M/s. Adadyn Technologies Private Limited, Bangalore V. Deputy Commissioner of Income Tax, Circle- 1(1)(1), Bangalore

ITA 994/BANG/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8035 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2015-2016
• Appeal Filed On: 09-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Assessee Lawyers: SUDEEP DAS
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 133A; 13

Judgement Text

ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ITA NO.994 & 995/BANG/2019 ASSESSMENT YEAR: 2015-16 & 2016-17 M/S. ADADYN TECHNOLOGIES PRIVATE LTD. COMMUNE COWORKS, 139, 1 ST CROSS ROAD 5 TH BLOCK BUILDING, 80 FEET ROAD KORAMANGALA BENGALURU-560 095 PAN NO : AAACO8283A VS. THE ACIT CIRCLE- 1(1)(1) BENGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI SUDEEP DAS, A.R. RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, D.R. DATE OF HEARING : 20.08.2020 DATE OF PRONOUNCEMENT : 21.08.2020 O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIRECTE D AGAINST SEPARATE, BUT IDENTICAL ORDERS OF THE CIT(A )-1 BENGALURU, BOTH DATED 21.3.2019 AND PERTAINS TO ASSESSMENT YEAR 2015-16 AND 2016-17. SINCE, THE FA CTS ARE IDENTICAL AND ISSUES ARE COMMON, FOR THE SAKE O F CONVENIENCE, THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER. ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 2 OF 17 2. THE ASSESSEE HAS MORE OR LESS RAISED COMMON GROUNDS OF APPEAL FOR BOTH THE ASSESSMENT YEARS, THEREFORE, FOR THE SAKE OF BREVITY THE GROUNDS OF A PPEAL FILED FOR ASSESSMENT YEAR 2015-16 ARE REPRODUCED AS UNDER: 1. THE LD. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE- 1(1)(1) (LEARNED AO) HAS ERRED IN LAW AND ON FACT S IN PASSING THE ASSESSMENT ORDER IN THE MANNER PASSED B Y HIM, AND THE CIT(A)-1 HAS ERRED IN SUSTAINING THE A DDITION MADE BY THE . LEARNED AO. THE ORDER PASSED BY THE LOWER INCOME-TAX AUTHORITIES ARE BAD IN LAW AND NOT DERIVED FROM THE INSTANT FACTS, AND LIABLE TO BE QU ASHED. 2. THE LEARNED CIT(A) HAS ERRED IN (A) TREATING EXPENDITURE INCURRED TOWARDS SALARY COST DURING THE TAX YEAR, TO BE CAPITAL IN NATURE; (B) DISREGARDING THE PROVISIONS OF ACCOUNTING STANDARD 26 AND RECOGNIZED THE SALARY EXPENDITURE, INCURRED TOWARDS RESEARCH OF THE COMPANYS PLANNED SOFTWARE PLATFORM, AS CAPITAL IN NATURE; (C) CONSTRUING THE SALARY COSTS TO BE IN THE NATURE OF CAPITAL WORK-IN-PROGRESS; (D) ASSUMING THAT THE PLATFORM WOULD EVENTUALLY GIVE AN ENDURING BENEFIT TO THE COMPANY, AFTER ITS DEVELOPMENT WITHOUT GIVING CONSIDERATION TO THE FACT THAT THE PLATFORM DEVELOPMENTAL ACTIVITIES WER E EVENTUALLY SHELVED IN THE SUBSEQUENT TAX YEAR. (E) DISREGARDING THE JURISDICTIONAL BINDING RATIO OF TH E HONBLE KARNATAKA HIGH COURT, WHILE ADJUDICATING TH E ISSUE. 