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TMI BlogWebsite- plant or machinery or revenue expenditure- choice is yours.X X X X Extracts X X X X X X X X Extracts X X X X ..... Website- plant or machinery or revenue expenditure- choice is yours. - By: - C.A. DEV KUMAR KOTHARI - Income Tax - Dated:- 23-9-2008 - - Website a short life high-tech high obsolescence item: One cannot doubt that a website is a high tech and high obsolescence item of asset. In any organization its website will require regular updates otherwise it will become obsolete and useless within a short span of time. If the website is not up to date, the public and concerned persons can be misguided and can suffer loss. For such loss the website owners/ website operators / maintainers can be held responsible. Thus website as such on principal of its useful life cannot be regarded as an asset having long useful life. An effective means of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommunication: Website is a user friendly substitute of mass communication. Website can fully or partly substitute communication system and can result in cost reduction. The communication can be with investors, customers, suppliers, service providers and public at large etc. Website is also a means of advertisement. It can also be used as a revenue earning source by providing advertisements of other interested organizations. Website system require various types of computers, mainframes - which are hardware and software classifiable as computers for the purpose of depreciation allowance. In view of the above features website can be considered as an item of asset which is prone to quick obsolescence and therefore, if capitalized, require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher amortization. Fortunately for computers we find rate of depreciation of 60% Treating website as a plant or machinery: Website consists of various software, hardware and data storage facilities. All these work electronically. For operation of website, services of internet service providers, website experts, data store, transmission etc. are required. Therefore, it can be said that the whole system is consists of plant and machinery consisting of computer hardware, and software. Therefore entire system is a 'plant'. The system produces information, pictures, voice, reports etc. These are now well recognized as an article or thing. The entire system of website cannot be regarded as a plant or machinery installed in office premis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The website and all related equipments cannot be regarded as office appliances. Therefore the website shall be considered as plant and machinery in nature of 'computers including software' and it will be eligible for normal depreciation @ 60% plus a further deduction u/s 32 (1) (iia) equal to 20% of the cost. Therefore, 80% of the cost can be claimed in the first year itself if the plant and machinery is used for 180 days in the first year. Therefore, depending on circumstances one may find it prudent to capitalize the cost and claim depreciation instead of claiming as revenue expenditure. However, in case of existing business, where claim as revenue expenses is more tax saver, the same can be claimed as revenue expenses. One can go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to say that even if in the accounts expenses are capitalized, still they can be claimed as revenue expenses by making separate claim and forgoing depreciation allowance. Delhi High Court - held expenses rightly allowed as revenue expenses : In CIT V Versus INDIAN VISIT. COM PVT. LTD 2008 -TMI - 30661 - DELHI HIGH COURT in A ppeal No. - 1011 of 2008 decided on 05 September 2008 the matter involved was whether the amount of Rs 20,23,317/- incurred by the assessee on development of its website was an expenditure of a capital nature or of a revenue nature? The assessee is engaged in the tour and travel business and makes all kinds of arrangements for its clients such as booking of hotel rooms, providing taxi services, booking o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f air tickets and railway tickets etc. The assessee created and hosted its website on which relevant information about various destinations and places for which it can arrange travel, hotel booking etc. for its clients are displayed. The customers of assessee can use the website for the purposes of reviewing facilities available as well as availing various services provided by the assessee. The Assessing Officer treated the expenditure of Rs 20,23,317/- as capital expenditure by holding that the assessee had acquired an asset which would provide the assessee with an enduring benefit over a long period of time. On appeal by assessee before the first appellate authority the view of A.O. was confirmed. On further appeal the Tribunal reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsed order of lower authorities and held that the said expenditure was of a revenue nature and was, therefore, allowable to the assessee. The Tribunal considered website as equal to an electronic brochure made available to prospective customers. The Tribunal was of the view that the website supplies information about the scope and activity and the profile of the assessee. The Tribunal also noted that expenses had to be incurred by the assessee for registering and renewing the domain name and further expenses were required from time to time to constantly update the information on the website. It was also indicated that through the medium of the website on the Internet, the assessee could avoid services of middle-men like travel agents as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as other expenses such as expenditure on magazines for advertising the assessee's business and the printing of other material for conveying the information to its clients and prospective customers. The Tribunal returned a finding that by spending money for its website, the assessee could not be considered to have acquired any capital asset even if such a website provided an enduring benefit to the assessee. Consequently, the Tribunal took the view that the expenditure for the acquisition and upgradation of the website was of a revenue nature. The Tribunal placed reliance on two decisions of the Supreme Court in the cases of Empire Jute Company Ltd v. CIT: 124 ITR 01 and Alembic Chemical Works Company Ltd v. CIT: 177 ITR 377. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Empire Jute Company Ltd (supra), the Supreme Court observed that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The Supreme Court observed that in such cases the test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. In Alembic Chemical Works Company Ltd (supra), the Supreme Court obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that the idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions: nor are the notions of 'capital' or 'revenue' a judicial fetish. The Supreme Court also observed that the 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. The Supreme Court also noted that in a given case, the test of 'enduring benefit' might break down. Considered in the light of these principles enunciated by the Supreme Court, it is clear that just because a particular expenditure may result in an enduring benefit would not make such an expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a capital nature. What is to be seen is what is the real intent and purpose of the expenditure and as to whether there is any accretion to the fixed capital of the assessee. In the case of expenditure on a website, there is no change in the fixed capital of the assessee. Although the website may provide an enduring benefit to an assessee, the intent and purpose behind the purpose for a website is not to create an asset but only to provide a means for disseminating the information about the assessee. The same could very well have been achieved and, indeed, in the past, it was achieved by printing travel brochures and other published materials and pamphlets. The advance of technology and the wide spread use of the internet has provided a ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry powerful medium to companies to publicize their activities to a larger spectrum of people at a much lower cost. Websites enable companies to do what the printed brochures did but, in a much more efficient manner as well as in a much shorter period of time and covering a much larger set of people worldwide. The High Court held that "The Tribunal has correctly appreciated the facts as well as the law on the subject and has come to the conclusion that the expenditure on the website was of a revenue nature and not of a capital nature. We see no reason to interfere with the impugned order. No such substantial question of law arises for our consideration. The appeal is dismissed. Conclusion: It can be said that a website is just a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substitution of existing information system to make information dissemination more wide spread, quick and easy to upgrade and disseminate. With help of website, existing systems are upgraded to make work easy, quick and less costly. With website, customers services are improved and costs in relation of selling or procurement can be reduced. Therefore the benefits derived are in field of revenue and not capital field. An expenditure, which saves revenue expenses, bring in more efficiency is a revenue expense, even if the benefit derived is of some enduring nature. In case of websites, the benefit of enduring nature is also not much relevant because of fast changes which one has to make to maintain website up to date , reliable and workab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. If a website is not updated regularly, it may become obsolete in a short span of time. In view of this factor also expenses of website creation and maintenance cannot be regarded as capital expenditure. Therefore, in case of existing business, where claim as revenue expenses is more tax saver, the same can be claimed as revenue expenses. One can go to say that even if in the accounts expenses are capitalized, still they can be claimed as revenue expenses by making separate claim and forgoing depreciation allowance. Where the assessee is having losses, it may be more profitable to claim depreciation so that unabsorbed depreciation can be carried forward without limitation on carry forward and set off. - - Scholarly articles for kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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