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TMI Blog2016 (6) TMI 789X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(c), they have been taken up together for the sake of convenience. 2. First we will take up ITA No.879/Ahd/2013. The assessee has raised following grounds of appeal:- "1. The order passed by the learned Commissioner of Income Tax (Appeals) is erroneous and contrary to the provisions of law & facts and therefore requires to be suitably modified. It is submitted that it be so done now. 2. The learned Commissioner has erred in not allowing the deduction in respect of software expenses of Rs.l4,12,131 paid in respect of purchase of operating software allowable as revenue expenditure u/s 37 of the Act. It is Submitted that it be so held now. 2.1 Learned Commissioner has erred in not allowing the said expenses u/s 37 of the Act by wrongly relying upon the order of Hon'ble CIT(A) for A.Y. 2006- 07 which was based on wrong interpretation of facts that these software are purchased as part of computers and therefore requires capitalization and hence eligible for depreciation. Learned Commissioner has erred in not appreciating the fact that the software are application software and not systems software. It is submitted it be so held now. 2.2 Learned Commissioner has also er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and therefore, even if the benefit of the same was available for more than a year, but they did not result into acquisition of any capital asset nor it could be said to be an enduring benefit looking to the rate of obsolescence in the electronic industry. The ld. Authorized Representative further submitted that the relevant tests to decide the nature of software expenditure as to whether it is capital or revenue are the test "enduring benefit" and "functional test". Applying the said tests, expenditure is treated as capital expenditure when it results in accrual of advantage of enduring nature to the assessee in the capital field which is not the case in the facts on hand. For ascertaining as to whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee acquires right to use the software becomes relevant, because the software becomes obsolete with technological innovation and advancement within a short span of time. In the case of the assessee, the impugned software expenditure of Rs. 35,30,328/- are either in the form of up-gradation of existing application software availed by the appellant or are in the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware. The ld. Assessing Officer has treated the impugned expenditure of Rs. 35,30,328/- as capital expenditure on the only footing that the assessee will receive the benefit for more than a year and has also allowed 60% depreciation on this expenditure of Rs. 35,30,328/- and a disallowance of Rs. 14,21,131/- has been made. However, from going through the submissions of the ld. Authorized Representative, we are able to understand that the impugned expenditure of Rs. 35,30,328/- has not been incurred to purchase any new software but they are either application software to run the existing software installed in the computers and also the expenditure has been incurred towards upgradation of the existing application software, because in the fast changing technology world, the software, which was purchased by the assessee in the previous years, needs to be upgraded or updated so as to be suitable with the current technologies brought in by various competitors as well as required for increasing the operational efficiency of the original software. 9. We also find that the Co-ordinate Bench has dealt with the similar issue in assessee's own case for Assessment Year 2006-07 in ITA Nos. 132 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever but whether the expense incurred does away with a recurring expense(s) defrayed towards running a business as against an expense undertaken for the benefit of the business as a whole. In other words, the expenditure which is incurred, which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched, would be an expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably, leaving the fixed assets untouched, would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would, thus, collapse in such like cases. It would be only truer in cases which deal with technology and software application, which do not in any manner supplant the source of income or added to the fixed capital of the assessee. [Para 9] This is the approach which the Supreme Court has applied even in cases where there is a once for all or a lump sum pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 49 lakhs was incurred to modify, customize and upgrade the software installed, while the balance expenditure was used for development and implementation, it returned a finding that the expenses were incurred to upgrade and run the system. In view of these findings, the Assessing Officer discovered an erroneous principle on the basis of which he denied the exemption to the assessee. [Para 10.1] Software is nothing bui another word for computer programmes, i.e., instructions, that make the hardware work. Software is broadly of two types, i.e., the systems software, which is also known as the operating system which controls the working of the computer: while the other being applications such as word processing programs, spread sheets and database which perform the tasks for which people use computers. Besides these, there are two other categories of software, these being: network software and language software. The network software enables groups of computers to communicate with each other, while language software provides with tools required to write programmes. [Para 11] The aforesaid would show that what the assessee acquired through A was an application software which e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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