2017 (4) TMI 163 - AT - Income Tax

Addition on account of website development expenses - revenue or capital expenditure - Held that - The issue involved in this appeal of the Revenue is squarely covered in favour of the assessee, inter alia, by the decision of the hon ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT 1989 (3) TMI 5 - SUPREME Court wherein it was held that the expenditure incurred by the assessee on website development was of a revenue nature and not of a capital nature. It was held that although the website might provide an enduring benefit to an assessee, the intended purpose behind the website was not to create an asset but only to provide a means for disseminating the information about the assessee. - Decided against revenue

Summary

Issues:
Challenge to deletion of addition of website development expenses treated as capital in nature.

Analysis:
1. The Revenue appealed against the deletion of an addition of website development expenses treated as capital expenditure by the Assessing Officer. The company, engaged in website development, filed its income tax return showing a loss. The Assessing Officer disallowed the expenses, leading to a reassessment under section 147. The Commissioner of Income-tax (Appeals) deleted the disallowance, stating that expenditure on computer software is transient in nature, not creating an asset. The Commissioner referred to various judgments, including Empire Jute Co. Ltd. v. CIT, Alembic Chemical Works Co. Ltd. v. CIT, and CIT v. Indian Visit.com (P.) Ltd. The Commissioner concluded that the website development expenditure should be treated as revenue expenditure, not capital, based on the intent and purpose of the expenditure and the continuous nature of website maintenance.

2. The Tribunal upheld the Commissioner's decision, citing the Supreme Court's ruling in Alembic Chemical Works Co. Ltd. v. CIT, which held that website development expenses are of a revenue nature, not capital. The Tribunal also referred to the decision in Deputy CIT v. Edelweiss Capital Ltd., emphasizing that website expenses are for day-to-day business operations, not capital assets. The Tribunal found no contrary decisions favoring the Revenue's argument. Therefore, the Tribunal dismissed the Revenue's appeal, affirming the deletion of the disallowance on website development expenses.

3. The Tribunal's decision was based on established legal principles that expenditure on website development is revenue in nature, aligning with the intent and purpose of the expense. The judgments cited emphasized that even if an expense provides enduring benefits, it does not necessarily make it capital in nature if it does not accrete to fixed capital. The Tribunal's analysis focused on the continuous nature of website operations and the absence of a change in fixed capital due to website expenditure. Overall, the Tribunal's decision was in line with previous judicial interpretations and upheld the treatment of website development expenses as revenue expenditure, leading to the dismissal of the Revenue's appeal.