Tribunal is available in paragraph 12.1 (order dated August 28, 2001) wherein it was held to be of revenue nature. No contrary decision has been brought to our notice by the Revenue. Consequently, the ground of the Revenue is also having ho merit.

Respectfully following the aforementioned decision, we uphold the decision of the Commissioner of Income Tax (Appeals) in regard to the treatment of software expenses as revenue expenditure and in deleting the addition of Rs. 30,15,972. Accordingly, the ground raised by the Revenue is dismissed.

Learned Counsel for the Revenue is not aware about the status of the decision of the Tribunal in Bank of Punjab Limited, which has been followed in the impugned order.

We have heard learned Counsel for the Revenue.

It is well settled that for claiming deduction, apart from expenditure being for business, the same has to be revenue expenditure. Though, there is no rigid rule to determine when expenditure is capital or revenue, generally acceptable test is where advantage is for enduring nature, it may be capital expenditure, while if the expenditure is for running of the business, it is of revenue nature. Some of the leading judgments of the hon''ble Supreme Court dealing with the issue are: Assam Bengal Cement Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, , Commissioner of Income Tax, Hyderabad-deccan Vs. Vazir Sultan and Sons, , Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , Alembic Chemical Works Co. Ltd. v. CIT : [1989]177ITR377(SC) and Commissioner of Income Tax, Mumbai Vs. General Insurance Corporation, .

In Alembic Chemical Works Co. Ltd. : [1989]177ITR377(SC) , the issue was whether the expenditure on technical know-how under an agreement with a foreign company was revenue expenditure. Answering the question in favour of the assessee, the hon''ble Supreme Court observed (in paragraph 13) that it would be unrealistic to ignore the rapid advances in research and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in fast changing area of science. The state of art is constantly updated so that know-how cannot be said to be the element of requisite degree of durability to qualify as enduring capital asset. Question of technical know-how did not amount to new or fresh venture and was for enabling carrying on business in a better way Referring to Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , it was observed that there may be cases where expenditure, even if incurred for an advantage of enduring benefit, may be revenue unless the advantage was in the capital field.

There is nothing to show that the software used by the assessee was of enduring nature and will not become outdated. Since technology is fast changing and day-by-day systems are being developed in a new way, software may be needed like raw material. The view taken by the Tribunal is certainly a possible view.

We are unable to hold that any substantial question of law arises. The appeal is dismissed.