2017 (6) TMI 1376 - AT - Income Tax

Allowable Revenue expenses u/s 37(1) - cost towards development of software products, solutions and management - treatment as expenditure as incurred for the purpose of setting up a new project -Expenditure incurred on development of a product of the same line of business - HELD THAT/ - We find assessee is engaged in the business of developing software, that it had debited an amount as exceptional item in its books of accounts under the head developing a new item, that the expenditure of the product pertained to the AY. 2004-05 to AY. 2007-08, that in the year under consideration it abandoned the development of the software, that it claimed the expenditure as revenue expenditure. Expenditure incurred on development of a product of the same line of business, in our opinion, held to be allowed as revenue expenditure. It is possible that the assessee, may due to certain reasons, abandoned the product but that would not make the expenditure of capital nature. Entries in the books of accounts are important to a certain extent only. What is to be seen is the real nature of the expenditure. In the case under consideration the incurring of expenditure is not in doubt, the AO has not held that expenditure was not incurred for development of software i. e. for the existing business of the assessee. See IL FS Education and Technology Services Private Ltd 2013 (4) TMI 992 - ITAT CHENNAI , M/S BINANI CEMENT LTD. 2015 (3) TMI 849 - CALCUTTA HIGH COURT and Indoram Synthetic India Private Ltd. 2009 (9) TMI 635 - DELHI HIGH COURT Thus we hold that the order of the FAA does not suffer from any legal or factual infirmity. As far as case of EID Perry 2001 (11) TMI 25 - MADRAS HIGH COURT is concerned, we would like to state that in that matter the Hon ble Madras High Court had held that it was clear from the assessee s own case that the expenditure was incurred for the purpose of setting up a new project. The case before us, is not of setting up of new project . In that matter the assessee, a manufacturer of sugar, wanted to set up a new project for the manufacture of methanol. Thus, the case is of no help to decide the issue. Effective ground of appeal against the AO.

Summary

Issues Involved:
1. Deleting the disallowance of ?7.10 crores claimed by the assessee as revenue expenditure.
2. Validity of reopening the assessment under section 148.
3. Delay in filing Cross Objections (CO).

Issue-wise Detailed Analysis:

1. Deleting the disallowance of ?7.10 crores claimed by the assessee as revenue expenditure:
The primary issue in this case was whether the expenditure of ?7.10 crores claimed by the assessee for the development of software products should be treated as revenue expenditure or capital expenditure. The AO disallowed the expenditure, treating it as capital in nature, as it was initially shown under the head "work in progress." The AO referenced the case of Rambahdur Thakur and argued that the expenditure was for developing a new product, which should be capitalized unless the product was abandoned. The FAA, however, allowed the expenditure as revenue, referencing the cases of IL & FS Education and Technology Services Private Ltd. and Indoram Synthetics India Private Ltd., where similar expenditures were allowed as revenue when the projects were abandoned.

The Tribunal upheld the FAA's decision, emphasizing that the expenditure was incurred in the same line of business and was thus revenue in nature. The Tribunal referenced several cases, including Magnetic Meter System India Ltd. and Essar Steel Ltd., which supported the view that expenditure for developing a new product in the same line of business is revenue expenditure. The Tribunal also noted that the real nature of the expenditure, not merely the book entries, should be considered.

2. Validity of reopening the assessment under section 148:
The assessee challenged the reopening of the assessment, arguing it was a case of change of opinion. The FAA upheld the AO's decision to reopen the assessment, referencing the case of Consolidated Photo and Finvest, which supported the AO's action. The Tribunal did not find any legal or factual infirmity in the FAA's order regarding the reopening of the assessment and upheld it.

3. Delay in filing Cross Objections (CO):
The assessee filed COs with significant delays (1056 days for AY 2007-08 and 188 days for AY 2006-07), arguing that the CO raised a legal issue and could be filed anytime before the appeal's disposal. The Tribunal found the reason for the delay unconvincing, emphasizing that the law of limitation is integral to tax litigation and should not be taken lightly. The Tribunal dismissed the belated COs, stating that the explanation provided by the assessee did not constitute a reasonable cause.

Conclusion:
The Tribunal dismissed the appeals filed by the AO and the COs of the assessee. The expenditure of ?7.10 crores was allowed as revenue expenditure, the reopening of the assessment was upheld, and the delayed COs were dismissed.