Software development expenses for the provision of services to customers are revenue expenses: ITAT

The Mumbai Bench of the Income Tax Appeal Tribunal (ITAT) ruled that software development expenses to render services to customers are revenue expenses.

The bench of two members of Vikas Awasthy (judicial member) and Gagan Goyal (accounting member) observed that the expenses were incurred in the normal course of the assessee’s business and to earn income and profit, therefore, the expenses are recorded on the income account.

The assessee/caller works in the field of process automation software and hardware engineering, including software development, export of technical services, etc. Expenses were in the nature of engineer salaries, hotel expenses, insurance, travel expenses, etc.

In the valuation procedures, the valuation agent considered the software development expenditure to be capital in nature.

The assessee appealed to the CIT (A). CIT(A), after reviewing the facts, found that software development expenses were normal business expenses and were incurred for the development of software for use by customers, including export to Foreign customers.

The CIT(A) reversed the evaluation officer’s findings and declared the expenditure to be on account of revenue.

The assessee argued that the assessor erred in assuming that the software development expenses were for the development of software for their own use. However, the expenses were for software development for the assessee’s clients.

ITA upheld the CIT(A) order and found that the expenditures were not for the development of software for use by the assessee, but for the provision of services to clients, including Foreign customers.

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

Reference: ITA n° 1785/MUM/2022

Date: 19.09.2022

Counsel for the Appellant: Dilip K. Shah

Counsel for the Respondent: Anuj Kisnadwala

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