2013 (9) TMI 113 - AT - Income Tax

Software expenditure, a revenue in nature of capital in nature Held that - Considering the nature of licences purchased by the assessee, being software of MS Office and Marketing Data Management System which facilitated the operations of the company and has no enduring benefit, the expenditure can only be considered as revenue in nature - Having regard to the fact that software becomes obsolete with technological innovation and advancement and life of the software being less than two years, the expenditure is rightly treated as revenue expenditure Also, reliance has been placed upon the judgment Amway Enterprises 2008 (2) TMI 454 - ITAT DELHI-C , wherein it has been held that for ascertaining as to whether the expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee acquires right to use the software becomes relevant. Website development charges, a capital expenditure or revenue Held that - Reliance has been placed upon the judgment in the case of CIT vs. Indian Visit.com P. Ltd 2008 (9) TMI 8 - DELHI HIGH COURT , wherein it has been held that just because a particular expenditure may result in an enduring benefit would not make such an expenditure of a capital nature. What is to be seen is what is the real intent and purpose of the expenditure and as to whether there is any accretion to the fixed capital of the assessee. In the case of expenditure on a website, there is no change in the fixed capital of the assessee. Although the website may provide an enduring benefit to an assessee, the intent and purpose behind development of a website is not to create an asset but only to provide a means for disseminating the information about the assessee. The same could very well have been achieved and, indeed, in the past, it was achieved by printing travel brochures and other published materials and pamphlets. The advance of technology and the wide spread use of the internet has provided a very powerful medium to companies to publicize their activities to a larger spectrum of people at a much lower cost. Websites enable companies to do what the printed brochures did but, in a much more efficient manner as well as in a much shorter period of time and covering a much large set of people worldwide Relying upon the above judgement it has been held in the present case that the expenditure in website development be a revenue expenditure Decided in favor of Assessee.

Summary

Issues:
1. Deletion of addition made by disallowing software expenditure.
2. Deletion of addition made by disallowing expenses for website development.

Analysis:

Issue 1: Deletion of addition made by disallowing software expenditure:
The appeal by the Revenue challenged the CIT(A)'s order deleting the addition of software expenditure amounting to Rs.1,75,500 for MS Office License and Marketing Data Management System. The Revenue contended that the expenditure should be treated as capital in nature. The CIT(A) held that the software expenses were revenue in nature as they enhanced productivity without resulting in acquisition of any capital asset. The CIT(A) referred to precedents like Amway Enterprises and CIT vs. Southern Roadways Ltd. to support the decision. The ITAT concurred with the CIT(A), emphasizing that the software had a short lifespan due to technological obsolescence, justifying its treatment as revenue expenditure. The ITAT upheld the CIT(A)'s order, confirming the revenue nature of the expenditure.

Issue 2: Deletion of addition made by disallowing expenses for website development:
The Revenue appealed the deletion of Rs.8,02,139 addition on account of website development charges. The Revenue argued that the website should be treated as a capital asset due to its enduring nature in the cyber space. However, the CIT(A) held that the website development expenditure was revenue in nature as it aimed at disseminating information rather than creating an asset. The CIT(A) cited the case of CIT vs. Indian Visit.com P. Ltd. to support the decision. The ITAT agreed with the CIT(A) and referenced the Delhi High Court's decision, emphasizing that the intent behind website development was not to create a capital asset but to provide a means for disseminating information. The ITAT upheld the CIT(A)'s decision, confirming the website development charges as revenue expenditure.

In conclusion, the ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues regarding software expenditure and website development charges. The judgments were based on the distinction between revenue and capital expenditure, emphasizing the intent and purpose behind the incurring of expenses in each case.