2012 (10) TMI 661 - AT - Income Tax

Revenue expenditure or capital - capital work-in-progress - assessee explained such sum as expenses for R&D for software development - assessee submitted that it had incurred certain expenditure for development of software for getting committed orders - some of the orders were delayed in the books pro rata expenses were shown as part of work-in-progress for having impressive accounting statements - As per the A.O. such expenditure brought an enduring benefit to the assessee Held that - Assessee chose to claim a sum as a revenue outgo in its computation statement - Claim of the assessee was that this was rent and electricity and having been incurred wholly for the purpose of business was allowable as revenue outgo and/or under Section 30 of the Act - treatment in the books of accounts is a pointer as to how the assessee itself treated the outgo for the purpose of its business - none of the authorities below considered the relevant Accounting Standards and nature of business of the assessee while deciding the issue - CIT(Appeals) fell in error in giving allowance to the assessee without verifying such aspects matter remanded to AO

Summary

Issues:
Allowability of claim of Rs. 86,47,623/- as revenue expenditure.

Analysis:
1. The Revenue appealed against the order of the Commissioner of Income Tax (Appeals)-VI, Chennai, allowing a claim of Rs. 86,47,623/- of the assessee as revenue expenditure. The Assessing Officer disallowed the claim as he considered the expenses incurred by the assessee for development of software to be eligible for charging against income in the succeeding financial year, bringing an enduring benefit to the assessee.

2. The assessee argued before the ld. CIT(Appeals) that the expenses were period costs wholly attributable to its business activities and should be allowed under Section 30 or Section 35(1)(i) of the Income-tax Act, 1961. The ld. CIT(Appeals) relied on the decision of the Hon'ble Apex Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT and deleted the disallowance, emphasizing that the treatment in the books of accounts was not decisive in determining the allowability of the claim.

3. The Appellate Tribunal observed that the total expenses capitalized by the assessee for software development were Rs. 2,52,40,055/-, with the disallowed amount of Rs. 86,47,623/- being part of it. The Tribunal noted that electronic publishing required software development, resulting in an enduring benefit to the assessee. While the treatment in the books of accounts is not the sole determinant, it provides insight into how the assessee viewed the expenses for business purposes.

4. Referring to the decision of the Hon'ble Apex Court in CIT v Woodward Governor India P.Ltd, the Tribunal highlighted the importance of accounting standards and consistency in determining the allowability of expenses. The Tribunal concluded that the authorities below did not adequately consider the relevant accounting standards and the nature of the assessee's business in allowing the claim. Therefore, the matter was remitted back to the Assessing Officer for fresh consideration.

5. The Tribunal allowed the Revenue's appeal for statistical purposes, setting aside the orders of the authorities below and directing a re-visit by the Assessing Officer to determine the allowability of the assessee's claim in accordance with law and considering the nature of the business.