2016 (3) TMI 1320 - HC - Income Tax

Disallowance towards expenses incurred for software and website development - nature of expenses - revenue or capital expenditure - Held that - Assessee had offered a satisfactory explanation which has been accepted by the CIT(A) as well as the ITAT that the aforementioned expenditure did not result in a capital asset of an enduring nature. Both the CIT (A) and the ITAT accepted that the expenditure was incurred only to update the website to keep pace with the development in technology therefore is not of a permanent character. There are no details unearthed by the AO to support the view that said expenditure was capital in nature. No substantial question of law. Treatment of expenses incurred towards repair and maintenance - AO treated the said expenses as a capital expenditure as reversed by the CIT(A) holding it to be revenue expenditure and this was concurred with by the ITAT - Held that - Revenue has projected a break-up of the said expenditure as including expenses towards the procurement of a server the AO has in his order not made any reference to such break-up. Here again the Assessee s explanation that this was an expenditure incurred for upgrading the computer hardware incurred to keep pace with the changing technology and therefore did not result in an asset of an enduring nature has been accepted both by the CIT(A) as well as the ITAT. The Court is not therefore persuaded to interfere with that fact.

Summary

Issues involved:
1. Disallowance of expenses for software and website development
2. Treatment of expenses for repair and maintenance
3. Expense for online membership subscription

Analysis:

Issue 1: Disallowance of expenses for software and website development
The first issue in this case revolves around the disallowance of expenses for software and website development. The Revenue filed two appeals under Section 260A of the Income Tax Act against the common order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Years 2005-06 and 2004-05. The Assessing Officer (AO) disallowed the expenses, but the Commissioner of Income Tax (CIT) and ITAT held them as revenue expenditure. The Court accepted the Assessee's explanation that the expenditure was for updating the website and software to keep pace with technology, not resulting in a capital asset. The Court declined to frame any question on this aspect, ultimately dismissing the appeal on this issue.

Issue 2: Treatment of expenses for repair and maintenance
The second issue concerns the treatment of expenses for repair and maintenance. The AO treated these expenses as capital expenditure, but the CIT and ITAT held them to be revenue expenditure. The Assessee explained that the expenses were for upgrading computer hardware to keep up with technology changes. The Court found no reason to interfere with this explanation and dismissed the appeal on this issue as well.

Issue 3: Expense for online membership subscription
The third issue involves an expense for a one-time payment for online membership subscription. Due to the rejection of framing questions on the first two issues and the tax effect being less than Rs. 10 lakhs, the Court did not find it necessary to address this issue in the current case. Therefore, this issue was left open for consideration in a future appropriate case.

In conclusion, the appeals by the Revenue were dismissed, with the Court upholding the decisions of the CIT and ITAT regarding the treatment of expenses for software and website development, as well as repair and maintenance. The issue of the expense for online membership subscription was not addressed in this judgment due to its tax effect and the decisions on the first two issues.