Business expenditure : Section 37(1) : A. Y. 2008-09: Software development and upgradation expenditure: Is allowable revenue expenditure:

In the relevant year, the assessee claimed deduction on account of software development and upgradation expenditure. The Assessing Officer held that software development and upgradation would give the assessee an enduring benefit and such expenditure should be treated as capital expenditure. Accordingly, he disallowed the claim. The Tribunal allowed the assesee’s claim. On appeal by the Revenue , the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The assessee had entered into contract with a company, which had agreed to provide certain services. These services, thus, essentially were in the nature of maintenance and support  services providing essentially backup to the assessee, who had procured software for its purpose. These services, thus, essentially did not give any fresh or new benefit in the nature of a software to be used by the assessee in the course of the business but were more in nature of technical support and maintenance of the existing software and hardware. For example, the service provider had to provide technical support to the employees of the company and to maintain the computers and the laptop, had to supply security service for controlling the data theft and providing checks on access by unauthorised persons to the data etc.

ii) In essence, these services, therefore, were in nature of maintenance, back up and support service to existing hardware and software already installed by company for the purpose of its business. The Tribunal, therefore, rightly held that the expenditure was revenue in nature.”