2021 (11) TMI 526 - AT - Income Tax

Nature of expenditure - Treatment of Research Dev. (R D) expenditure - revenue or capital expenditure - AO opined that the same would be capital expenditure in the nature of intangible assets which would be eligible for depreciation - HELD THAT - The expenditure is mostly in the nature of salaries, contribution to PF, business promotion, web services expenses, consultancy charges and training of employees etc. These are mostly revenue in nature and incurred in the area of testing, shortcuts in coding etc. The expenditure was not incurred on creation of end products being developed by the assessee but to increase expertise in technology to increase the revenue. By incurring such expenditure, the assessee may get enduring benefit in future, nevertheless, the same would not result into creation of any new capital asset. Therefore, such expenditure, in our considered opinion, would be fully allowable being revenue in nature as held by Pune Tribunal in Opus Software Solutions Pvt. Ltd 2012 (11) TMI 619 - ITAT PUNE on similar factual matrix. We order so. The deprecation granted by Ld. AO would stand reversed - Decided in favour of assessee. Remuneration to Directors - the only reason to make impugned addition is the opinion of Ld. AO that reimbursements should have been included in salary component in Form No. 16 - HELD THAT - Theses reimbursements are part of offer letters issued by the assessee to respective directors - Upon perusal of the same, we find that the directors were reimbursed telephone expenses, petrol/other expenses which are duly reflected in pay-slip issued by the assessee - there are no findings by lower authorities that these reimbursements were taxable. Nevertheless this fact would not jeopardize assessee's claim of expenditure u/s. 37(1) since the assessee has incurred the expenditure. Therefore, the impugned addition is not sustainable - This ground stand allowed.

Summary

Issues:
1. Treatment of Research & Development (R&D) expenditure as capital expenditure
2. Addition on account of discrepancy in directors' remuneration

Analysis:

Issue 1: Treatment of Research & Development (R&D) expenditure as capital expenditure
The appeal for Assessment Year 2015-16 involved the treatment of R&D expenditure as capital expenditure. The assessee, engaged in software development, debited R&D expenditure of ?81.99 Lacs. The Assessing Officer (AO) considered it as capital expenditure eligible for depreciation, as it would bring enduring benefit to the assessee. However, the assessee argued that the expenditure aimed to improve services, expertise in technology, and increase revenue, not to create new capital assets. The ITAT Chennai examined the nature of the expenditure, which included salaries, PF contributions, business promotion, web services expenses, consultancy charges, and employee training. The ITAT concluded that the expenditure, mainly revenue in nature and aimed at enhancing technology expertise and increasing revenue, did not result in the creation of new capital assets. Citing a similar case, the ITAT held the expenditure to be fully allowable, reversing the depreciation granted by the AO.

Issue 2: Addition on account of discrepancy in directors' remuneration
The second issue pertained to the remuneration paid to four directors, each receiving ?12.00 Lacs, which included medical allowance and travel/expenditure reimbursement. The AO added the travel/expenditure reimbursement to the income of the assessee, contending it should have been included in the salary component. However, the ITAT noted that the reimbursements were genuine and part of the offer letters issued to the directors, reflected in pay-slips. There was no evidence that these reimbursements were taxable. The ITAT emphasized that since the assessee had genuinely incurred the expenditure, the addition made by the AO was not sustainable under Section 37(1). Consequently, the ITAT allowed this ground of appeal.

In conclusion, the ITAT Chennai allowed the appeal, ruling in favor of the assessee on both issues. The judgment was pronounced on 12th October 2021.