ACIT, CHENNAI vs. M/S. PENTASOFT TECHNOLOGIES LTD., CHENNAI

आदेश / O R D E R PER G. MANJUNATHA, AM: These two cross-appeals filed by the assessee, as well as the Revenue

are directed against the order of the Commissioner of Income Tax

(Appeals)-V, Chennai, dated 29.11.2010, and pertains to assessment year

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 2 ::

2004-05. Since, the facts are identical and issues are common, for the sake

of convenience, these appeals were heard together and are being disposed

off, by this consolidated order.

in the business of software development & services is exporting software

and services from Software Technology Park and claimed deduction u/s.10A

of the Act. The assessee has filed its return of income for the AY 2004-05

on 01.11.2004 declaring a loss of Rs.26,62,56,653/-. The assessment has

been completed u/s.143(3) of the Act, on 22.12.2006 and determined total

income of Rs.34,14,15,708/-, by making various additions and also re-

computation of deduction claimed u/s.10A of the Act. The assessee carried

the matter in appeal before the First Appellate Authority, and the Ld.CIT(A)

for the reasons stated in their appellate order dated 29.11.2010 partly

allowed the appeal filed by the assessee.

ITA No.121/Chny/2011 for the AY 2004-05 – (assessee’s appeal):

of the assessee’s appeal is assessment of income from sale of course

material under the head ‘income from other sources’. The AO assessed

income from course material under the head ‘income from other sources’

and also denied deduction claimed u/s.10A of the Act, on the ground that

the receipts are not in the nature of profits & gains derived from export

unit.

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 3 ::

3.1 The Ld.AR for the assessee submitted that the main business of the

assessee is to impart education and training in the field of software

development & services and hence, income from sale of course material is

assessable under the head ‘profits & gains of business’, but not under the

head ‘income from other sources’. The Ld.Counsel for the assessee made

an alternative submission and argued that if at all, same needs to be

assessed under the head ‘income from other sources’, then only net income

after expenses needs to be assessed.

3.2 The ld.Sr.DR/Dr.S.Palanikumar, for the Revenue, on the other hand,

supporting the order of the Ld.CIT(A) submitted that this issue is covered

against the assessee by the decision of the ITAT Chennai Benches, in

assessee’s own case, for the AY 1996-97 in ITA Nos.1597 &

1598/Mds/2008, wherein, the Tribunal after considering the nature of

receipt, held that income from sale of course material, is assessable under

the head ‘income from other sources’.

3.3 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. The assessee is

in the business of software development & services and derived income

from export of software and services from Software Technology Park Units

(in short “STP Units"). The assessee also derived income from training and

related course materials. The assessee had declared income from course

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 4 ::

material under the head ‘other income’ in the P & L A/c. Further, from the

details filed by the assessee, it is undoubtedly clear that income from

course material, is not at all related to the business of export of software

products & services. Therefore, we are of the considered view that there

is no error in the reasons given by the AO and the Ld.CIT(A) to assess

income from course material under the head ‘income from other sources’,

because, it is nothing to do with main business activity of the assessee i.e.

export of software products & services from STP Units and thus, we confirm

the action of the AO in assessing income from course material under the

head ‘income from other sources’ and also denial of deduction u/s.10A of

the Act. Further, this issue is also covered against the assessee by the

decision of ITAT Chennai Benches, in the assessee’s own case, for the AY

1996-97 in ITA Nos.1597 & 1598/Mds/2008, where the Tribunal after

considering relevant facts has rightly held that income derived from training

fee and related course material, is not entitled for deduction u/s.10B of the

Act. Therefore, consistent with view taken by the co-ordinate bench, we

are inclined to uphold the findings of the Ld.CIT(A) and reject the ground

taken by the assessee. As regards alternate claim of the assessee, the AO

is directed to verify the claim and if found correct, the assessed net income

under the head ‘income from other sources’.

of the assessee’s appeal is assessment of rental income under the head

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 5 ::

‘income from other sources’. The AO has assessed rental income under the

head ‘income from other sources’ on the ground that said income is not in

the nature of profits & gains derived from export unit and thus, denied

deduction claimed u/s.10A of the Act. The Ld.CIT(A) assessed rental

income under the head ‘income from business’ and also allowed consequent

expenses like depreciation on building, rates & taxes, insurance, and

repairs & maintenance. However, affirmed the findings of the AO in not

allowing deduction u/s.10A of the Act.

