2022 (11) TMI 554 - AT - Income Tax

Nature of expenditure - Software Development Expenditure - revenue or capital expenditure - HELD THAT - The Software Development expenses claimed by the assessee are in the nature of payment of salaries and allowances to the Engineers, travelling expenses, etc. The assessee is engaged in the process of providing automation, software and hardware engineering. The said expenditure is in the regular course of business of the assessee, which has been named as Software Development Expenditure. CIT(A) has given a categoric finding that the said expenses are not towards Software Development for use by the assessee but for rendering services to the clients including overseas clients. Thus, the expenditure has been incurred in the regular course of business of the assessee and for earning revenue and profits, hence, the expenditure is on revenue account. DR has not been able to controvert the findings of the CIT(A). We find no infirmity in the order of CIT(A) on this issue, hence, the same is upheld and the appeal of Revenue is dismissed being devoid of any merit.

Summary

Issues Involved:
Revenue's appeal against the CIT(A)'s order regarding the nature of Software Development Expenditure for the assessment year 2017-18.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai involved a single issue raised by the Revenue against the CIT(A)'s decision on the nature of Software Development Expenditure. The Revenue contended that the CIT(A) erred in treating the said expenditure as revenue in nature. The assessee, engaged in process automation software and hardware engineering, had claimed expenditure of Rs. 7,09,55,807 towards Software Development, including salaries of Engineers, hotel expenses, insurance, and travel expenses. The Assessing Officer initially classified the expenditure as capital in nature. However, the CIT(A) reversed this decision, holding that the expenditure was regular business expenditure incurred for developing software for clients, including overseas clients. The authorized representative of the assessee argued that the Software Development expenditure was for clients, not for self-use. On the other hand, the Departmental Representative vehemently defended the assessment order, claiming the CIT(A) was wrong in categorizing the expenditure as revenue in nature.

During the proceedings, it was established that the Software Development expenses were related to salaries, allowances to Engineers, and travel expenses, all essential for the business of providing automation, software, and hardware engineering services. The CIT(A) conclusively determined that the expenses were not for the assessee's internal use but for providing services to clients, including overseas clients. Therefore, the expenditure was deemed to be in the regular course of business, aimed at generating revenue and profits. The Tribunal found no fault in the CIT(A)'s decision, upholding it and dismissing the Revenue's appeal for lacking merit. The order was pronounced on September 19, 2022, in open court.

This detailed analysis of the judgment highlights the key arguments presented by both parties, the reasoning behind the CIT(A)'s decision, and the Tribunal's affirmation of the CIT(A)'s ruling on the nature of Software Development Expenditure.