Bombay High Court
Pr. Commissioner Of Income Tax-5 vs Trigent Software Ltd on 2 December, 2022
Bench: Dhiraj Singh Thakur, Abhay Ahuja
ITXA-634-2018=640-2018.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 634 OF 2018
WITH
INCOME TAX APPEAL NO. 640 OF 2018
Pr. Commissioner of Income Tax-5, ]
5th Floor, Room No. 559, ]
M.K. Road, Mumbai 400 020. ]
]
].. Appellant
VERSUS
]
Trigent Software Limited, ]
201, Vastushilp Annex, 11th Flloor, ]
Above HDFC Bank, ]
Gamadia Colony Road, Tardeo, ]
Mumbai 400 007. ].. Respondent
PAN : AABCT2852P
****
Mr.Suresh Kumar, Advocate for appellant.
Mr.Chaitanya KK, Senior Advocate with Mr.Prabhakar K. Shetty,
Advocate for respondent.
****
CORAM : DHIRAJ SINGH THAKUR AND
ABHAY AHUJA, JJ.
Pronounced on : 2nd DECEMBER 2022
:JUDGMENT:
PER DHIRAJ SINGH THAKUR, J :
1. The present appeals under section 260A of Income Tax Act,
Shraddha Talekar, PS 1/10
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1961 ('the Act') are preferred against the order dated 6 th June 2017
passed by the Income Tax Appellate Tribunal, "G" Bench, Mumbai
in ITA Nos. 3629/Mum./2015 & 7668/Mum./13 for the
assessment years 2006-07 and 2007-08, respectively.
2. In both appeals, the following question of law has been
framed, for our consideration :
"Whether on the facts and circumstances of
the case and in law, the ITAT was right in
allowing the capital expenditure in connection
with the development of new products as
revenue expenditure?"
3. Income Tax Appeal No. 634 of 2018 :
The assessee is engaged in the business of software
development solution and management. The assessee fled its
return of income on 31st October 2007 declaring total income at
Rs.3,31,29,870/-. The Assessing Offcer ('AO') completed the
original assessment on a total income of Rs.3,78,61,610/-. Later
on, the case was reopened and assessment completed under
section 143(3) read with section 147 of the Act. The AO found that
the assessee had debited to the proft and loss account an
amount of Rs.7.09 crores under the head "Exceptional Items",
which expenditure, the AO held after investigation, was incurred
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in connection with the development of a new product. The
assessee had treated the expenditure as a part of capital work in
progress for the assessment years 2004-05 to 2007-08. The
development of this software was abandoned and the assessee
then claimed the whole capital work in process as revenue
expenditure. The AO accordingly made an addition of Rs.7.09
crores.
4. In Income Tax Appeal No. 640 of 2018 :-
The assessee fled its return of income on 30 th October 2006
declaring total income at Rs.13,15,321/-. The AO completed the
original assessment on a total income of Rs.94,97,912/-. Later on,
the case was reopened and assessment completed under section
143(3) read with section 147 of the Act. The AO found that the
assessee had debited to the proft and loss account an amount of
Rs.81,82,591/- under the head "Exceptional Items", which
expenditure, the AO held after investigation, was incurred in
connection with the development of a new product. The assessee
had treated the expenditure as a part of capital work in progress
for the assessment year 2004-05 to 2007-08. The development of
this software was abandoned and the assessee then claimed the
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whole capital work in process as revenue expenditure. The AO
accordingly made an addition of Rs.81,82,591/-.
5. Appeals came to be preferred by the assessee before the
Commissioner of Income Tax (Appeals) against the orders of
assessment dated 19th March 2013 and 31st December 2013,
respectively. The appeals were allowed by the Commissioner of
Income Tax (Appeals) partly by holding that the expenditure for
the development of a new product by the assessee was in the
assessee's existing line of business, and therefore, relying upon
the decisions of Delhi High Court in the case of Indo Rama
Synthetic (I) Ltd. Vs. Vs. Commissioner of Income-tax 1 and of
Mumbai ITAT in the case of IL & FS Education & Technology
Services Pvt. Ltd. Vs. ITO 2, the CIT (A) held that though the
assessee had also shown the expenditure as capital work in
progress for the assessment years 2004-05 to 2007-08, the
deduction had to be allowed as a revenue expenditure in the year
in which the project in question was abandoned.
6. The revenue preferred an appeal against the order of the CIT
1 [2011] 333 ITR 18 (Delhi)
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(A), dated 31st March 2015 which too, came to be dismissed, by
placing reliance upon the judgment of Delhi High Court in the
case of Indo Rama Synthetic (I) Ltd. (Supra) and IL & FS
Education & Technology Services Pvt. Ltd. (Supra). The ITAT
upheld the views expressed by the CIT (A), by virtue of its order
dated 6th June 2017 impugned in the present appeals.
7. Learned counsel for the appellant urged that the view
expressed by the ITAT was unsustainable inasmuch as the
expenditure could not have been allowed as revenue expenditure
as the assessee had treated the said expenditure as capital in
nature and had entered the same in its books of accounts as
"Capital work in progress". That expenditure was incurred in
connection with the development of a new product,
notwithstanding that the new product had not come into existence
on account of its viability, expenditure could not have been
claimed as revenue expenditure.
8. Learned counsel for the respondent, on the other hand,
placed reliance upon the judgment of the Apex Court in Empire
Jute Co. Ltd. vs Commissioner Of Income Tax 3, and CIT Vs. EID
3 1980 124 ITR 1 (SC)
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Perry India Ltd. 4 and Indo Rama Synthetic (I) Ltd. (Supra).
9. Heard learned counsel for the parties.
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 :
"When an expenditure is made, not only once and for all,
but with a view to bringing into existence an asset or an
advantage for the enduring beneft of a trade, there is
very good reason (in the absence of special circumstances
leading to an opposite conclusion) for treating such an
expenditure as properly attributable not to revenue but to
capital."
4 257 ITR 253
5 10TC 155
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11. However, notwithstanding that a reference had been made to
the said principle of law, the Apex Court held that the "enduring
beneft 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 feld 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 effciently or more proftably, while
leaving the fxed capital untouched, the expenditure would be on
revenue account, even though the advantage may endure for an
indefnite 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 Dixon, 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
classifcation of the legal rights, if any,
secured, employed or exhausted in the
process."
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The question must be viewed in the larger context of
business necessity or expediency. If the outgoing
expenditure. is so related to the carrying on or the conduct
of the business that it may be regarded as an integral part
of the proft-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 proft earning ? or, on the other
hand, is it a capital outlay, is it expenditure
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 (I) 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 materialised 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
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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 beneft, 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. 6.
13. 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 beneft to the assessee, and therefore, in these
circumstances, the expenditure could only be said to be revenue
in nature.
6 [2012] 211 Taxman 257 (Jharkhand)
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14. We are of the view that the view already expressed by the
ITAT in the order impugned requires no interference. We fnd no
merit in the present appeals, and the same are accordingly
dismissed.
[ ABHAY AHUJA, J.] [ DHIRAJ SINGH THAKUR, J. ]
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