4.1 The Ld.Counsel for the assessee submitted that rental income derived

by the assessee is assessable under the head ‘income from house property’

as held by the jurisdictional Hon’ble High Court of Madras in the case of

Indian Overseas Bank Ltd. v. CIT reported in 246 ITR 206, 208 (Mad).

Therefore, the Ld.CIT(A) is erred in not deciding the issue in light of above

decision.

4.2 The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A),

submitted that there is no clarity on income derived by the assessee,

whether it is from leasing of land & building or any other equipment.

Therefore, the AO has rightly assessed said receipt under the head ‘income

from other sources’ and their orders should be upheld.

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 6 ::

4.3 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. It is an admitted

fact that the assessee has declared rental income under other income in

the P & L A/c. Further, there is no details as regards whether rental income

is derived from leasing of land & building or any plant & machinery or

equipment. Further, even in the assessment order there is no details about

nature of rental receipt. Although, the Ld.CIT(A) directed the AO to assess

rental receipt under the head ‘income from business & profession’ and also

allow consequent expenses, but there is no discussion on nature of rent

received by the assessee. Therefore, we are of the considered view that

the issue needs to be set aside to the file of the AO for further verification.

In case, the assessee derived rental income from lease of land & building,

then definitely said income is assessable under the head ‘income from

house property’ and consequent action needs to be followed. But, in case,

rental income is derived from lease of plant & machinery or equipment,

then same needs to be assessed under the head ‘income from other

sources’ and consequent action needs to be followed. Further, if at all the

assessee is in the business of letting out properties or plant & machinery,

then same needs to be assessed under the head ‘income from business or

profession’ as considered by the Ld.CIT(A) and consequent action needs to

be followed like allowing expenses relatable to said income. Since, facts

are not clear, we set aside the issue to the file of the AO and direct the AO

to re-consider the issue in light of our discussion given hereinabove and

decide the issue in accordance with law.

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 7 ::

of the assessee’s appeal is depreciation on non-compete fee. The AO has

disallowed depreciation on non-compete fee on the ground that the non-

compete fee/good will is not depreciable asset, eligible for depreciation

u/s.32(i)(ii) of the Act, nor the expenditure on acquisition of goodwill, is

eligible item for deduction u/s.35D(2) of the Act. The Ld.CIT(A) allowed

depreciation on non-compete fee, by following the decision of ITAT in the

assessee’s own case for the earlier assessment years.

5.1 The Ld.Counsel for the assessee submitted that this issue is covered

in favour of the assessee by the decision of the Hon’ble Madras High Court

in the case of Pentasoft Technology Ltd. v. DCIT reported in [2014] 264

CTR 0187 (Mad), where the Hon’ble Madras High Court allowed depreciation

on non-compete fee as an intangible asset in terms of sec.32(1) of the Act.

5.2 The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A),

submitted that non-compete fee is not an intangible asset eligible for

depreciation u/s.32(1)(ii) of the Act. However, fairly agreed that the issue

is covered in favour of the assessee by the decision of the Hon’ble Madras

High Court.

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5.3 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. Depreciation on

non-compete fee whether it is an intangible asset eligible for depreciation

u/s.32(1)(ii) of the Act, is no longer res integra. The Ld.CIT(A) allowed

depreciation on non-compete fee by following the decision of ITAT in the

assessee’s own case for the AYs 2001-02 & 2002-03, where the Tribunal

held that non-compete fee is an intangible asset eligible for depreciation

u/s.32(1)(ii) of the Act. The matter reached to the Hon’ble Madras High

Court and the jurisdictional High Court of Madras had considered an

identical issue in the case of Pentasoft Technology Ltd. (supra) and held

that non-compete fee is in the nature of intangible asset in terms of sec.

u/s.32(1)(ii) of the Act, and would be a capital asset entitled for

depreciation. The relevant findings of the Hon’ble Madras High Court are

as under:

