Expenditure on Software is of Revenue Nature

Background and Facts:

• Assessee company engaged in business of manufacturing turbine, gear and gear boxes etc.
• Company incurred certain expenditure on implementation of a new software package.
• Deduction of same was rejected by Assessing Officer holding that it was in nature of capital expenditure and allowed depreciation benefits u/s 32 of Income Tax Act.

 Contention of the Assessee:

• Assessee contended that, AO failed to appreciate that aforesaid expenses incurred merely facilitated the day-to-day business operations and no revenue generated per-se by the assessee from any of such licensed software.
• Assessee further contended, since no ownership of any software is acquired by him as a consequence of the impugned expenditure and it is only a limited right to use the concerned software for the smooth functioning of day to day business activities.
• All these expenses incurred are fundamentally revenue expenses like consultancy charges, AMC, analysis charges, maintenance charges, etc. none of the said expenditure, resulted in any enduring benefit in capital field.

Contention of the Department:

Department Contended that, expenditure on ERP is clearly linked to acquiring of Software and its implementation. Benefits derived by acquiring such software is not limited to the current year only, but brings to the Assessee an advantage of enduring nature in future years. Consequently, the expenditure is of capital nature and only the benefit of depreciation is allowed.

Decision held By ITAT Delhi Bench:

• Tribunal held that, ownership of any software is not acquired by the assessee and it was acquired without right of transferring the said software.
• It held that, AO ignored the fact that, in today’s fast changing technology where software becomes obsolete easily, it needs that the software needs to be replaced/upgraded by an assessee from time to time for smooth functioning of the business. And the software, in any case cannot be said to result in any enduring benefit for future periods making it capital in nature and allowing depreciation benefits. Hence, it cannot be held as capital expenditure.

Comments:    

Thus, it can be concluded that, the expenses incurred on the software’s and Servers for the smooth functioning of the business in day to day activities will not be considered as Expenditure of Capital nature and deduction for the same is allowed u/s 37 (1) of the Income Tax Act.

Source:  Triveni Engineering & Industries Ltd. Vs Additional Commissioner of Income-Tax. [2020] 118 taxmann.com 301.

-Mayank Mittal, Associate, SW India