A landmark decision recently delivered by the Delhi High Court in the case of CIT v. INDIAN VISIT. COM (P.) LTD. is sure to cheer the hearts of several business entities that spend large amounts in developing their websites.
SUMMARY OF THE CASE LAW
Income Tax – Assessee deals in hotel, air and taxi booking for tourists – Expenditure on creating a website for regular business – claims deduction – AO disallows it by invoking enduring benefits theory – Tribunal allows the assessee’s appeal – Held, merely because an expenditure may result in enduring benefits it cannot be classified as expenditure of a capital nature – Revenue needs to examine the real intent and purpose of the expenditure and to see whether there is any accretion to the fixed capital of the assessee – Since the purpose of creating a website is not to acquire an asset but to promote the business it is revenue expenditure – Revenue’s appeal dismissed.
ANALYSIS OF THE CASE
In the case of CIT v. Indian.Visit.Com (P.) Ltd. (2009) 176 Taxman 164 (Delhi), an interesting issue that arose for consideration before the court was whether the expenditure of nearly Rs. 20 lakhs incurred by the expenditure of nearly Rs. 20 lakhs incurred by the assessee – company on the development of its website was a capital expenditure or of a revenue nature. The assessee being engaged in the travel business, making all kinds of arrangement for its clients such as booking of hotel rooms, providing taxi services, booking of air and railway tickets, etc., through its website had indicated various destinations and places for which it could arrange such services.
The Assessing Officer and the Commissioner (Appeals) held that the website development expenditure was not allowable as business revenue expenditure since it was of a capital nature, inasmuch as it would provide the assessee with an enduring benefit.
The Tribunal, however, holding in favour of the assessee- company, compared the website to an electronic brochure which supplied information about the profile and scope of activity of the company. It also noted that expenses had to be incurred by the assessee for registering and renewing domain name and updating the information on the internet, the website. Through the website on the internet, the assessee could avoid services of middlemen and other expenditure for advertising the assessee’s business. The tribunal took the view that the expenditure for acquisition and up gradation of the website was of a revenue nature.
Disposing of the appeal by the department, the High Court held that the tribunal had correctly appreciated the facts, as well as the law on the subject. Referring to the principles enunciated by the Supreme Court in Empire Jute Co. Ltd., and Alembic Chemical Works Ltd., the Delhi High Court has held that just because a particular expenditure may result in enduring benefit, it would not make the same of a capital nature. What is to be seen is the real intent and purpose of the expenditure and as to whether there is any accretion to the fixed capital of the assessee.
The High Court observed that,
“.. in the case of expenditure on a website, there is no change in the fixed capital of the assessee. Although the website may provide an enduring benefit to an assessee, the intent and purpose behind the same is not to create an asset but only provide a means for disseminating information about the assessee. The same could very well have been achieved and, indeed, in the past it was achieved and, indeed, in the past it was achieved by printing travel brochures and other published materials and pamphlets. The advance of technology and the pamphlets. The advance of technology and the widespread use of the Internet have provided a very powerful medium to companies to publicize their activities to a larger spectrum of people at much lower cost. Websites enable companies to do what printed brochures did but, in a much more efficient manner as well as in a much shorter period of time and covering a much larger set of people worldwide.
This maiden High Court decision on the subject has thus clearly and unequivocally assured a 100% tax break in respect of the entire expenditure for the set-up, maintenance and update of business websites on the internet.