The two member bench of the Income Tax Appellate Tribunal (ITAT), Ahmedabad ruled that expenses incurred on a software project, which was ultimately abandoned and provided no enduring benefit, should be treated as revenue in nature, thereby deleting the addition made by the tax authorities.
The assessee, Global Tech India Private Limited, engaged in software development and maintenance, filed its income tax return for the assessment year 2013-14 on September 30, 2012, declaring a total income of Rs. 38,825/-. The return was selected for scrutiny, and the Assessing Officer disallowed the claimed product development expenses of Rs. 19,66,641/-, adding this amount to the assessee’s income.
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The company had incurred these expenses while developing a software product called “Pro HR,” aimed at integrating HR management, payroll, and web-based self-service. The development began in the financial year 2009-10, with the expectation that the costs would be capitalized as Intellectual Property Rights upon completion and amortized over two to four years. However, due to technological obsolescence and the rise of Microsoft-Dot Net technology, the project was deemed economically unviable, leading to its abandonment and the write-off of capital work-in-progress. Despite these explanations, the Assessing Officer rejected the claim, relying on various case laws, and included the expenses as income, thus raising a tax demand.
The assessee, dissatisfied with the assessment order, appealed to the Commissioner of Income Tax (Appeals) [CIT (A)], who also dismissed the appeal. The CIT(A) held that the software, intended for use over several years, could not suddenly be treated as a revenue expenditure after three years and written off in a single year. The CIT (A) further noted that the case laws cited by the assessee were not applicable to this case, resulting in the dismissal of the appeal.
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Representing the assessee, Mr. Pramod Kedia reiterated the arguments made before the lower authorities, emphasizing that the development of “Pro HR” was abandoned due to the failure to validate the software during initial trials and the rapid technological advancements in the market. He cited previous rulings by Co-ordinate Benches of the Tribunal, such as in DCIT vs. Magnetic Meter Systems India Ltd. and ACIT vs. Essar Steel Ltd., where expenses on unsuccessful capital projects were treated as revenue expenditures, and deductions were allowed. Mr. Kedia also referred to judgments from the Calcutta High Court in Binani Cement Ltd. vs. CIT and the Bombay High Court in PCIT vs. Trigent Software Ltd. and CIT vs. Idea Cellular Ltd., requesting that the addition made by the Assessing Officer be deleted.
In response, Santosh Kumar, representing the Revenue, supported the decisions of the lower authorities and requested that they be upheld.
Upon reviewing the case, the Tribunal, consisting of Accountant Member Annapurna Gupta and Judicial Member T.R. Senthil Kumar, noted that the “Pro HR” software project was never completed or put on trial with any customers, making it unsellable in the market. Due to technological advancements and competition, the project was abandoned, leading to the write-off of expenses in the assessment year 2013-14.
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The Tribunal referenced judicial precedents where expenses on abandoned projects were treated as revenue in nature. Consequently, the Tribunal concluded that since the software project did not provide any enduring benefit to the assessee, the expenses should be allowed as revenue expenditures, and the additions made by the lower authorities were ordered to be deleted.
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