A division bench of the Bombay High Court has held that the expenses incurred in respect of the development of an abandoned software would be eligible for income tax deduction as the same constitute “revenue expenditure” for the purpose of the Income Tax Act, 1961.
The assessee, M/s Trigent Software Limited, is engaged in the business of software development solution and management, claimed deduction of expenses in connection with the development of a new product. The assessee had treated the expenditure as a part of capital work in progress for the assessment years 2004-05 to 2007-08. Later, the development of this software was abandoned and the assessee then claimed the whole capital work in process as revenue expenditure. However, the AO rejected the claim and made addition accordingly.
Later, the ITAT allowed the plea of the assessee and held that the said expenditure would amount to revenue expenditure.
The income tax department approached the High Court against the ITAT order contending that as the expenditure could not have been allowed as revenue expenditure as the assessee had treated the said expenditure as capital in nature and had entered the same in its books of accounts as “Capital work in progress”. The department further argued that expenditure was incurred in connection with the development of a new product, notwithstanding that the new product had not come into existence on account of its viability, expenditure could not have been claimed as revenue expenditure.
Relying on the Apex Court rulings, Justice Dhiraj Singh Thakur and Justice Abhay Ahuja observed that “if the advantage consisted merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assesse’s business to be carried on more effciently or more proftably, while leaving the fxed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefnite future.”
Upholding the ITAT order favouring the assessee, the division bench held that“it can be seen that the appellant is admittedly in the business of development of software solution and management, and therefore, it’s endeavour to develop a new software was nothing but an endeavour in its existing line of business of developing software solutions. Admittedly, the product which was sought to be developed, never came into existence and the same was abandoned. No new asset came into existence which would be of an enduring beneft to the assessee, and therefore, in these circumstances, the expenditure could only be said to be revenue in nature.”
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
