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Income Tax Appellate Tribunal, KOLKATA ‘A(SMC
Before: Shri P.M. Jagtap
This appeal is preferred by the Revenue against the order of ld. Commissioner of Income Tax (Appeals)-XIX, Kolkata dated 07.07.2014 for the assessment year 2002-03 and in the solitary ground raised therein, the Revenue has challenged the action of the ld. CIT(Appeals) in deleting the addition of Rs.1,37,77,569/- made by the Assessing Officer on account of Website Development Expenses treating the same as capital in nature.
The assessee in the present case is a Company, which is engaged in the business of Website Development. The return of income for the year under consideration was filed by it on 31.10.2002 declaring a loss of Rs.1,75,97,080/-. The said return was initially processed by the Assessing Officer under section 143(1) on 03.02.2003. Thereafter he noticed the following aspects from the relevant record:- “(i) The assessee debited Rs.1,37,77,768.86 as Website Development Expenses written off. Further scrutiny of ./2014 Assessment year: 2002-2003 Page 2 of 5 assessment records revealed that the assessee’s accumulated Website Development Expenditure aggregating to Rs.2,75,55,537.72 (including Rs.3,63,254/- incurred upto 28th April, 2000) was written off in two years. The expenditure incurred during the period from 29th April, 2000 to 31st March, 2001 had been charged to the P& L account in full.
(ii) The aforesaid amount of Rs.2,75,55,537/- shown in the balance sheet of the assessee as misc. Expenditure.
(iii) From the Director’s report to the Members for the year ended 31.03.02 it was revealed that the aforesaid amount is the capitalized cost of intangible software asset purchased by the company in previous years. These were written off completely. The cost relates primarily in payments made against invoices raised by Vedika Software Pvt. Ltd. for services rendered by them of and reimbursement of related costs towards developing the portals for allindia.com”.
Keeping in view the above, the Assessing Officer was of the view that the amount of Rs.1,37,77,768/- debited by the assessee to the Profit & Loss Account, which constituted capital expenditure, was required to be added back to its total income and there was thus escapement of income of the assessee to that extent from the assessment. He, therefore, reopened the assessment by issuing notice under section 148 after recording the reasons and in the assessment completed under section 143(3)/147 vide an order dated 03.08.2009, the Website Development Expenses of Rs.1,37,77,769/- were disallowed by him.
Against the order passed by the Assessing Officer under section 143(3)/147, an appeal was preferred by the assessee before the ld. CIT(Appeals) disputing the disallowance made by the Assessing Officer on account of Website Development Expenses and after considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) deleted the said disallowance made by the Assessing Officer for the following reasons given in paragraph no. 4.2 to 4.5 of his impugned order:- ./2014 Assessment year: 2002-2003 Page 3 of 5 “4.2. On consideration of the rival contentions on the issue, my findings and decision thereon are as follows. On a critical analysis of the issue at hand, in my opinion, expenditure incurred towards computer software should be treated as that of being only transient in nature. In today's world of technological revolution, it is a known fact that technological upgradation, especially in the field of computer environment, software upgradation is a continuous affair which entails continuous expenditure in this regard. There is hardly any scope for creating an asset with this kind of expenditure. The AO has not appreciated this fact and based his observation on criteria which do not hold much water. The contention of the appellant is that it has followed the guidelines of the Institute of Chartered Accountants of India (ICAI), which is the Accounting Body constituted by the Parliament of India and also the issue is covered by the judgment of the Apex Court as well as by various High Courts. Reference in this regard was made to the following judgments: 1. Empire Jute Co. Ltd. vS.CIT [1980J 1241TR 1 (SC) 2. Alembic Chemical Works Co. Ltd. vs. CIT [1989J 177 ITR 377 (SC) 3. CIT vs. Indian Visit.com (P) Ltd. [2009J 176 Taxman 164 (Delhi)
4.3. It may be mentioned that the Delhi High Court in the case of India Visit.com had referred to the pronouncement of the Apex Court in the above two referred cases at SI. No. 1 & 2 wherein it was ruled with reference to SI No.1 that 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 Apex Court further 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.
4.4. In the case of Alembic Chemical Works Co. Ltd. the Apex Court finally decided that the expenditure on the website was of a revenue nature and not of a capital nature. The highlight of the judgment is that just because a particular expenditure may result in an enduring benefit would not make such an expenditure of 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 website expenditure, 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.
4.5. The matter is also dealt with in the case of Deputy Commissioner of Income Tax Vs M/s Edelweiss Capital Ltd I.T.A No: 3971/Mum/2009. The opinion laid down was that even if the websites had materialized, the expenditure could not have been viewed as capital expenditure because the website is put up for the ./2014 Assessment year: 2002-2003 Page 4 of 5 purposes of day-to-day running of the business and even if one was to view that some enduring benefit is obtained by the asessee, the benefit cannot be said to accrue to the assessee in the capital field. A web site is something where full information about the assessee's business is given and it helps the assessee's customers in dealing with it. A website constantly needs updating, otherwise it may become obsolete. It helps in the smooth and efficient running of the day-to-day business. Going by the entire matrix of facts and the rulings of both the Apex Court and the High Court as depicted above, I can only hold that website development expenditure is to be treated as revenue expenditure rather than capital. The addition made by the AO on account of this expenditure is therefore directed to be deleted”.
Aggrieved by the order of the ld. CIT(Appeals), the Revenue has preferred this appeal before the Tribunal.
I have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the issue involved in this appeal of the revenue is squarely covered in favour of the assessee, inter alia, by the decision of the Hon’ble Supreme Court in the case of Alembic Chemical Works Co. Limited reported in 177 ITR 377, wherein it was held that the expenditure incurred by the assessee on Website Development was of a revenue nature and not of a capital nature. It was held that although the Website might provide an enduring benefit to an assessee, the intended purpose behind the Website was not to create an asset but only to provide a means for disseminating the information about the assessee. To the similar effect is the decision of Mumbai Bench of this Tribunal in the case of DCIT –vs.- M/s. Edelweiss Capital Limited (ITA No. 3971/Mum./2009), wherein it was held that the expenditure incurred on Website could not be viewed as capital expenditure because the Website was put up for the purposes of day-to- day running of the business. It was also held that even if some enduring benefit was obtained by the assessee by way of development of Website, such benefit could not be said to have accrued to the assessee in the capital field. At the time of hearing before me, the ld. D.R. has not brought to my notice any decision, wherein a different view in favour of the ./2014 Assessment year: 2002-2003 Page 5 of 5 Revenue has been taken on this issue. I, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) in deleting the disallowance made by the Assessing Officer on account of Website Development Expenses incurred by the assessee by following the decision of the Hon’ble Supreme Court in the case of Alembic Chemical Works Co. Limited (supra) and that of the Tribunal in the case of Edelweiss Capital Limited (supra) and upholding the same on this issue, I dismiss the ground raised by the Revenue.
In the result, the appeal of the Revenue is dismissed. Order pronounced in the open Court on September 16, 2016.