Tribunal classifies salary and marketing expenses as revenue, not capital, for software development.

The tribunal ruled in favor of the assessee, determining that the salary expenses for software development and marketing expenses should be classified as revenue expenditure rather than capital expenditure. The software developed was never operational and was abandoned, leading to the conclusion that the salary costs did not result in an enduring asset. The marketing expenses were found to be for overall business promotion and not directly linked to the new software platform. Therefore, the additions made for both salary and marketing expenses were directed to be deleted, treating them as revenue expenditures.

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Issues Involved:
1. Classification of salary expenses for software development as capital or revenue expenditure.
2. Classification of marketing expenses as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Classification of Salary Expenses for Software Development:
The primary issue was whether the salary costs incurred for the development of a new software platform should be treated as capital expenditure, providing enduring benefits, or as revenue expenditure. The assessee argued that the software was never put to use and was eventually abandoned due to rapid technological changes, thus the expenses should be considered as revenue in nature. The A.O. and CIT(A) held that the expenses were capital in nature, assuming the software would provide enduring benefits.

Upon review, it was noted that the software developed was never operational and was abandoned due to technological shifts. The tribunal referenced the decision of the Karnataka High Court in Karnataka State Industrial and Development Corporation, which held that expenses on research and feasibility studies are revenue expenditures. The tribunal also cited Accounting Standard-26, which states that research expenses should be recognized as incurred. Therefore, the tribunal concluded that since the software was never put to use and no new asset came into existence, the salary expenses should be treated as revenue expenditure. The tribunal directed the A.O. to delete the additions made for salary expenses.

2. Classification of Marketing Expenses:
The second issue involved whether marketing expenses incurred in the USA to gauge the effect of the new software platform should be treated as capital expenditure. The assessee contended that these expenses were for promoting the company's overall business and attracting potential customers, not specifically tied to the new software platform.

The tribunal found that the marketing expenses had no direct nexus with the new software platform and were primarily for overall business promotion. Even if associated with the new platform, the expenses would still be revenue in nature as the software was never utilized and was abandoned. Therefore, the tribunal directed the A.O. to delete the additions made for marketing expenses as capital expenditure.

Conclusion:
The tribunal allowed the appeals for both assessment years, directing the deletion of additions made towards salary and marketing expenses, treating them as revenue expenditures. The judgment emphasized that expenses related to research and feasibility studies, which do not result in a usable asset, should be considered revenue in nature.

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