3. THE LEARNED CIT(A) HAS ERRED IN (A) TREATING EXPENDITURE INCURRED TOWARDS MARKETING, WHICH WAS TOWARDS THE OVERALL PROMOTION OF THE PRODUCTS OF THE COMPANY DURING THE TAX YEAR, TO BE CAPITAL IN NATURE. ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 3 OF 17 (B) ASSUMING THAT THE SAID MARKETING EXPENSES, WERE ASSOCIATED WITH THE PLATFORM DEVELOPMENTAL PROJECT WITHOUT GIVING CONSIDERATION TO THE FACT THAT THE COMPANY HAS INCURRED THE SAID MARKETING EXPENSES TOWARDS PROMOTION AND RENEWED BRAND IMAGE, OF THE COMPANY AND WITH THE PROSPECT OF ATTRACTING POTENTI AL CUSTOMERS. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF RENDERING CUSTOMISED INTERNET ADVERTISING SERVICES FOR ADVERT ISERS SUCH AS NEWS, FINANCIAL SERVICES AND ENTERTAINMENT. IT HAS A SUBSIDIARY IN USA, ADADYN INC., USA SET UP IN SEPTEMBER, 2010, WHICH IS ENGAGED IN PROVIDING MARKETING AND BUSINESS SUPPORT SERVICES TO ADADYN, INDIA. THE ASSESSEE BUSINESS MODEL HAS TWO STREAMS OF INCOME. THE FIRST IS CALLED PRAGMATIC MODEL AND TH E SECOND IS RESELLING MODEL. THE PRAGMATIC BUSINESS CONSISTS OF SERVICES RENDERED TO INTERNATIONAL CUST OMERS AND THIS INVOLVES ONLINE DISPLAY, ADVERTISEMENT I.E . OPTIMIZED VIA DEMAND SIDE SOFTWARE INTERFACES AND ALGORITHMS. IT ALSO INVOLVES BUYING AND SELLING ADVERTISEMENT, SALES ON ONLINE SOFTWARE PLATFORM SU CH AS APPNEXUS. THIS MAY BE DONE MANUALLY OR BY USE OF ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 4 OF 17 SOFTWARE. MAJOR PORTION OF THE REVENUE OF THE ASSE SSEE WAS FROM THIS STREAM OF BUSINESS. DURING THE FINAN CIAL YEAR 2013-14, ADADYN, INDIA HAD STARTED A NEW BUSIN ESS LIKE RESELLING. IN THIS SEGMENT, ADADYN, INDIA BUY S ADVERTISEMENT INVENTORY FROM THE WEBSITE (PUBLISHER S) AND RESELLS IT TO ITS CUSTOMERS (PREDOMINANTLY GOOGLE). IN OTHER WORDS, RESELLING AN ADVERTISEMENT SPACE OF PU BLISHER TO CUSTOMERS. A SURVEY U/S 133A OF THE INCOME TAX A CT, 1961 (HEREIN AFTER CALLED AS THE ACT) WAS CARRIED OUT IN THE CASE OF THE ASSESSEE ON 18.7.2017. DURING THE C OURSE OF SURVEY, THE STATEMENT OF MR. NITHIN KURIAN, H.R. MANAGER WAS RECORDED. FURTHER, STATEMENT OF CEO OF ASSESSEE COMPANY SHRI KURIAN GOPINATH WAS ALSO RECORDED ON 27.7.2016, WHERE THEY HAVE ADMITTED THA T THE COMPANY HAS STARTED A NEW BUSINESS MODEL, FOR WHICH IT IS DEVELOPING NEW SOFTWARE PLATFORM. 4. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2015-16 ON 28.11.2015 DECLARING TOT AL INCOME OF RS.14,16,63,540/-. THE CASE WAS SELECTED FOR SCRUTINY AND DURING THE COURSE OF ASSESSMENT ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 5 OF 17 PROCEEDINGS, THE ASSESSEE WAS ASKED TO EXPLAIN AS T O WHY EXPENSES PERTAINING TO DEVELOPMENT OF SOFTWARE PLAT FORM SHALL NOT BE CAPITALIZED AS IT WILL GIVE AN ENDURIN G BENEFIT. THE ASSESSEE VIDE ITS