2008 (9) TMI 8 - HC - Income Tax

Website development costs are revenue expenses, not capital investment, when they don't create or augment fixed capital

COMMISSIONER OF INCOME TAX Versus INDIAN VISIT. COM PVT. LTD

HC held that expenditure on developing a website is of revenue, not capital, nature. Applying Supreme Court principles, the court found that enduring ... Nature of expenditure incurred on the development of the website - capital expenditure Or revenue nature - HELD THAT:- Considered in the light of the principles enunciated by the Supreme Court in Alembic Chemical Works Company Ltd.[1989 (3) TMI 5 - SUPREME COURT], it is clear 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 expenditure on a website, 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. The same could very well have been achieved and, indeed, in the past, it was achieved by printing travel brochures and other published materials and pamphlets. The advance of technology and the wide spread use of the internet has provided a very powerful medium to companies to publicize their activities to a larger spectrum of people at a much lower cost. Websites enable companies to do what the printed brochures did but, in a much more efficient manner as well as in a much shorter period of time and covering a much larger set of people worldwide. The Tribunal has correctly appreciated the facts as well as the law on the subject and has come to the conclusion that the expenditure on the website was of a revenue nature and not of a capital nature. Issues:Whether the expenditure incurred on the development of the website by the assessee is of a capital nature or a revenue nature.Analysis:The only issue before the Tribunal was to determine if the expenditure of Rs 20,23,317 on the website development was of a capital or revenue nature for the assessment year 2001-02. The Assessing Officer and the Commissioner of Income-tax (Appeals) considered it as a capital expenditure due to acquiring an asset with enduring benefits. However, the Tribunal disagreed, viewing the website as a tool for providing information to clients, akin to an electronic brochure. The Tribunal highlighted the ongoing expenses for domain registration, updates, and the cost-saving benefits of reaching clients directly without middle-men. It concluded that the expenditure was revenue in nature, not leading to the acquisition of a capital asset.The Tribunal relied on two Supreme Court decisions, Empire Jute Company Ltd v. CIT and Alembic Chemical Works Company Ltd v. CIT. In Empire Jute, the Court emphasized that enduring benefits do not automatically classify expenditure as capital, considering the specific circumstances. Alembic Chemical Works further clarified that the enduring benefit test is not definitive, and the purpose and effect of the expenditure should be assessed practically. The intent behind the outlay and its impact on fixed capital are crucial in determining the nature of the expenditure.Applying the principles from the Supreme Court decisions, the High Court affirmed the Tribunal's decision. It noted that while a website may provide enduring benefits, the primary aim is information dissemination, not asset creation. The court highlighted the cost-effectiveness and efficiency of websites compared to traditional printed materials for publicity. Websites serve as a modern medium for companies to reach a broader audience at lower costs, aligning with the business realities and technological advancements.In conclusion, the High Court upheld the Tribunal's decision, stating that the expenditure on the website was of a revenue nature, not leading to any change in fixed capital. The court found no substantial question of law requiring consideration and dismissed the appeal, affirming the Tribunal's ruling on the nature of the expenditure.