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TMI Blog2020 (8) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... g the year under consideration and the same has never been put to use even in subsequent financial year and finally abandoned, then it cannot be termed that an independent product was came into existence, which gives enduring benefit to the assessee to treat expenditure incurred on development of said product to be in capital in nature. At best, the expenditure incurred by the assessee towards development of new software platform is in the nature of expenditure incurred for preparation of feasibility of the new project in respect of same business, which is already carried out by the assessee, even if it is for expansion of business and definitely cannot be treated as capital expenditure incurred for development of a new product, which gives enduring benefit to the assessee. This view taken by us is fortified by the decision of Karnataka State Industrial Development Corporation [ 1986 (2) TMI 16 - KARNATAKA HIGH COURT] where the court clearly held that expenditure incurred on investigation, research and feasibility studies laid out by assessee was revenue expenditure in nature and thus was an allowable deduction. As per Accounting Standard-26 prescribed by the ICAI for treatme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accountant Member For the Appellant : Shri Sudeep Das, A.R. For the Respondent : Shri Muzaffar Hussain, D.R. ORDER PER G. MANJUNATHA, ACCOUNTANT MEMBER: These two appeals filed by the assessee are directed against separate, but identical orders of the CIT(A)-1 Bengaluru, both dated 21.3.2019 and pertains to assessment year 2015-16 and 2016-17. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed of by this consolidated order. 2. The assessee has more or less raised common grounds of appeal for both the assessment years, therefore, for the sake of brevity the grounds of appeal filed for assessment year 2015-16 are reproduced as under: 1. The Ld. Deputy Commissioner of Income-tax Circle-1(1)(1) ( learned AO) has erred in law and on facts in passing the assessment order in the manner passed by him, and the CIT(A)-1 has erred in sustaining the addition made by the . learned AO. The order passed by the lower income-tax authorities are bad in law and not derived from the instant facts, and liable to be quashed. 2. The learned CIT(A) has erred in (a) Treating expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs (predominantly Google). In other words, reselling an advertisement space of publisher to customers. A survey u/s 133A of the Income Tax Act, 1961 (herein after called as The Act ) was carried out in the case of the assessee on 18.7.2017. During the course of survey, the statement of Mr. Nithin Kurian, H.R. Manager was recorded. Further, statement of CEO of assessee company Shri Kurian Gopinath was also recorded on 27.7.2016, where they have admitted that the company has started a new business model, for which it is developing new software platform. 4. The assessee has filed its return of income for assessment year 2015-16 on 28.11.2015 declaring total income of ₹ 14,16,63,540/-. The case was selected for scrutiny and during the course of assessment proceedings, the assessee was asked to explain as to why expenses pertaining to development of software platform shall not be capitalized as it will give an enduring benefit. The assessee vide its letter dated 21.8.2017 submitted that the product that it was developing cannot be termed as an independent product, which can be put to use. It was only working to bring out specific market output by simplifying the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economic benefits are probable. Further, the standards make it very clear that expenditure on research should be recognized as expenditure, when it is incurred. 7. The Ld. CIT(A) after considering the submissions of the assessee and also taken note of factual matrix brought out by the A.O. came to the conclusion that the new software platform being under development during the year is expected to give enduring benefit to the assessee and being a new intangible product, on which one can recognise the intellectual property in the same. Thus, it can be fairly assumed that the new product, once developed is expected to give enduring benefit to the assessee which was to support and form the back bone of the new line of business of reselling of online digital advertisement space. Thus, expenditure incurred on the project assumes the character of capital expenditure. Accordingly, the Ld CIT(A) was of the opinion that there is no error in the findings accorded by the A.O. in treating the expenditure to be capital in nature. Aggrieved by the CIT(A) order, the assessee is in appeal before us. 8. The Ld.A.R. for the assessee submitted that the Ld. CIT(A) has erred in treating e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has developed a software platform, which can be used from desktop. The assessee has incurred various expenditures, including salary and marketing expenses for conducting feasibility study of the new product in USA to gauge the effect of new software platform among customers and also to start popularising this software platform. But due to rapid change of technology and shifting of advertisement from desktop to mobile platform, the software being developed by assessee was abandoned and closed since the product was very unusable. Further, at no point of time, this new platform was put to use. In this factual matrix, if we examine the nature of expenditure incurred by the assessee towards salary paid to personnel for development of new software platform, it is very clear that the software developed by the assessee was never put to use because of change in technology. The question whether expenditure is in the nature of capital expenses, which gives enduring benefit to the assessee arises only when a product is developed and a new asset came into existence. Unless the product developed, comes in the form of a new product, which can be independently used, then it cannot be said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h future economic benefits are probable. Therefore, we are of the considered view that the A.O. as well as the Ld. CIT(A) were erred in coming to the conclusion that expenditure incurred on developing new software platform is expected to give enduring benefit and one can recognise the intellectual property in the same to come to conclusion that expenditure incurred for development of new software platform is capital in nature. Hence, we direct the A.O. to delete additions made towards disallowance of salary expenses incurred for development of new software platform. 12. Coming to marketing expenses; Although the A.O. as well as Ld. CIT(A) has never brought out clear facts with regard to the nature of marketing expenses incurred by the assessee and its nexus with a new product being developed by the assessee, on perusal of details filed by the assessee, we find that marketing expenses incurred by the assessee has no nexus with new product being developed by the assessee. Further, marketing expenses were incurred in order to show-cause the capabilities of Adadyn to the potential customers and from this it has a clear indication that expenses were incurred primarily towards attract ..... X X X X Extracts X X X X X X X X Extracts X X X X
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