LETTER DATED 21.8.2017 SUBMIT TED THAT THE PRODUCT THAT IT WAS DEVELOPING CANNOT BE T ERMED AS AN INDEPENDENT PRODUCT, WHICH CAN BE PUT TO USE. IT WAS ONLY WORKING TO BRING OUT SPECIFIC MARKET OUTPU T BY SIMPLIFYING THE BUSINESS OF APPNEXUS, FOR LESS SOPHISTICATED CLIENT BASE, WHO COULD NEITHER AFFORD TO HEAR SPECIALIZED AD OPERATIONS NOR AFFORD TO PAY LICENSE FEE FOR APPNEXUS. THE ASSESSEE FURTHER SUBMITTED THAT IT HA S SPENT VARIOUS EXPENSES INCLUDING SALARIES ON TECHNI CAL PERSONNEL AND MARKETING EXPENSES IN USA TO GAUGE TH E EFFECT OF THIS NEW SOFTWARE PLATFORM. HOWEVER, DUE TO RAPID CHANGE OF TECHNOLOGY AND SHIFTING OF ADVERTIS EMENT FROM DESKTOP TO MOBILE PLATFORM, THE SOFTWARE BEING DEVELOPED BY THE ASSESSEE WAS ABANDONED AND CLOSED SINCE THE PRODUCT WAS VERY UNUSABLE. FURTHER, AT N O POINT OF TIME, THIS NEW PLATFORM WAS PUT TO USE AND NO DEPRECIATION IS CLAIMED ON THE PROJECT. THEREFORE, ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 6 OF 17 EXPENSES INCURRED FOR CONDUCTING FEASIBILITY STUDY OF THE NEW SOFTWARE PLATFORM CANNOT BE CONSIDERED AS CAPIT AL EXPENDITURE, WHICH GIVES ENDURING BENEFIT TO THE AS SESSEE. 5. THE A.O. WAS NOT CONVINCED WITH THE EXPLANATION OF THE ASSESSEE AND ACCORDING TO HIM, THE SOFTWARE PLA TFORM DEVELOPED BY THE ASSESSEE WOULD GIVE AN ENDURING BE NEFIT TO THE ASSESSEE. THE ASSESSEE IS THE OWNER OF THE SOFTWARE PLATFORM BEING DEVELOPED AND THE AMOUNT OF EXPENDIT URE MADE ON TECHNICAL PERSON AND IN SALE AND MARKETING OF THE SOFTWARE INDICATED THAT IT IS LIKELY TO CENTRAL TOOL OF BUSINESS OF THE ASSESSEE AND SHOULD BE CONSIDERED A S CAPITAL EXPENDITURE. THEREFORE, HE OPINED THAT EXPENDITURE INCURRED ON DEVELOPMENT OF NEW SOFTWARE PLATFORM IS IN CAPITAL NATURE, WHICH GIVES ENDURING BENEFIT TO THE ASSESSEE AND THUS, NEEDS TO BE CAPITALIZED. ACCORDINGLY, DISALLOWED AN AMOUNT OF RS.6,06,30,146 /- BEING EXPENDITURE INCURRED ON SALARIES FOR SOFTWARE PRODUCT DEVELOPMENT AND ITS MARKETING. 6. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BE FORE THE ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 7 OF 17 CIT(A), THE ASSESSEE REITERATED ITS ARGUMENT TAKEN BEFORE THE A.O. ALONG WITH CERTAIN JUDICIAL PRECEDENTS AND SUBMITTED THAT EXPENDITURE INCURRED FOR PREPARATION OF FEASIBILITY REPORT OF A NEW PROJECT, IN RESPECT OF SAME BUSINESS, WHICH IS ALREADY CARRIED ON BY THE ASSESS EE EVEN IF IT IS FOR EXPANSION OF BUSINESS CANNOT BE T REATED AS CAPITAL IN NATURE. THE ASSESSEE HAS ALSO TAKEN SUP PORT FROM ACCOUNTING STANDARDS-26 ISSUED BY THE ICAI FOR ACCOUNTING OF EXPENDITURE ON RESEARCH AND DEVELOPME NT TO ARGUE THAT IN THE RESEARCH PHASE OF A PROJECT, A N ENTERPRISE CANNOT DEMONSTRATE THAT AN INTANGIBLE AS SET EXISTED FROM WHICH FUTURE ECONOMIC BENEFITS ARE PRO BABLE. FURTHER, THE STANDARDS MAKE IT VERY CLEAR THAT EXPENDITURE ON RESEARCH SHOULD BE RECOGNIZED AS EXPENDITURE, WHEN IT IS INCURRED. 7. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND ALSO TAKEN NOTE OF FACTUAL MATRIX BROUGHT OUT BY THE A.O. CAME TO THE CONCLUSION THAT THE NEW SOFTWARE PLATFORM BEING UNDER DEVELOPMENT DURIN G THE YEAR IS EXPECTED TO GIVE ENDURING BENEFIT TO TH E ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 8 OF 17 ASSESSEE AND BEING A NEW INTANGIBLE PRODUCT, ON WHI CH ONE CAN RECOGNISE THE INTELLECTUAL PROPERTY IN THE SAME. THUS, IT CAN BE FAIRLY ASSUMED THAT THE NEW PRODUCT , ONCE DEVELOPED IS EXPECTED TO GIVE ENDURING BENEFIT TO T HE ASSESSEE WHICH WAS TO SUPPORT AND FORM THE BACK BON E OF THE NEW LINE OF BUSINESS OF RESELLING OF ONLINE DIG ITAL ADVERTISEMENT SPACE. THUS, EXPENDITURE INCURRED ON THE PROJECT ASSUMES THE CHARACTER OF CAPITAL EXPENDITUR E. ACCORDINGLY, THE LD CIT(A) WAS OF THE OPINION THAT THERE IS NO ERROR IN THE FINDINGS ACCORDED BY THE A.O. IN TR EATING THE EXPENDITURE TO BE CAPITAL IN NATURE. AGGRIEVED BY THE CIT(A) ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 8. THE LD.A.R. FOR THE ASSESSEE SUBMITTED THAT THE LD. CIT(A) HAS ERRED IN TREATING EXPENDITURE INCURRED T OWARDS SALARY COST OF TECHNICAL PERSON INVOLVED IN DEVELOP MENT OF NEW SOFTWARE PLATFORM AND MARKETING EXPENSES INCURR ED FOR CONDUCTING FEASIBILITY STUDY OF NEW SOFTWARE PL ATFORM IS CAPITAL IN NATURE, WHICH GIVES ENDURING BENEFIT TO THE ASSESSEE WITHOUT APPRECIATING FACT THAT THE NEW SOF TWARE PLATFORM DEVELOPED BY THE ASSESSEE WAS NEVER PUT TO USE ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 9 OF 17 AND THE SAME HAS BEEN ABANDONED DURING NEXT FINANCI AL YEAR. THE A.R. FURTHER SUBMITTED THAT EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS SALARY COST WERE R EVENUE IN NATURE AS THE ENTIRE TEAM WAS DEDICATED TO MAKE AN OFFERING FOR THE NORTH AMERICAN MARKET SME SEGMENT, THUS THERE WAS NO DEVELOPMENT OF ANY NEW INDEPENDEN T PRODUCT FOR THIS MARKET, ACCORDINGLY, THE SALARY CO ST CANNOT BE CAPITALISED. FURTHER, THE MARKETING EXPE NSES WERE INCURRED IN ORDER TO SHOW CAUSE THE CAPABILITI ES OF ADADYN TO THE POTENTIAL CUSTOMERS AND THIS IS A CLE AR INDICATION THAT OTHER EXPENSES WERE INCURRED PRIMAR ILY TOWARDS ATTRACTING POTENTIAL CUSTOMERS FOR DEVELOPM ENT OF BUSINESS IN GENERAL FOR THE COMPANY. FURTHER, THE EXPENDITURE INCURRED TOWARDS MARKETING OF THE PRODU CT IS NOT RELATED TO NEW SOFTWARE PLATFORM DEVELOPED BY T HE ASSESSEE. THEREFORE, THE A.O. WAS INCORRECT IN DISA LLOWING MARKETING EXPENSES ON THE GROUND THAT IT IS IN THE NATURE OF CAPITAL EXPENDITURE. IN THIS REGARD, HE RELIED UPON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 10 OF 17 KARNATAKA STATE INDUSTRIAL AND DEVELOPMENT CORPORAT ION (163 ITR 657). 