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Commissioner Of Income-Tax v. Varinder Agro Chemicals Limited
Factual and Procedural Background
The Revenue preferred an appeal under section 260A of the Income-tax Act, 1961 against the order of the Income-tax Appellate Tribunal, Chandigarh Bench “B” (I.T.A No. 138.Chandi/2006, dated April 24, 2007) for the assessment year 2002–03. The assessee had claimed a deduction for amounts spent on computer software; the Assessing Officer disallowed that claim. The Commissioner of Income-tax (Appeals) allowed the assessee's claim, and that decision was affirmed by the Income-tax Appellate Tribunal. The Revenue proposed the substantial question of law whether the Tribunal was justified in holding that computer software expenses were revenue in nature despite section 43(3) and an asserted enduring advantage.
Legal Issues Presented
- Whether, on the facts and in law, the Income-tax Appellate Tribunal was justified in holding that computer software expenses were revenue in nature, disregarding the meaning of "plant" under section 43(3) and the contention that an enduring advantage was derived by the assessee by incurring such expenditure.
Arguments of the Parties
Appellant (Revenue)
- The expenditure on acquisition of software was capital in nature and not deductible as revenue expenditure.
- Implicitly relied on the meaning of "plant" under section 43(3) and the contention that an enduring advantage accrued to the assessee.
Respondent (Assessee)
- The software expenditure was revenue in nature and deductible. The Commissioner (Appeals) and the Tribunal had accepted this position.
- The Tribunal relied on earlier Tribunal decisions (including Bank of Punjab Limited v. Joint CIT (I.T.A No. 340.Chd/2001) and Abhishek Industries Limited, I.T.A No. 395.Chandi/2006) holding software expenditure to be of revenue nature.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Assam Bengal Cement Co. Ltd. v. CIT, [1955] 27 ITR 34 | Listed as one of the leading judgments of the hon'ble Supreme Court dealing with capital versus revenue classification. | Cited among leading authorities establishing tests for distinguishing capital and revenue expenditure. |
| CIT v. Vazir Sultan and Sons, [1959] 36 ITR 175 | Listed as one of the leading judgments of the hon'ble Supreme Court dealing with capital versus revenue classification. | Cited among leading authorities establishing tests for distinguishing capital and revenue expenditure. |
| Empire Jute Co. Ltd. v. Commissioner Of Income Tax, [1980] 124 ITR 1 (SC) : (1980) 4 SCC 25 | Authority for the proposition that there may be cases where expenditure incurred for an advantage of enduring benefit may still be revenue unless the advantage is in the capital field. | The Court referred to this principle to show that enduring benefit alone does not automatically convert expenditure into capital expenditure. |
| Alembic Chemical Works Co. Ltd. v. CIT, [1989] 177 ITR 377 (SC) : (1989) 3 SCC 329 : AIR 1989 SC 1913 | Decided whether expenditure on technical know-how was revenue; recognized that rapid advances in science may prevent technical know-how from possessing the requisite durability to be capital in nature. | The Court relied on Alembic to explain that in fast-changing technological fields technical advantages may not be enduring and can be revenue in nature; applied this reasoning to software. |
| CIT v. General Insurance Corporation, [2006] 286 ITR 232 (SC) | Listed as one of the leading judgments dealing with the capital/revenue issue. | Cited among authorities that inform the general test distinguishing capital and revenue expenditure. |
| Bank of Punjab Limited v. Joint CIT (I.T.A No. 340.Chd/2001) | Tribunal decision held software expenditure to be of revenue nature (referred to by the Tribunal in the present matter). | The Tribunal's conclusion in paragraph 12.1 (order dated August 28, 2001) that software expenses were revenue in nature was followed; the Court noted the Tribunal decision was relied upon and that no contrary decision was brought to its notice by the Revenue. |
| Abhishek Industries Limited, I.T.A No. 395.Chandi/2006 | Tribunal decision cited as covering the issue in favour of the assessee in a related assessment year. | The impugned Tribunal relied on this decision to support deletion of the addition and treated the software expenditure as revenue in nature. |
Court's Reasoning and Analysis
The Court proceeded by identifying the established test: expenditure incurred for business must also be revenue expenditure to be deductible; although there is no rigid rule, a generally acceptable test is that expenditure yielding an advantage of enduring nature is likely capital, whereas expenditure used in the running of the business is revenue.
The Court reviewed relevant Supreme Court authorities (listed as leading judgments) and examined Alembic Chemical Works Co. Ltd., where the Supreme Court observed that rapid advances in research make it unrealistic to attribute durability to technical know-how in fast-changing fields. The Court noted Empire Jute for the proposition that expenditure conferring an enduring advantage might nevertheless be revenue unless the advantage is in the capital field.
Applying these principles to the facts, the Court observed that there was nothing to show the software used by the assessee was of an enduring nature or that it would not become outdated. Given the fast-changing nature of technology and continuous development of new systems, software may be consumable or akin to raw material rather than an enduring capital asset. The Court held that the view taken by the Tribunal — treating the software expense as revenue expenditure — was a possible view open on the materials.
The Court further noted that the Tribunal relied on earlier Tribunal decisions (Bank of Punjab Limited and Abhishek Industries Limited) and that the learned counsel for the Revenue was not aware of the status of the Bank of Punjab decision. On this basis and the foregoing analysis, the Court concluded that no substantial question of law arose.
Holding and Implications
APPEAL DISMISSED
Holding: The appeal under section 260A was dismissed; the Tribunal's decision treating the software expenditure as revenue expenditure and deleting the addition of Rs. 30,15,972 was upheld.
Implications: The direct effect is that the assessee's deduction for software expenses was sustained and the assessed addition of Rs. 30,15,972 was deleted. The Court found no substantial question of law to be answered and did not lay down a new precedent beyond applying existing authorities and confirming that the Tribunal's view was tenable. No broader implications were discussed in the opinion.
Adarsh Kumar Goel, J.:— The Revenue has preferred this appeal under section 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 under section 43(3) and the fact that enduring advantage was derived by the assessee by incurring such expenditure?”
2. 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.
3. The finding recorded by the Tribunal on the question proposed to be raised is as under:
“4. 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 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 hereunder:
‘4. 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.”
4. 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.
5. We have heard learned counsel for the Revenue.
6. 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. v. CIT, [1955] 27 ITR 34, CIT v. Vazir Sultan and Sons, [1959] 36 ITR 175, Empire Jute Co. Ltd. v. Commissioner Of Income Tax , [1980] 124 ITR 1 (SC) : (1980) 4 SCC 25, Alembic Chemical Works Co. Ltd. v. CIT, [1989] 177 ITR 377 (SC) : (1989) 3 SCC 329 : AIR 1989 SC 1913 and CIT v. General Insurance Corporation, [2006] 286 ITR 232 (SC).
7. In Alembic Chemical Works Co. Ltd., [1989] 177 ITR 377 (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.
8. 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, [1980] 124 ITR 1 (SC) : (1980) 4 SCC 25, 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.
9. 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.
10. We are unable to hold that any substantial question of law arises.
11. The appeal is dismissed.
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