Expense on technology upgradation of existing business is deductible

Advocate Akhilesh Kumar Sah

Cox & Kings Ltd. case: Where expenses incurred were for travel booking engine and SAP software which was only for the purpose of technology upgradation to the existing business of the assessee and not creating any new line of business or asset: Expenses held to be deductible under section 37(1)

In the appeal of Cox & Kings Limited vs. Addl. CIT [IT(TP)A No. 2066/Mum/2017, A.Y. 2012-13, decided on 03-01-2019], one of the issue was against the order of AO / TPO/ DRP as regards to the disallowance of Travel Book engine expense considering the same as capital work-in-progress in the books of accounts and claimed by assessee as Revenue in the return of income.

Briefly stated facts were that the assessee was in process of development of front and customize travel booking Portal and SAP software which enable the customers to book tickets for tour packages and other allied serves directly by using the comparable. The assessee had also developed SAP software for its back office functions like accounting and Human Resource management and for this various direct and indirect expenses have been incurred by the assessee. The assessee claimed total expenses for development of portal and SAP software amounting to Rs.31,88,06,569/- forming part of capital work in progress as per AS(Accounting Standard) followed by the assessee. The AO while framing assessment disallowed an expenses of Rs. 1,20,24,914/- mainly incurred by assessee on account of salary expense of staff/ employees and according to the AO these were not wholly and exclusively involved in the development and implementation of software and their involvement is less than 60% of the total activity. The assessee carried the matter to DRP and raised objections which were rejected by holding that the expenses incurred on travel booking engine and SAP software was to acquire new capital asset to be used in a new line of business of assessee allowing the customers to book tickets, tour packages etc. and accordingly the same cannot be allowed under section 37(1) of the Income Tax Act,1961. Aggrieved, assessee came in appeal before ITAT Mumbai. The learned Members of the ITAT heard rival contentions and gone through the facts and circumstances of the case. The learned Counsel for the assessee relied on the decision of Mumbai, ITAT in the case of Reliance Footprint Limited vs. ACIT (2014) (41 Taxmann 553).

The learned Members observed that DRP had considered that the assessee was in new line of business or where the assessee was incurring expenses on expanding of its existing line of business. The expenses incurred by assessee on account of salary on development of travel booking engine and SAP software cannot be considered as adding a new line of business for its customers, infact, upon successfully development of the same, the existing business of the assessee for providing tours and travel services can be carried out more effectively and efficiently. Thus, incurring of these expenses for travel booking engine, the assessee was expanding its existing line of business. Further, it was also a fact that the expenses incurred for travel booking engine and SAP software was only for the purpose of technology upgradation to the existing business of the assessee and by incurring the same the assessee has not created any new line of business or asset which can be given enduring benefit to the assessee. The learned Members of the ITAT held that in view of the factual and legal submission, the salary and profession expenses incurred and disallowed by AO amounting to Rs. 1,20,24,914 over the development of travelling booking engine and SAP software is to be allowed as Revenue expenses under section 37(1) of the Act. The facts and circumstances of the case were similar to the decision of Mumbai, ITAT in the case of Reliance Footprint Limited (supra) and hence, respectfully following the same, the learned Members of the ITAT allowed the claim of the assessee.