9. THE LD. D.R. ON THE OTHER HAND, STRONGLY SUPPORTING ORDER OF CIT(A) SUBMITTED THAT THE FACTS BROUGHT OU T BY THE A.O. CLEARLY INDICATE THE FACT THAT EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS SALARY COST FOR SO FTWARE DEVELOPMENT AND MARKETING EXPENSES IS FOR DEVELOPME NT OF NEW SOFTWARE PLATFORM TO BE USED IN MARKET, WHIC H DEFINITELY CAN GIVE ENDURING BENEFIT TO THE ASSESSE E, THEREFORE, WHATEVER EXPENDITURE INCURRED FOR DEVELO PMENT OF NEW SOFTWARE PLATFORM IS IN THE NATURE OF CAPITA L EXPENDITURE AND HENCE THERE IS NO ERROR IN THE FIND INGS RECORDED BY THE A.O. AS WELL AS LD. CIT(A) TO DISAL LOW SUCH EXPENDITURE AS CAPITAL IN NATURE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW ALONG WITH THE CASE LAWS C ITED BY THE ASSESSEE. ADMITTEDLY, THE ASSESSEE IS IN THE B USINESS OF ONLINE ADVERTISEMENT, FOR WHICH IT HAS DEVELOPED A ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 11 OF 17 SOFTWARE PLATFORM, WHICH CAN BE USED FROM DESKTOP. THE ASSESSEE HAS INCURRED VARIOUS EXPENDITURES, INCLUDI NG SALARY AND MARKETING EXPENSES FOR CONDUCTING FEASIB ILITY STUDY OF THE NEW PRODUCT IN USA TO GAUGE THE EFFECT OF NEW SOFTWARE PLATFORM AMONG CUSTOMERS AND ALSO TO S TART POPULARISING THIS SOFTWARE PLATFORM. BUT DUE TO RA PID CHANGE OF TECHNOLOGY AND SHIFTING OF ADVERTISEMENT FROM DESKTOP TO MOBILE PLATFORM, THE SOFTWARE BEING DEVE LOPED BY ASSESSEE WAS ABANDONED AND CLOSED SINCE THE PROD UCT WAS VERY UNUSABLE. FURTHER, AT NO POINT OF TIME, T HIS NEW PLATFORM WAS PUT TO USE. IN THIS FACTUAL MATRIX, IF WE EXAMINE THE NATURE OF EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS SALARY PAID TO PERSONNEL FOR DEVEL OPMENT OF NEW SOFTWARE PLATFORM, IT IS VERY CLEAR THAT THE SOFTWARE DEVELOPED BY THE ASSESSEE WAS NEVER PUT TO USE BECA USE OF CHANGE IN TECHNOLOGY. THE QUESTION WHETHER EXPENDITURE IS IN THE NATURE OF CAPITAL EXPENSES, W HICH GIVES ENDURING BENEFIT TO THE ASSESSEE ARISES ONLY WHEN A PRODUCT IS DEVELOPED AND A NEW ASSET CAME INTO EXIS TENCE. UNLESS THE PRODUCT DEVELOPED, COMES IN THE FORM OF A NEW ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 12 OF 17 PRODUCT, WHICH CAN BE INDEPENDENTLY USED, THEN IT C ANNOT BE SAID THAT THE PRODUCT WOULD GIVE ENDURING BENEFI T TO THE ASSESSEE. IN THIS CASE, ON PERUSAL OF FACTS AV AILABLE ON RECORD, IT IS VERY CLEAR FROM FACTS BROUGHT OUT BY THE A.O. THAT ACTUALLY THE ASSESSEE IS DEVELOPING A NEW SOFT WARE PLATFORM BUT SUCH NEW PLATFORM WAS ABANDONED DURING THE SUBSEQUENT FINANCIAL YEAR DUE TO RAPID CHANGE I N TECHNOLOGY AND SHIFTING OF TECHNOLOGY FROM DESKTOP TO MOBILE PLATFORM. THE PRODUCT HAS NEVER BEEN PUT TO USE AND NO DEPRECIATION HAS BEEN CLAIMED. FURTHER, THE EXPENDITURE INCURRED