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

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) in the case Dy. Commissioner of Income Tax- 3(3)1) Versus M/s. Sikraft Infotech Private Limited observed and has held that the software development expenses for rendering services to clients are revenue expenses.
The two-member bench comprising of Judicial Member, Vikas Awasthy and the Accountant Member, Gagan Goyal in the case observed that the expenditure has been incurred in the regular course of business of the assessee and for earning of the profits and revenue, hence the expenditure being on the revenue account.
In the present case, the appellant/assessee is in the business of process automation software and hardware engineering, which includes software development, export of technical services, etc. Thus, during the period relevant to the assessment year under appeal, it has been claimed by the assessee, the expenditures toward software development. The expenditure claimed was in the nature of salaries for engineers, hotel expenses, insurance, travel expenses, etc.
It has been held by the Assessing Officer that the expenditure on software development to be capital in nature, in an assessment proceeding.
An appeal has been filled by the assessee before the CIT (A). After examining the fact, it has been held by the CIT(A) that the expenditure on software development is regular business expenditure and has been incurred for the development of software for use by clients which include the export to overseas clients.
The findings were reversed by the CIT(A) of the Assessing Officer and held the expenditure to be on a revenue account.
Further, it had been submitted by the assessee 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. Thus, the expenditure being for the development of software for the clients of the assessee.
Accordingly, the ITAT upheld the order of the CIT(A) and has held that the expenses were not for software development for use by the assessee but for rendering services to clients which also includes the overseas clients.