ITAT Chennai rules R&D expenditure as revenue, reverses depreciation for AY 2015-16 &D

The ITAT Chennai ruled in favor of the assessee in an appeal concerning the treatment of Research & Development (R&D) expenditure as capital expenditure for Assessment Year 2015-16. The ITAT held that the R&D expenditure, aimed at enhancing technology expertise and increasing revenue, was revenue in nature and did not result in the creation of new capital assets, reversing the depreciation granted by the AO. Additionally, the ITAT allowed the appeal regarding the addition on account of a discrepancy in directors' remuneration, emphasizing that the reimbursements were genuine and not taxable.

---

---

Issues:
1. Treatment of Research & Development (R&D) expenditure as capital expenditure
2. Addition on account of discrepancy in directors' remuneration

Analysis:

Issue 1: Treatment of Research & Development (R&D) expenditure as capital expenditure
The appeal for Assessment Year 2015-16 involved the treatment of R&D expenditure as capital expenditure. The assessee, engaged in software development, debited R&D expenditure of Rs. 81.99 Lacs. The Assessing Officer (AO) considered it as capital expenditure eligible for depreciation, as it would bring enduring benefit to the assessee. However, the assessee argued that the expenditure aimed to improve services, expertise in technology, and increase revenue, not to create new capital assets. The ITAT Chennai examined the nature of the expenditure, which included salaries, PF contributions, business promotion, web services expenses, consultancy charges, and employee training. The ITAT concluded that the expenditure, mainly revenue in nature and aimed at enhancing technology expertise and increasing revenue, did not result in the creation of new capital assets. Citing a similar case, the ITAT held the expenditure to be fully allowable, reversing the depreciation granted by the AO.

Issue 2: Addition on account of discrepancy in directors' remuneration
The second issue pertained to the remuneration paid to four directors, each receiving Rs. 12.00 Lacs, which included medical allowance and travel/expenditure reimbursement. The AO added the travel/expenditure reimbursement to the income of the assessee, contending it should have been included in the salary component. However, the ITAT noted that the reimbursements were genuine and part of the offer letters issued to the directors, reflected in pay-slips. There was no evidence that these reimbursements were taxable. The ITAT emphasized that since the assessee had genuinely incurred the expenditure, the addition made by the AO was not sustainable under Section 37(1). Consequently, the ITAT allowed this ground of appeal.

In conclusion, the ITAT Chennai allowed the appeal, ruling in favor of the assessee on both issues. The judgment was pronounced on 12th October 2021.

---