GLOBAL TECH INDIA PRIVATE LIMITED,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-2(1)(1), AHMEDABAD

The brief facts of the case is that the assessee is a Company engaged in the business of Software Development and Maintenance. The assessee filed its Return of Income for the Asst. Year 2013-14 on 30.09.2012 declaring total income of Rs.38,825/-. The return was taken up for scrutiny assessment. The Assessing Officer disallowed Product Development expenses written off Rs.19,66,641/- and added as the income. The assessee explained the expenditure was incurred for development of one software product on HR Management System in the name of “ProHR” for linking strategy and performance with integrated payroll and Web based self-service which was started in the year 2009-10. The expenditure of Rs.19,27,806/- relates to expenses for the development of this software which was to be capitalized as intellectual Property Rights upon completion of the Project and the same would be amortized for a period of two to four years. However, due to technological obsolescence, the said project is not likely to result in any economic benefits to the assessee. Therefore, the capital work-in-progress of this project was written off and ultimately the project was abandoned. Further New Technology from Microsoft – Dotnet was popular in the market, which was cloud based technology and cost efficiency. Therefore the software project prepared by the assessee namely “Pro-HR” could not get a single client and the same was abandoned. However the Assessing Officer relying upon various case laws disallowed the claim and added the expenses as the income of the assessee and demanded tax thereon.

Aggrieved against the assessment order, the assessee filed an appeal before Ld. CIT(A) which was also dismissed by observing when the software has been prepared with a sole motive to use it for a number of years as claimed and it is of enduring nature, suddenly it cannot be converted to revenue expenditure after three years and claim it as expenditure in a single year, it is not an advance of money for any capital asset, that after three years it becomes abandoned. Further Ld. CIT(A) held that the case laws relied by the assessee are not applicable to the facts of the case and then dismissed the assessee appeal.

Aggrieved against the same, the assessee is in appeal before us raising the following Grounds of Appeal:

The Ld. Counsel reiterated the arguments made before the Lower Authorities and submitted that the assessee decided to abandon the development of the software “ProHR”. Since the software had not fructified as the assessee was not successful in validation of Alpha version of the subject software by initial trials/live testing/feedback, without which completion of software development could not have been achieved. Further due to technological obsolescence, the development of the software “ProHR” was ultimately abandoned by the assessee.

Per contra, Ld. Sr. D.R. appearing for the Revenue supported the orders passed by the Lower Authorities and requested to uphold the same.

We have given our thoughtful consideration and perused the materials available on record. It is seen from the order passed by the Lower Authorities, Ld. A.O. presumed that the Software Development Project was completed, whereas the software project “ProHR”was not completed and not even put for initial trial with any customers then only the product can be sellable in the open market. Further due to technological advancement with other competitive software in the market, the assessee decided to drop the above project and had written off the expenses in the present Asst. Year 2013-14. In such abandoned projects, the expenses were treated as Revenue in nature in the following judicial precedents.

The Hon’ble Bombay High Court in the case of PCIT-Vs-Trigent Software Ltd. (in & 640 of 2018) order dated 02.12.2022 wherein it was held as follows: “…10. The issue as to whether a particular expenditure incurred was of capital or revenue in nature has been the subject matter of legal debate before various Courts in the Country. As held by the Apex Court in the case of Empire Jute Co. Ltd. (Supra), since there does not exist an all-embracing formula which can provide a ready solution to the problem; no touchstone has been devised and that every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. However, it referred to one celebrated test laid down in the case of British Insulated & Helsby Cables Ltd. Vs. Atherton 5. The principle as stated therein was as under:

However, notwithstanding that a reference had been made to the said principle of law, the Apex Court held that the "enduring benefit test was not a certain or conclusive test and cannot be applied mechanically without regard to the particular facts and circumstances of a given case and that what was material to consider was the nature of the advantage and that it is only where the advantage was in the capital held that the expenditure would be disallowable on an application of this test. If the advantage consisted merely in facilitating the assessee's trading operations or enabling the management and conduct of the assesse'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 held: 11 When dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixan, J. said in Hallstrom's Property Limited v. Federal Commissioner of Taxation 72 CLR 634 "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the Justice classification of the legal rights, if any, secured, employed or exhausted in the process" The question must be viewed in the larger contest of business necessity or expediency If the outgoing expenditure is a related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure See Bombay Steam Navigation Co (1953) Pvt. Ltd v Commissioner of Income Tax (2) The same test was formulated by Lord Clyde in Robert Addze & Son's Collieries Ltd. v Inland Revenue(3) in these words "Is it part of the company's working expenses is it expenditure laid out as part of the process of profit earning or on the other hand is it a capital outlay, is it expenditure A.Y. 2013-14 Page No 7 Global Tech India Pvt. Ltd. vs. ITO necessary for the acquisition of property or of rights of permanent character, the possession of which is a condition of carrying on its trade at all? 12. In Indo Rama Synthetic (1) Ltd. (Supra), it was held that if the expenditure was incurred for starting a new business which was not carried out by the assessee earlier, then such expenditure would be held to be of a capital nature and it would be irrelevant as to whether the project really materialized or not. However, if the expenditure incurred was in respect of the same business, which was already carried on by the assessee, even if it was for the expansion of the business, i.e., to start a new unit and there was unity of control and a common fund, then such an expense was to be treated as business expenditure. It was held that in such a case whether a new business/asset came into existence or not would become a relevant factor and that if there was no creation of a new asset, then the expenditure incurred would be of revenue nature and that if the new asset came into existence which was of an enduring benefit, then such expenditure would be of a capital nature. This view was also followed in the case of Commissioner of Income-tax, Ranchi Vs. Tata Robins Fraser Ltd.

Applying the ratio of the aforementioned judgments in the present case, it can be seen that the appellant is admittedly in the business of development of software solution and management, and therefore, it’s endeavour to develop a new software was nothing but an endeavour in its existing line of business of developing software solutions. Admittedly, the product which was sought to be developed, never came into existence and the same was abandoned. No new asset came into existence which would be of an enduring benefit to the assessee, and therefore, in these circumstances, the expenditure could only be said to be revenue in nature.” 8.1. The Hon’ble Bombay High Court in the case of CIT-Vs- Idea Cellular Ltd. (cited supra) wherein it was held as follows:

Since the software project “Pro HR” was abandoned, there was no enduring benefit to the assessee, as there is no existence of a new software. Therefore the expenses are to be allowed as Revenue in nature and the addition made by the lower authorities are liable to be deleted.

In the result, the appeal filed by the Assessee is allowed.