Software Expenses Not Capital Asset, Allowable as Revenue; Double Disallowance Cannot Lead to Taxation Twice: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that expenditure incurred on software licenses, upgrades, and related services is revenue in nature and cannot be treated as capital expenditure merely on the ground of perceived enduring benefit. The bench of Beena Pillai (Judicial Member) and Prabhash Shankar (Accountant Member) clarified that double disallowance of the same income is impermissible under law and directed verification to prevent double taxation. The ruling came in cross-appeals filed by both the assessee and the Revenue for Assessment Years 2014–15 and 2018–19, arising from orders passed by the National Faceless Appeal Centre (NFAC). The Revenue had challenged the relief granted by the Commissioner of Income Tax (Appeals), who had allowed the assessee’s claim treating substantial software expenditure as revenue in nature. The central issue before the Tribunal was whether expenses incurred on software—amounting to over ₹37.87 crore in one of the assessment years—should be treated as capital expenditure eligible for depreciation or as revenue expenditure allowable in full. Buy Now: Income Tax Judgments E-Compilation : April 2026 The Assessing Officer had treated the expenditure as capital in nature, arguing that such spending resulted in enduring benefit and formed part of the company’s business infrastructure. Accordingly, depreciation was allowed while the remaining amount was disallowed. However, the CIT(A) reversed this finding, holding that the expenses were revenue in nature. The Revenue challenged this conclusion before the Tribunal, reiterating that the magnitude and long-term utility of the software justified its classification as capital expenditure. The Tribunal upheld the CIT(A)’s order and dismissed the Revenue’s appeal, making several important observations the expenditure was primarily incurred towards software licenses, database access, maintenance, and periodic upgrades, which are recurring in nature. Such expenses do not create any independent capital asset, but merely facilitate efficient day-to-day business operations. In a rapidly evolving technological environment, software becomes obsolete quickly, weakening the traditional “enduring benefit” test. The Tribunal also relied on the Supreme Court’s ruling in Engineering Analysis Centre of Excellence Pvt. Ltd., noting that payments for software typically grant only a limited right to use and do not result in acquisition of copyright or ownership. Therefore, such payments remain in the revenue field unless proprietary rights are acquired. The Tribunal noted that the Revenue failed to demonstrate that the assessee had acquired any ownership or copyright in the software, which could justify capitalisation. On the assessee’s appeal, the Tribunal dealt with a separate but crucial issue of double disallowance of income relating to year-end provisions. The assessee had initially claimed deduction for provisions, which were later disallowed due to non-deduction of TDS. Subsequently, during reassessment proceedings, the assessee voluntarily disallowed the same amount in earlier years and claimed deduction in the year of TDS deduction or reversal. Despite this, the Assessing Officer again added the same amount in the relevant year, effectively taxing the same income twice. The Tribunal held that double taxation of the same income is impermissible in law. The assessee’s approach represented a timing adjustment rather than a fresh claim. The CIT(A) erred in treating the issue as “academic” without adjudicating it on merits. The Tribunal restored the matter to the Assessing Officer for verification, directing that appropriate relief be granted if the claim of prior disallowance is established. The court dismissed Revenue’s appeals for both assessment years. Case Details Case Title: BNP Paribas India Solutions Private Limited Versus ACIT Citation: JURISHOUR-1061-ITA-2026(MUM) Case No.: ITA 8000/MUM/2025 Date: 30/04/2026 Counsel For Appellant: Niraj Sheth, AR Counsel For Respondent: Shailja Rai,CIT DR Click Here To Read Order Read More: CIC Order Directing Disclosure of Husband’s Income Tax Details Quashed: Delhi High Court

Software Expenses Not Capital Asset, Allowable as Revenue; Double Disallowance Cannot Lead to Taxation Twice: ITAT

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