2010 (12) TMI 880 - AT - Income Tax

Capital or revenue expenditure - Software Expenses and web-hosting expenses - Depreciation - It was his submission that the expenditure pertains to the purchase of licences/packages of computer programs which are application programmes/upgrading the programs - assessee is following the consistent practice of writing off the software for a period of 12 to 24 months in the business of comprehensive systematic consistent object well documented quest research pre-employment screening program - it is noticed that there are certain OS licences as well as application licences - in the case of Amway India Enterprises (2008 -TMI - 64346 - ITAT DELHI-C) - Held that fact that software becomes obsolete with technological innovation and advancement within a short span of time it can be said that where the life of the computer software is shorter (say less than 2 years) it may be treated as revenue expenditure - Since the functionality test is to be examined with reference to the items of licensed software purchased/expenditure claimed in the interest of justice - Appeal is allowed by way of remand to AO Regarding web-hosting expenditure - The advance of technology and the wide spread use of the internet has provided a very powerful medium to companies to publicize their activities to a larger spectrum of people at a much lower cost - Since the details of expenditure were not examined by the A.O. we are of the opinion that he might have considered the entire expenditure towards web hosting expenditure - It is directed to treat as revenue expenditure - In the result appeal is allowed for statistical purpose

Summary

Issues:
1. Treatment of Software Expenses as Capital Expenditure
2. Treatment of Web-Hosting Expenses as Capital Expenditure

Issue 1: Treatment of Software Expenses as Capital Expenditure:

The appeal contested the confirmation of Software Expenses of Rs.47,36,199 as Capital Expenditure. The CIT(A) upheld the AO's decision to capitalize the amount and allow depreciation at 60%. The AR argued that the expenditure pertained to computer software licenses and programs like Windows XP Professional, Office Win 32, etc., asserting it as revenue expenditure. Referring to legal precedents, the AR contended that software expenses for regular upgradation are revenue in nature. The DR supported the AO's decision based on enduring advantage. The ITAT noted the consistent practice of writing off software over 12-24 months and directed the AO to reexamine the nature of the expenditure, considering the functional test and the principles laid down by the Special Bench. The matter was remanded to the AO for fresh examination.

Issue 2: Treatment of Web-Hosting Expenses as Capital Expenditure:

The appeal challenged the treatment of web-hosting expenses of Rs.1,29,598 as capital expenditure. The AO did not allow depreciation as no asset was created. The CIT(A) considered the expenditure as capital due to enduring advantage and disallowed depreciation. The counsel argued that web-hosting expenses were essential for online interaction in the recruitment business and should be treated as revenue expenditure. The ITAT examined the expenditure details and found that most expenses were for maintenance, data transfer, and antivirus charges, which are revenue in nature. Citing a decision by the Delhi High Court, the ITAT concluded that web-hosting expenses do not create a capital asset and are revenue expenditure. The AO was directed to allow the expenditure as revenue expenditure. The appeal was allowed for statistical purposes.

In conclusion, the ITAT Mumbai, in the cited judgment, addressed the issues of treating Software Expenses and Web-Hosting Expenses as Capital Expenditure. The detailed analysis involved considerations of legal precedents, the nature of the expenditures, and the enduring benefit derived. The ITAT directed a fresh examination by the AO for the Software Expenses issue and ruled in favor of treating Web-Hosting Expenses as revenue expenditure.