No enduring benefit arises when software project was abandoned due to change in technology. Supreme Court dismisses SLP of Department
In a recent case, the Hon’ble Supreme Court has dismissed the Special Leave Petition (SLP) of the Revenue against the judgment of the Hon’ble High Court of Karnataka that question whether expenditure is capital giving enduring benefit arises only when a product is developed and a new asset came into existence.
ABCAUS Case Law Citation:
ABCAUS 4012 (2024) (05) SC
The assessee company was engaged in the business of rendering customised internet advertising services for advertisers which can be used on the Desktop. In order to develop its software, the assessee had incurred large expenditure on salaries and marketing expenditure for development of new software platform
A survey u/s 133A of the Income Tax Act, 1961 (‘The Act’) was carried out in the case of the assessee. During the course of survey, the statement of H. R. Manager was recorded. Further, statement of CEO of assessee company was also recorded where they admitted that the company has started a new business model, for which it is developing new software platform.
The case of the assssee 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 submitted that 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 for less sophisticated client base, who could neither afford to bear specialized Ad operations nor afford to pay license fee for existing product.
The assessee further submitted that it has spent various expenses including salaries on technical personnel and marketing expenses in USA to gauge the effect of this new software platform. However, due to rapid change of technology and shifting of advertisement from desktop to mobile platform, the software being developed by the assessee was abandoned and closed since the product was very unusable. Further, at no point of time, this new platform was put to use and no depreciation is claimed on the project. Therefore, expenses incurred for conducting feasibility study of the new software platform cannot be considered as capital expenditure, which gives enduring benefit to the assessee.
However, Assessing Officer (AO) opined that expenditure incurred on development of new software platform was in capital nature, which gives enduring benefit to the assessee and thus, needs to be capitalized. Accordingly, AO disallowed expenditure incurred on salaries for software product development and its marketing. The CIT(A) confirmed the additions.
The Tribunal held that 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 the product would give enduring benefit to the assessee.
The Tribunal opined that at best, the expenditure incurred by the assessee towards development of new software platform was 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.
The ITAT placing reliance on Accounting Standard-26 prescribed by the ICAI for treatment of expenditure of research and development expenses held that expenditure claimed were not capital in nature.
Not satisfied with the order of the ITAT, the Income Tax Department contested it before the Hon’ble High Court.
The Hon’ble High Court observed that it was not disputed that the assessee had invested money to develop a software platform for the Desktops. It was also not disputed that due to rapid change in the technology, the application sought to be developed by assessee had become obsolete and the assessee abandoned further development. In substance, assessee had incurred expenditure in two years to develop a software but due to change in technology, it had to abandoned the product. In effect, it had lost money spent on this product. The product having been abandoned, the assessee shall not get any endure in benefit.
The Hon’ble High Court opined that the ITAT, had correctly analysed the facts and allowed the appeals and there was no ground to interfere with the findings recorded by the ITAT.
Still dissatisfied, the Department filed a Special Leave Petition before the Hon’ble Supreme Court. The Apex Court heard the parties but declined to interfere with the impugned judgment and order passed by the High Court and dismissed the SLP.
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