The enduring benefit test and the business necessity or expediency test are crucial in determining the nature of expenditure as capital or revenue in the context of business operations.

JUDGMENT :

DHIRAJ SINGH THAKUR, J.

1. The present appeals under section 260A of Income Tax Act, 1961 (‘the Act’) are preferred against the order dated 6th June 2017 passed by the Income Tax Appellate Tribunal, “G” Bench, Mumbai in ITA Nos. 3629/Mum./2015 & 7668/Mum./13 for the assessment years 2006-07 and 2007-08, respectively.

2. In both appeals, the following question of law has been framed, for our consideration :

“Whether on the facts and circumstances of the case and in law, the ITAT was right in allowing the capital expenditure in connection with the development of new products as revenue expenditure?”

3. Income Tax Appeal No. 634 of 2018 :

The assessee is engaged in the business of software development solution and management. The assessee fled its return of income on 31st October 2007 declaring total income at Rs.3,31,29,870/-. The Assessing Officer (‘AO’) completed the original assessment on a total income of Rs.3,78,61,610/-. Later on, the case was reopened and assessment completed under section 143(3) read with section 147 of the Act. The AO found that the assessee had debited to the profit and loss account an amount of Rs.7.09 crores under the head “Exceptional Items”, which expenditure, the AO held after investigation, was incurred in connection with the development of a new product. The assessee had treated the expenditure as a part of capital work in progress for the assessment years 2004-05 to 2007-08. The development of this software was abandoned and the assessee then claimed the whole capital work in process as revenue expenditure. The AO accordingly made an addition of Rs.7.09 crores.

4. In Income Tax Appeal No. 640 of 2018 :-

The assessee fled its return of income on 30th October 2006 declaring total income at Rs.13,15,321/-. The AO completed the original assessment on a total income of Rs.94,97,912/-. Later on, the case was reopened and assessment completed under section 143(3) read with section 147 of the Act. The AO found that the assessee had debited to the profit and loss account an amount of Rs.81,82,591/- under the head “Exceptional Items”, which expenditure, the AO held after investigation, was incurred in connection with the development of a new product. The assessee had treated the expenditure as a part of capital work in progress for the assessment year 2004-05 to 2007-08. The development of this software was abandoned and the assessee then claimed the whole capital work in process as revenue expenditure. The AO accordingly made an addition of Rs.81,82,591/-.

5. Appeals came to be preferred by the assessee before the Commissioner of Income Tax (Appeals) against the orders of assessment dated 19th March 2013 and 31st December 2013, respectively. The appeals were allowed by the Commissioner of Income Tax (Appeals) partly by holding that the expenditure for the development of a new product by the assessee was in the assessee’s existing line of business, and therefore, relying upon the decisions of Delhi High Court in the case of Indo Rama Synthetic (I) Ltd. Vs. Vs. Commissioner of Income-tax, [2011] 333 ITR 18 (Delhi) and of Mumbai ITAT in the case of IL & FS Education & Technology Services Pvt. Ltd. Vs. ITO, ITA No.765, Mumbai (2009) dt. 10-04-2013, the CIT (A) held that though the assessee had also shown the expenditure as capital work in progress for the assessment years 2004-05 to 2007-08, the deduction had to be allowed as a revenue expenditure in the year in which the project in question was abandoned.

6. The revenue preferred an appeal against the order of the CIT (A), dated 31st March 2015 which too, came to be dismissed, by placing reliance upon the judgment of Delhi High Court in the case of Indo Rama Synthetic (I) Ltd. (Supra) and IL & FS Education & Technology Services Pvt. Ltd. (Supra). The ITAT upheld the views expressed by the CIT (A), by virtue of its order dated 6th June 2017 impugned in the present appeals.

7. Learned counsel for the appellant urged that the view expressed by the ITAT was u