Software Development Expenses For Rendering Services To Clients Is Revenue Expense: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the software development expenses for rendering services to clients are revenue expenses.

The two-member bench of Vikas Awasthy (Judicial Member) and Gagan Goyal (Accountant Member) has observed that the expenditure has been incurred in the regular course of business of the assessee and for earning revenue and profits, hence the expenditure is on the revenue account.

The assessee/appellant is in the business of process automation software and hardware engineering, including software development, export of technical services, etc. During the period relevant to the assessment year under appeal, the assessee claimed expenditures toward software development. The expenditure was in the nature of salaries for engineers, hotel expenses, insurance, travel expenses, etc.

In assessment proceedings, the Assessing Officer held the expenditure on software development to be capital in nature.

The assessee filed an appeal before the CIT (A). The CIT(A), after examining the facts, held that the expenditure on software development is regular business expenditure and has been incurred for the development of software for use by clients, including export to overseas clients.

The CIT(A) reversed the findings of the Assessing Officer and held the expenditure to be on a revenue account.

The assessee submitted that the assessing officer had erred in assuming that the software development expenditure is for the development of software for the assessee's own use. However, the expenditure was for the development of software for the clients of the assessee.

The ITAT upheld the order of the CIT(A) and held that the expenses were not for software development for use by the assessee but for rendering services to clients, including overseas clients.

Case Title: Dy. Commissioner of Income Tax- 3(3)1) Versus M/s. Sikraft Infotech Private Limited

Citation: ITA No. 1785/MUM/2022

Date: 19.09.2022

Counsel For Appellant: Dilip K. Shah

Counsel For Respondent: Anuj Kisnadwala

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