INDIA BUSINESS WORLD - DECEMBER 1^st - DECEMBER 15^th - 2007

SUPREME COURT TO DECIDE ON SOFTWARE UPGRADE SPEND TAX LIABILITY

The Supreme Court has decided to examine whether expense incurred on upgradation of computer by changing software is capital expenditure or revenue expenditure for the purpose of calculating income-tax liability.

After hearing a preliminary plea of the income tax department, the SC bench headed by Justice S H Kapadia issued notice to the assessee.

The department in its appeal has stated that the expenditure incurred for acquisition of a new computer software for business purposes in a modern business world should not be construed as revenue expenditure but treated as capital expenditure.

Appearing on behalf of revenue, Additional Solicitor General(ASG) Vikas Singh said the acquisition of software for upgradation of computer cannot be construed as revenue expenditure within the meaning of Section 37 (1) of the Income Tax Act. He said that upgradation of computer by change of software brings a new product of an enduring nature and hence the expenses should be treated as capital expenditure.

The case pertains to Sundaram Finance which in its income tax return for the assessment year 1998-99 had claimed revenue expenditure under technical head service charges (leasing).

The assessing officer, however, had found that the cost of software purchased for leasing out was not revenue expenditure but capital expenditure and allowed depreciation at the rate of 25% only.

Sundaram Finance aggrieved by the order approached Commissioner of Income Tax (Appeals). The First appellate court in Chennai confirmed the order passed by the assessing officer that the expenditure on purchasing new software for leasing out is capital expenditure and not revenue expenditure.

The assessee filed an appeal before the Income Tax Appellate Tribunal against sit. Subsequently, the department also moved a cross appeal before the quasi-judicial body.

Tribunal partly allowed the appeals of both the parties and remanded the issue back to the assessing officer holding that exact nature of expenditure was not ascertainable whether it was for upgradation of software or acquiring new software.

The department challenged it and went to the Madras high court, but latter relying upon the Southern Roadways Ltd case, dismissed the plea. In Southern Roadways case, it was held that upgradation of computer by changing certain parts and enhancing configuration of computer for improving efficiency but without making any structural alterations is not enduring in nature. The revenue challenged it and appealed before the apex court on the ground that the findings in Southern Roadways case was pending before it.