GANART TECHNOLOGIES PVT.LTD,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 9,, PUNE

The only issue raised herein is against the confirmation of disallowance of Rs.7,15,81,164/- made by the Assessing Officer (AO) towards ‘Project Development cost written off’ by the assessee.

The facts apropos this issue are that the assessee is engaged in the activity of Software Development. It debited a sum of Ganart Technologies Pvt. Ltd., Rs.7,15,85,164/- to its Profit and loss account under the head ‘Extraordinary item – Project Development cost written off’. The AO called for the details of such costs, which were submitted by the assessee backed by relevant vouchers and evidence. On their verification, the AO observed that the assessee incurred almost 93% of the project costs during financial years 2007-08 to 2009-

No expenditure, except debenture interest, was included in the costs for the financial year 2010-11 and such debenture interest cost was reversed in the next year 2011-12. However, for the financial year 2012-13, the assessee incurred Salary cost of Rs.16,63,898/- on the project, making total project costs at Rs.7,15,85,164/-. On being called upon to explain as to how the amount could be written off in the year under consideration when majority of the costs on the project were incurred in earlier years, the assessee tendered an explanation to the effect that it was making efforts to market the project by developing a software catering to the needs of the Department of Postal Services, Government of India. When the project was awarded to some other party and there was no hope left for the assessee to reap any benefit out of such software project, the costs incurred on it were written off. The AO accepted the otherwise deductibility of the Ganart Technologies Pvt. Ltd., amount, but disputed the year of deduction by holding that the assessee was not justified in writing off the amount in the year under consideration because the project was shelved in an earlier year on incurring the major costs. When the matter came up in the first appeal, the ld. CIT(A) upheld the conclusion of the AO about the non-deductibility of the amount but with different reasoning. He held that the project development expenses incurred by the assessee were for an enduring benefit and hence constituted an ‘Intangible asset’, otherwise eligible for depreciation. Since the so called ‘Intangible asset’ was not put to use during the year, he denied the claim of depreciation as well.

Having heard the rival submissions and gone through the relevant material on record, it is seen that the assessee is engaged in the business of software development. The development of a software may get over in a short time or may, in certain cases, go on for a long time extending to certain years. When fully developed, the software becomes an income earning asset, which is sold/licensed over a period. Reverting to the facts, a new project of software development was espoused by the assessee during the financial year 2007-08, which went uninterrupted for Ganart Technologies Pvt. Ltd., three years. After that, there was a lull for two years. Again, the project was taken up in the preceding year. Ultimately, the assessee realized that the project was not workable and wrote off the total costs incurred on it to the tune of Rs.7.15 crore. The AO held on page 4 of his order that: `The claim of the AR of the assessee that the expenses are deductible u/s 37 is not dismissed; however the timing of the claim is what is not acceptable’. Once a project is abandoned, all the revenue costs incurred on it become deductible. It manifests that the AO accepted that the expenditure incurred on the project was of the revenue nature but denied the deduction as it did not pertain to the year under consideration. Au contraire, the ld. CIT(A) held the expenditure to be of capital nature resulting in enduring benefit to the assessee but he made it ineligible for depreciation as the so called intangible asset emerging out of such expenditure, was not put to use.

The project of development of the software was started by the assessee in an earlier year but it turned out in the year under consideration to be of no use and hence a futile exercise. Ex consequenti, the cost of Rs.7.15 crore incurred on the project was written off. If the software development project had become successful, the amount incurred on it over the years, categorised

Coming to the view point of the AO, it is seen that he did not dispute the otherwise allowability of the expenses. His point of view was that such expenditure could not be allowed as deduction by writing it off during the year under consideration. The ld. AR has placed on record necessary details of the project costs which evidently demonstrate that all the expenses incurred were of Ganart Technologies Pvt. Ltd., revenue nature. This approves the raison d’etre of the AO that the expenditure is otherwise deductible.

The dispute raised by the AO is on the year of deductibility and not the amount of deduction. The year of deductibility is when the assessee realizes that the project has become unworkable and should not be further pursued. It is for the assessee to decide as to when the project becomes unviable and requires to be written off. Unless any mala fide is attributed, the decision of the assessee about the time of shelving off the project has to be respected.

The AO in the present case, going with the amount of expenses incurred in earlier years, has decided that the project ought to have been written off in earlier year. Even though the assessee incurred 93% of the project costs in earlier years, it can be seen that it incurred further costs of Rs.16.63 lakh on the project in the immediately preceding year, which divulges that the project was still going on up to the end of the preceding year. It was only in the current year that the assessee realized that the project cannot be continued and hence wrote off the costs incurred on it. In our considered opinion, no exception can be taken to the assessee’s point of view of deciding the year in which Ganart Technologies Pvt. Ltd., the project became unviable so as to write off the revenue costs incurred on it. As the assessee found the project to be lost and decided to write it off, it is this year in which the write off has to be allowed. In view of the fact that the revenue nature of the costs incurred has not been disputed by the AO, we hold that the assessee is entitled to deduction of Rs.7.15 crore in the current year. The impugned order is overturned pro tanto to this extent.

In the result, the appeal is allowed. Order pronounced in the Open Court on 18th day of October, 2022.