Sun Pharma Labs. Ltd.'s Software Upgradation Expenses classified as Revenue Expenditure: ITAT upholds CIT(A) Ruling [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the Commissioner of Income Tax (Appeals) [CIT(A)] ruling regarding Sun Pharma Laboratories Ltd.'s software upgradation expenses, classifying them as revenue expenditures.

The revenue-appellant contested the CIT(A) order dated 28.02.2019 concerning the assessment for Assessment year(AY) 2015-16 under Section 143(3) of the Income Tax Act.

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Sun Pharma Laboratories Ltd.,the respondent-assessee, claimed software upgradation and support expenses totaling ₹1,49,62,413. These expenses included costs related to data migration, online support services, improvements to accounting software for daily operations, and routine maintenance.

The Assessing Officer (AO) argued that these expenses provided enduring benefits and should be classified as capital expenditure. However, the CIT(A) disagreed, determining that the software upgradation costs were of a revenue nature and eligible for deduction under Section 37(1) of the Act.

The CIT(A) emphasized that these expenses were essential for maintaining operational efficiency and encompassed ongoing functions like corrective maintenance, periodic updates, and network management.

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In reaching this conclusion, the CIT(A) cited prior judgments from the Gujarat High Court that established the principle that expenditures enhancing the efficiency of a profit-making structure, without altering its fundamental nature, qualified as revenue expenses.

During the hearing, the Revenue's representative could not identify any specific errors in the findings of the CIT(A) but supported the AO’s position. In contrast, the senior counsel for the respondent upheld the CIT(A)’s decision, arguing that the nature of the expenses was predominantly maintenance-related and did not confer new benefits.

Ultimately, the tribunal upheld the CIT(A)’s decision, affirming that the classification of the software expenses as revenue was appropriate.

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The two member bench comprising T.R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) dismissed the Revenue’s appeal, confirming that the AO’s disallowance of the expenses was rightly deleted by the CIT(A). This ruling reinforced the acceptability of certain software-related expenditures as revenue expenses eligible for immediate deduction.

To Read the full text of the Order CLICK HERE

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