CIT vs. Asahi India Safety Glass Ltd (Delhi High Court)

DATE: (Date of pronouncement)
DATE: November 6, 2011 (Date of publication)

Click here to download the judgement (asahi_amway_software_expenditure_revenue.pdf)

Expenditure on ‘Application Software’ is revenue in nature

The assessee, engaged in manufacturing safety glass, entered into an agreement with Arthur Anderson for installation of the “Oracle” software application for financial accounting, inventory and purchase. A Master Software Licence and Services Agreement was also entered into with Oracle. The assessee incurred expenditure of Rs. 1.36 crores & Rs. 1.70 crores in AY 1997-98 & 1998-99. While in the books the expenditure for AY 1997-98 was capitalized, the expenditure for AY 1998-99 was treated as “deferred revenue expenditure”. The AO rejected the claim for deduction of the entire expenditure on the ground that it had resulted in “enduring benefit” and was “capital” in nature though the CIT (A) & Tribunal allowed the claim on the ground that the expenditure had not resulted in creation of new asset or a new source of income. On appeal by the department to the High Court, HELD dismissing the appeal:

(i) The test of enduring benefit is not a certain or a conclusive test which the courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. Expenditure incurred which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched is 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 is of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage collapses in such like cases especially 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 (Alembic Chemical Works 177 ITR 377 followed);

(ii) On facts, the expenditure was for overhauling the accountancy and to efficiently train the accounting staff. It was incurred under various sub-heads such as licence fee, annual technical support fee, professional charges, data entry operator charges, training charges and travelling expenses. None of these resulted in either creation of a new asset or brought forth a new source of income for the assessee. The software was “application software” which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance more efficiently;

(iii) The fact that the expenditure was not written off in the books/ treated as ‘deferred revenue’ is irrelevant (Kedar Nath Jute vs CIT 82 ITR 363 (SC) followed)

Note: (i) This was followed in CIT vs. Amway (included in file) where the Tribunal followed the verdict of the Special Bench in Amway vs. DCIT 111 ITD 112 (Del). See also Raychem RPG Ltd & Varinder Agro 309 ITR 272 (P&H) (ii) In CIT vs. Amway it was also held that expenditure on improvements in leasehold premises is deductible despite Expl 1 to s. 32

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