Expenditure incurred on maintenance, back-up and support services to existing hardware and software is revenue in nature

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 186 of 2013

COMMISSIONER OF INCOME TAX I….Appellant(s)
Versus
N J INDIA INVEST PVT LTD… .Opponent(s)

 

Issue pertains to expenditure of Rs.1.02 crores ( rounded off) expended by the assessee and whether the same should be treated as capital or revenue expenditure. For the assessment year 2008-09 the Assessing Officer noticed that the assessee had debited in the profit and loss account, amount of Rs.1.02 crores (rounded off) towards software support and maintenance charges. Out of which, a sum of R. 97.75 lakhs pertained to software development and upgradation charges. The Assessing Officer was of the opinion that software development and upgradation would give the assessee an enduring benefit and such expenditure, therefore, should be treated as capital in nature. After hearing the assessee on the issue, he disallowed such expenditure and treated the same as capital in nature.

In essence, these services, therefore, were in the nature of maintenance, back up and support service to the existing hardware and software already installed by the company for the purpose of its business. The Tribunal, in our opinion, therefore, rightly held that the expenditure was revenue in nature. The Tribunal observed that even the test of enduring benefit, may, in given set of circumstances, break down as held by Delhi High Court in the case of Commissioner of Income Tax vs. Asahi India Safety Glass Limited reported in (2011) 245 CTR Reports 529 in which it was observed, inter alia, that the expenditure which is incurred enables the profit-making structure to work more efficiently leaving the source of the profit- making structure untouched would be an expenditure in the nature of revenue.