INCOME TAX ACT, 1961

--Business expenditure--In books, expenses treated as deferred revenue expenses Allowability--Assessee entered into an agreement with Arthur in the financial year 1996-97 (assessment year 1997-98) for installation of a software application for assistance in areas related to financial accounting, inventory and purchase. The said agreement also required assessee to enter into a back-to-back agreement with Oracle. The reasons being that the software application supplied by the Arthur worked on oracle application. Assessee was required to pay: apart from the fee to Arthur licence fee to Oracle. In respect of this transaction, assessee incurred some expenditure and claimed thereof as revenue expenditure. AO noticed that in the books of account assessee had not written off any sum, while in the succeeding assessment year, i.e., 1998-99 assessee had written off only a part of the expenditure thus he disallowed the same on the ground that assessee's own understanding of the nature of the expense involved was that it was expended on capital account and it would enure to the benefit for a long period of time. CIT(A) and Tribunal allowed assessee claim and held that the expenses incurred were recurring in nature, expended either to upgrade the system or run the system. Held Was justified. The treatment of a particular expense or a provision in the books of account never be conclusively determinative of the nature of the expense.

The test of enduring benefit is not a certain or a conclusive test which the courts can apply almost by note. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure resulted in creation of fixed capital for assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts for ever 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. What the assessee acquired through Arthur was an application software which, enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time to time based on the requirements of assessee in the context of the advancement of its business and/or its diversification, if any; the changes brought about due to statutory amendments by law or by professional bodies like the Institute of Chartered Accountants of India, which are given the responsibility of conceiving and formulating the accounting standards from time to time, and perhaps also, by reason of the fact that expenses may have to be incurred on account of corruption of the software due to unintended or intended ingress into the system - ought not give a colour to the expenditure incurred as one expended on capital account. Given the fact that there are myriad factors which may call for expenses to be incurred in the field of software applications, it cannot be said that either the extent of the expense or the expense being incurred in close proximity, in the subsequent years, would be conclusively determinative of its nature.