Expenditure on Software Application Development treated as Revenue Expenditure: SC dismisses SLP filed by Income Tax Department [Read Judgement]

The Supreme Court dismissed the Special Leave Petition ( SLP ) filed by the Income Tax Department regarding the assessment of expenditure on software application development.

The SLP arose out of an impugned final judgment and order dated 10-04-2023 in ITA No. 159/2021, passed by the High Court of Karnataka at Bengaluru.

M/s Adadyn Technologies Private Limited, a company providing customised internet advertising services, incurred significant costs developing software to adapt to rapid technological advancements. However, the software application became obsolete due to the evolving technological landscape, prompting the company to abandon further development of the project.

The Assessing Officer ( AO ) of the Income Tax Department categorised the expenditure on the software as a capital expense, implying it would be spread out over the software’s useful life for tax purposes. The respondent company contested this classification, arguing the expenditure should be treated as a revenue expense, which is fully deductible in the year it is incurred.

The Karnataka High Court ruled that the software’s obsolescence and abandonment of the project justified classifying the expenditure as a revenue expense.

A two-judge bench of Justices Pamidighantam Sri Narasimha and Aravind Kumar dismissed the Special Leave Petition (SLP) filed by the department challenging the decision of the High Court.

To Read the full text of the Judgement CLICK HERE

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