TOWARDS DEVELOPMENT OF NEW SOFTWARE PLATFORM WAS TREATED AS PART OF REVENUE EXPENDITURE AND HAS NEVER BEEN DEBITED TO CAPITAL W ORK IN PROGRESS IN THE BOOKS OF ACCOUNTS. THEREFORE, WE A RE OF THE CONSIDERED VIEW THAT WHEN THE PRODUCT WAS IN DEVELOPMENT STAGE DURING THE YEAR UNDER CONSIDERATI ON AND THE SAME HAS NEVER BEEN PUT TO USE EVEN IN SUBSEQUENT FINANCIAL YEAR AND FINALLY ABANDONED, TH EN IT CANNOT BE TERMED THAT AN INDEPENDENT PRODUCT WAS CA ME INTO EXISTENCE, WHICH GIVES ENDURING BENEFIT TO THE ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 13 OF 17 ASSESSEE TO TREAT EXPENDITURE INCURRED ON DEVELOPME NT OF SAID PRODUCT TO BE IN CAPITAL IN NATURE. AT BEST, THE EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS DEVELOPMENT OF NEW SOFTWARE PLATFORM IS IN THE NATU RE OF EXPENDITURE INCURRED FOR PREPARATION OF FEASIBILITY OF THE NEW PROJECT IN RESPECT OF SAME BUSINESS, WHICH IS A LREADY CARRIED OUT BY THE ASSESSEE, EVEN IF IT IS FOR EXPA NSION OF BUSINESS AND DEFINITELY CANNOT BE TREATED AS CAPITA L EXPENDITURE INCURRED FOR DEVELOPMENT OF A NEW PRODU CT, WHICH GIVES ENDURING BENEFIT TO THE ASSESSEE. THIS VIEW TAKEN BY US IS FORTIFIED BY THE DECISION OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF KARNATAKA STATE INDUSTRIAL DEVELOPMENT CORPORATION (SUPRA), WHERE T HE COURT CLEARLY HELD THAT EXPENDITURE INCURRED ON INVESTIGATION, RESEARCH AND FEASIBILITY STUDIES LAI D OUT BY ASSESSEE WAS REVENUE EXPENDITURE IN NATURE AND THUS WAS AN ALLOWABLE DEDUCTION. 11. WE FURTHER NOTED THAT AS PER ACCOUNTING STANDARD- 26 PRESCRIBED BY THE ICAI FOR TREATMENT OF EXPENDIT URE OF ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 14 OF 17 RESEARCH AND DEVELOPMENT EXPENSES, THE STANDARD CLE ARLY LAID DOWN THE PROCEDURE FOR ACCOUNTING OF RESEARCH EXPENDITURE, AS PER WHICH EXPENDITURE ON RESEARCH S HOULD BE RECOGNISED AS AN EXPENDITURE WHEN IT IS INCURRED . THE ACCOUNTING STANDARD FURTHER STATES THAT IN THE RESE ARCH PHASE OF THE PROJECT, AN ENTERPRISE CANNOT DEMONSTR ATE THAT AN INTANGIBLE ASSET EXISTS FROM WHICH FUTURE ECONOMIC BENEFITS ARE PROBABLE. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE A.O. AS WELL AS THE LD. CI T(A) WERE ERRED IN COMING TO THE CONCLUSION THAT EXPENDI TURE INCURRED ON DEVELOPING NEW SOFTWARE PLATFORM IS EXP ECTED TO GIVE ENDURING BENEFIT AND ONE CAN RECOGNISE THE INTELLECTUAL PROPERTY IN THE SAME TO COME TO CONCLU SION THAT EXPENDITURE INCURRED FOR DEVELOPMENT OF NEW SOFTWARE PLATFORM IS CAPITAL IN NATURE. HENCE, WE DIRECT THE A.O. TO DELETE ADDITIONS MADE TOWARDS DISALLOWA NCE OF SALARY EXPENSES INCURRED FOR DEVELOPMENT OF NEW SOF TWARE PLATFORM. 