2013 (12) TMI 1419 - HC - Income Tax

Product Development Cost - Capital or Revenue - Held that - The development was on account of scientific research - The evidence on record shows most of the money is spent towards cost of the employees who had developed the product multi channel customer relationship management solution which provides sales marketing services human resources and finance through the medium of e-mail chat wireless fax phone etc. to the end users - The expenditure in respect of the scientific research even if it is capital in nature as it was incurred in relation to the business carried on by the assessee under Section 35(1)(iv) of the Act - the said expenditure is to be deducted - Decided against Revenue.

Summary

Issues:
1. Whether the expenses incurred by the assessee should be treated as capital expenditure and be eligible for deduction under Section 35(1)(iv) of the Income Tax Act?
2. Whether the Appellate Authorities were correct in granting relief to the assessee under Section 35(1)(iv) of the Act?

Analysis:
1. The case involved a company engaged in software development and product sales. The assessee claimed a deduction of Rs. 9,27,34,277 as product development cost, which the Assessing Officer treated as a capital asset, disallowing the expenses but allowing depreciation. The Commissioner of Income Tax (Appeals) upheld the capital asset treatment but granted deduction under Section 35(1)(iv) of the Act for scientific research. The Tribunal affirmed this decision. The Revenue challenged this, arguing that the expenditure did not qualify as scientific research. However, the Court found that the development of the product "Talisma Enterprise 2.5" involved scientific research related to the business, making the expenditure deductible under Section 35(1)(iv).

2. The Revenue contended that since the intellectual property acquisition cost was capitalized, further development expenses should also be treated as capital in nature. The Court noted that the development aimed to improve intellectual rights for enduring benefits, involving a continuous process to create a Customer Relationship Management solution. The expenditure primarily covered employee salaries and administrative costs. Despite the capital nature of the development, the Court held that under Section 35(1)(iv), the expenditure on scientific research related to the business was deductible. The Appellate Authority and Tribunal's decisions were upheld, dismissing the Revenue's appeal.

In conclusion, the Court ruled in favor of the assessee, allowing the deduction under Section 35(1)(iv) for the expenses incurred in scientific research related to the business. The judgment emphasized that even if the expenditure was capital in nature, if it pertained to scientific research for business extension, it qualified for deduction. The decision highlighted the importance of distinguishing between capital expenditure and scientific research expenses eligible for deduction under the Income Tax Act.