Scanwell vs Jt. Commissioner of Income Tax

B.V. Nagarathna, J.—This appeal is filed by the Assessee by challenging the order dated 4-10-2004 passed in IT Appeal No. 569/Bang/2003.

The facts leading to the filing of this appeal are that for the assessment year 1997-98, the Assessee had incurred certain expenditure towards machinery maintenance and a sum of Rs. 10,15,950 was incurred towards the purchase of computers and a sum of Rs. 18,00,000 towards the purchase of computer software and the Assessee had claimed deduction of the said amounts by contending that the same should be treated as revenue expenditure. According to the Assessee, three computers were purchased to improve the quality of the product and to carry out diverse nature of work, which enabled reduction in the cost of material since the work was carried out on the computers instead of on the raw material and the purchase of software was to improve the process involved in the course of its business. The return of income filed by the Assessee on 30-10-1998 was taken up for assessment and the assessing officer passed an order on 30-8-1999 wherein the assessing officer held that the expenditure incurred was capital in nature and disallowed the same from computation of taxable income. The said disallowance was challenged by the Assessee before the Commissioner (Appeals), who allowed the appeal of the Assessee and held that the additions of Rs. 10,15,950 and Rs. 18,00,000 were not correct and allowed the expenditure claimed as revenue expenditure by his order dated 23-3-2000. As against the said order, the revenue preferred an appeal before the Tribunal. The Tribunal allowed the appeal filed by the revenue and held that the said expenditure has to be treated as capital in nature and did not accept the contention of the Assessee. Being aggrieved by the said order, the Assessee has preferred this appeal.

We have heard the learned Counsel for the Assessee and the learned Counsel for the revenue.

It is contended on behalf of the Assessee that when the computer systems were installed for the first time, the said expenditure had been treated as capital expenditure and that for the assessment year 1997-98 i.e., prior to the allowing of the depreciation for attachments in respect of software and for the said relevant period, the department itself was treating it as a revenue expenditure. Therefore, for the assessment year in question, namely 1997-98, the Tribunal ought to have held, that in respect of the computer software the expenditure had to be treated as a revenue expenditure and that the order passed regarding computers as such by treating it as capital expenditure is also not correct. In support of his contentions, he has relied on the decision in the case of Commissioner of Income Tax Vs. Southern Roadways Ltd., and with regard to the nature of expenditure incurred insofar as software is concerned, he has relied on another decision of Madras High Court in the case of CIT v. Sundaram Clayton Ltd. (2008) 10 DTR (Mad) 134 and the decision of the Delhi High Court in the case of CIT v. G.E. Power Services India Ltd. (2008) 171 Taxman 10 (Del).

Per contra, supporting the order of the Tribunal, learned Counsel for the revenue submits that the Tribunal has followed the test with regard to finding out as to whether the amount expended with regard to purchase of the computers as well as software for the computers has to be treated as capital expenditure or as revenue in nature and has given a reasoned decision and that the disallowance of the same by the assessing officer was just and proper and the Tribunal has rightly allowed the appeal filed by the revenue, which order does not call for any interference by this Court.

Having heard the counsel on both sides and on perusal of the materials on record, it is not in dispute that the Assessee has spent certain amount both in regard to acquiring computer systems and also for purchase of software for the said systems. The Tribunal has not applied its mind as to whether the same has to be treated as capital expenditure or revenue expenditure, considering the fact that the said expenditure was incurred for the assessment year 1997-98 i.e. prior to the depreciation being given for attachments i.e. software and for the said relevant period, the department itself was treating it as a revenue expenditure. Since these aspects have not been taken into consideration by the Tribunal, it is just and proper to remand the entire matter back to the assessing officer to reconsider the entire issue in the light of the decision that was rendered prior to 1-4-2001 and also the fact that the department itself was treating such expenditure as revenue expenditure. The assessing officer to also take into consideration as to how in respect of other Assessees, who had made similar expenditure, the nature of the expenditure was treated as revenue expenditure.

For the aforesaid reasons, the appeal is allowed. The matter is remanded back to the assessing officer to reconsider the entire issue in terms of the aforesaid considerations. Hence, the substantial questions of law raised in this appeal are not answered. All contentions of the parties are left open.