12. COMING TO MARKETING EXPENSES; ALTHOUGH THE A.O. AS WELL AS LD. CIT(A) HAS NEVER BROUGHT OUT CLEAR FACT S WITH ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 15 OF 17 REGARD TO THE NATURE OF MARKETING EXPENSES INCURRED BY THE ASSESSEE AND ITS NEXUS WITH A NEW PRODUCT BEING DEVELOPED BY THE ASSESSEE, ON PERUSAL OF DETAILS FI LED BY THE ASSESSEE, WE FIND THAT MARKETING EXPENSES INCUR RED BY THE ASSESSEE HAS NO NEXUS WITH NEW PRODUCT BEING DEVELOPED BY THE ASSESSEE. FURTHER, MARKETING EXPE NSES WERE INCURRED IN ORDER TO SHOW-CAUSE THE CAPABILITI ES OF ADADYN TO THE POTENTIAL CUSTOMERS AND FROM THIS IT HAS A CLEAR INDICATION THAT EXPENSES WERE INCURRED PRIMAR ILY TOWARDS ATTRACTING POTENTIAL CUSTOMERS AND FURTHER DEVELOPMENT OF THE BUSINESS IN GENERAL FOR THE COMP ANY. WHEN THE MARKETING EXPENDITURE INCURRED TOWARDS THE OVERALL PROMOTION OF THE BUSINESS OF THE COMPANY AN D THERE IS NO DIRECT NEXUS BETWEEN THE MARKETING EXPE NSES AND THE NEW SOFTWARE PLATFORM BEING DEVELOPED BY TH E ASSESSEE, THE A.O. AS WELL AS LD. CIT(A) WERE CLEAR LY ERRED IN COMING TO THE CONCLUSION THAT MARKETING EXPENDIT URE IS IN THE NATURE OF CAPITAL EXPENDITURE. FURTHER, ASS UMING THAT SAID MARKETING EXPENSES WERE ASSOCIATED WITH T HE NEW PLATFORM DEVELOPMENTAL PROJECT, EVEN THEN SAID ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 16 OF 17 EXPENDITURE IS REVENUE IN NATURE, BECAUSE THE PRODU CT UNDER DEVELOPMENT WAS NEVER PUT TO USE AND ALSO THE SAME HAS BEEN ABANDONED IN SUBSEQUENT FINANCIAL YEA R. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT MARKE TING EXPENSES INCURRED BY THE ASSESSEE IN USA TO GAUGE T HE EFFECT OF NEW SOFTWARE PLATFORM CANNOT BE TREATED A S CAPITAL IN NATURE. ACCORDINGLY, WE DIRECT THE A.O. TO DELETE ADDITIONS MADE TOWARDS MARKETING EXPENSES AS CAPITA L IN NATURE. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE FOR ASST. YEAR 2015-16 IS ALLOWED. ITA NO 995/BANG/2019- ASST YEAR 2016-17 14. THE FACTS AND ISSUES INVOLVED IN THIS APPEALS F ILED BY THE ASSESSEE ARE IDENTICAL TO THE FACTS AND ISSUES WHICH WE HAD CONSIDERED IN ITA NO.994/BANG/2019 FOR THE A .Y. 2015-16. THE REASONS GIVEN BY US IN PRECEDING PARA GRAPH IN ITA NO.994/BANG/2019 MUTATIS MUTANDIS SHALL APPL Y TO THIS APPEAL, AS WELL. THEREFORE, FOR DETAILED R EASONS ITA NOS.994 & 995/BANG/2019 M/S. ADADYN TECHNOLOGIES PVT.LTD., BANGALORE PAGE 17 OF 17 RECORDED IN PRECEDING PARAGRAPHS, WE DIRECT THE LD. AO TO DELETE ADDITIONS MADE TOWARDS DISALLOWANCES OF SOFT WARE DEVELOPMENT EXPENSES AND MARKETING EXPENSES INCURRE D ON NEW SOFTWARE PLATFORM. 15. IN THE RESULT, APPEALS FILED BY THE ASSESSEE FO R BOTH ASSESSMENT YEARS ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST AUG20 SD/- (N.V. VASUDEVAN) VICE PRESIDENT SD/- (G. MANJUNATHA) ACCOUNTANT MEMBER BANGALORE, DATED 21 ST AUG, 2020. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.