2008 (9) TMI 8 - HC - Income Tax

Whether expenses on development of website was capital expenditure assessee, in travel business, indicates the various destinations and places for which it can arrange travel, hotel booking etc. for his clients - assessee s clients can use the assessee s website for the purposes of availing of the services provided by the assessee - just because a particular expenditure may result in an enduring benefit wouldn t make such an expenditure of a capital nature held these are revenue expenditure

Summary

Issues:
Whether the expenditure incurred on the development of the website by the assessee is of a capital nature or a revenue nature.

Analysis:
The only issue before the Tribunal was to determine if the expenditure of Rs 20,23,317 on the website development was of a capital or revenue nature for the assessment year 2001-02. The Assessing Officer and the Commissioner of Income-tax (Appeals) considered it as a capital expenditure due to acquiring an asset with enduring benefits. However, the Tribunal disagreed, viewing the website as a tool for providing information to clients, akin to an electronic brochure. The Tribunal highlighted the ongoing expenses for domain registration, updates, and the cost-saving benefits of reaching clients directly without middle-men. It concluded that the expenditure was revenue in nature, not leading to the acquisition of a capital asset.

The Tribunal relied on two Supreme Court decisions, Empire Jute Company Ltd v. CIT and Alembic Chemical Works Company Ltd v. CIT. In Empire Jute, the Court emphasized that enduring benefits do not automatically classify expenditure as capital, considering the specific circumstances. Alembic Chemical Works further clarified that the enduring benefit test is not definitive, and the purpose and effect of the expenditure should be assessed practically. The intent behind the outlay and its impact on fixed capital are crucial in determining the nature of the expenditure.

Applying the principles from the Supreme Court decisions, the High Court affirmed the Tribunal's decision. It noted that while a website may provide enduring benefits, the primary aim is information dissemination, not asset creation. The court highlighted the cost-effectiveness and efficiency of websites compared to traditional printed materials for publicity. Websites serve as a modern medium for companies to reach a broader audience at lower costs, aligning with the business realities and technological advancements.

In conclusion, the High Court upheld the Tribunal's decision, stating that the expenditure on the website was of a revenue nature, not leading to any change in fixed capital. The court found no substantial question of law requiring consideration and dismissed the appeal, affirming the Tribunal's ruling on the nature of the expenditure.