2024 (5) TMI 659 - HC - Income Tax

Karnataka HC rules abandoned software development expenses due to tech changes are revenue, not capital expenditure.

THE PR. COMMISSIONER OF INCOME TAX CIT (A), THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE - 1 (1) (1) Versus M/s. ADADYN TECHNOLOGIES PVT LTD

The HC of Karnataka upheld the ITAT's decision, concluding that the expenditure incurred by the assessee for developing a software platform should be ... Nature of expenditure - expenditure claimed by assessee as salaries and marketing expenditure for development of new software platform - revenue or capital expenditure - ITAT held such expenditure claimed as Revenue expenditure - HELD THAT:- It is not disputed that the Assessee had invested money to develop a software platform for the Desktops. It is also not disputed that due to rapid change in the technology, the application sought to be developed by Assessee had become obsolete and the Assessee abandoned further development. In substance, Assessee has incurred expenditure in these two years to develop a software but due to change in technology, it had to abandoned the product. In effect, it had lost money spent on this product. The product having been abandoned, the Assessee shall not get any endure in benefit. The ITAT, in our considered opinion has correctly analised the facts in para No.10 of the impugned judgment and allowed the appeals. Decided in favour of assessee. Issues:Challenge to order regarding disallowance of expenditure claimed as salaries and marketing expenses for software development. Determination of nature of expenditure as capital or revenue.Analysis:The High Court of Karnataka heard appeals by the Revenue challenging an order passed by the Income Tax Appellate Tribunal (ITAT) related to the assessment years 2015-2016 and 2016-2017. The main issue revolved around whether the expenditure claimed by the assessee for developing a new software platform should be considered capital or revenue in nature. The Revenue contended that the expenditure was capital in nature as it involved creating an intangible asset for enduring benefit. On the other hand, the assessee argued that the project was abandoned due to technological changes, making the expenditure revenue in nature.The court considered the arguments presented by both sides. It was established that the assessee, a company providing internet advertising services, had incurred significant expenditure to develop a software platform for desktops. However, due to rapid technological advancements, the project became obsolete, leading to its abandonment. As a result, the court concluded that the expenditure incurred did not result in any enduring benefit for the assessee since the project was abandoned, causing a loss of the money invested.The court upheld the ITAT's decision, emphasizing that the facts supported the conclusion that the expenditure should be treated as revenue in nature. The court found no reason to interfere with the ITAT's findings and dismissed the appeals. Consequently, the substantial questions of law were answered in favor of the assessee and against the Revenue, affirming the ITAT's decision in the matter.