2022 (12) TMI 190 - HC - Income Tax

Nature of expenditure - expenditure in connection with the development of new products / software - revenue or capital expenditure - question of larger context of business necessity or expediency - HELD THAT - The issue as to whether a particular expenditure incurred was of capital or revenue in nature has been the subject matter of legal debate before various Courts in the Country. As held by the Apex Court in the case of Empire Jute Co. Ltd. 1980 (5) TMI 1 - SUPREME COURT since there does not exist an all-embracing formula which can provide a ready solution to the problem; no touchstone has been devised and that every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. The appellant is admittedly in the business of development of software solution and management, and therefore, it s endeavour to develop a new software was nothing but an endeavour in its existing line of business of developing software solutions. Admittedly, the product which was sought to be developed, never came into existence and the same was abandoned. No new asset came into existence which would be of an enduring benefit to the assessee, and therefore, in these circumstances, the expenditure could only be said to be revenue in nature. We are of the view that the view already expressed by the ITAT in the order impugned requires no interference. - Decided in favour of assessee.

Summary

Issues:
1. Whether the ITAT was right in allowing the capital expenditure in connection with the development of new products as revenue expenditure?

Analysis:
1. The appeals were filed against the ITAT's order regarding the treatment of capital expenditure for the development of new products as revenue expenditure for assessment years 2006-07 and 2007-08.
2. The AO found that the expenditure was incurred in connection with the development of new products and treated it as capital work in progress, later abandoned, and claimed as revenue expenditure.
3. The CIT (A) allowed the deduction as revenue expenditure, considering it part of the existing business line, citing relevant judgments.
4. The revenue's appeal was dismissed, upholding the CIT (A)'s decision based on precedents.
5. The appellant argued against the ITAT's view, stating that the expenditure was treated as capital in nature and entered as "Capital work in progress."
6. The respondent relied on judgments like Empire Jute Co. Ltd. and CIT Vs. EID Perry India Ltd. to support the revenue expenditure treatment.
7. The Apex Court's stance on distinguishing capital and revenue expenditure was discussed, emphasizing the enduring benefit test and business necessity.
8. Referring to Indo Rama Synthetic (I) Ltd., it was highlighted that the nature of the expenditure depends on whether a new business or asset is created with enduring benefit.
9. In the present case, as the new software development did not materialize and no enduring benefit asset was created, the expenditure was deemed revenue in nature.
10. The ITAT's decision was upheld, finding no merit in the appeals, and they were dismissed.