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 9 ::

that may be developed by them in future. The other rights owned by PMGL with regard to the development and training also stood approval under the said agreement. Further in the agreement, the assessee had agreed that the consideration for transfer of the Intellectual property and agreeing to non-compete shall be Rs.544.21 crores. It is to be pointed out that in the agreement there was no break-up details given as to how much of the above amount is allocable towards the transfer of IPR and how much towards non-compete fee. Nevertheless, such details has been furnished by the assessee before the Authorities below. The Assessing Officer, after taking note of the opinion of the Chartered Accountant of the assessee held that the opinion was not based on any scientific valuation and it is not a proper professional approach and accordingly, the capitalization of the goodwill, i.e. Intellectual Property Rights and non-compete fee was rejected and the claim for depreciation was disallowed.

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 10 ::

32(1)(ii) of the Act, it would first be relevant to refer to the said provision, which reads as under:

"Depreciation: 32(1) [in respect of depreciation of

(i)...........

(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed -] Therefore, in terms of the above provision, deduction is allowable in respect of depreciation of patents, copy rights, trade marks, licence, franchise, etc or any other business or commercial rights of similar nature. There is no difficulty insofar as the trade mark and copy rights, which have been transferred in favour of the assessee.

........."that the right of nomination is conferred on the member of the exchange; that, the said right shall cease and vest in the exchange when his membership gets forfeited to the exchange; that on such forfeiture the right of membership gets vested in the exchange and on such vesting the exchange has the right to deal with

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 11 ::

it as it may think fit. That, on forfeiture even the right of nomination vests in the exchange. Thus, a non-defaulting continuing member owns the right of nomination with respect to the membership of the exchange till his right of membership is forfeited to the exchange."

However, the Hon’ble Supreme Court observed that the right of membership including the right of nomination gets vested in the exchange on the demise/default committed by the member; that on such forfeiture and vesting in the exchange, the same gets disposed of by inviting offers and the consideration received thereof is used to liquidate the dues owed by the former/defaulting member to the exchange or clearing house.

5.4 In this view of the matter and by respectfully following the decision

of the jurisdictional High Court of Madras in Pentasoft Technology Ltd.

(supra), we are of the considered view that the assessee is entitled for

depreciation on non-compete fee and thus, we direct the AO to allow

depreciation on non-compete fee as claimed by the assessee.

is partly allowed.

ITA No.449/Chny/2004-05 for the AY 2004-05 – (Revenue’s

appeal)

of the Revenue’s appeal is exclusion of software development expenses and

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 12 ::

exchange fluctuation loss from export turnover but not from total turnover.

The AO while re-computing deduction u/s.10A of the Act, excluded

expenditure incurred towards software development expenses as per

Explanation (2) to sec.10A of the Act, and exchange fluctuation loss, but

does not exclude same from total turnover.

7.1 The Ld.Counsel for the assessee submitted that this issue is covered

in favour of the assessee by the decision of the Hon’ble Supreme Court in

the case of HCL Technologies Ltd. v. CIT reported in 165 DTR 305 (SC),

where it has been held that expenses deducted from export turnover also

needs to be deducted from the total turnover.

7.2 The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A),

submitted that as per law, export turnover and total turnover has been

defined and further, while computing deduction u/s.10A/10B of the Act,

expenses incurred in foreign currency needs to be excluded from export

turnover. However, same need not be excluded from total turnover. But,

he fairly agreed that the issue is covered in favour of the assessee by the

decision of the Hon’ble Supreme Court in the case of HCL Technologies Ltd.

(supra).

7.3 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. The issue of

computation of deduction u/s.10A of the Act, in light of definition of export

turnover and total turnover, has been resolved by the Hon’ble Supreme

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 13 ::

Court in the case of HCL Technologies Ltd., where it was held that expenses

deducted from export turnover needs to be deducted from total turnover.

Therefore, we are of the considered view that the AO & the Ld.CIT(A) is

erred in not excluded expenses deducted from export turnover from total

turnover and thus, we direct the AO to exclude expenditure incurred

towards software development and foreign exchange loss from total

turnover also.

of the Revenue’s appeal is depreciation on Intellectual Property Rights (in

short “IPR"). The Ld.Counsel for the assessee submitted that this issue is

covered in favour of the assessee by the decision of ITAT in the assessee’s

own case for the AY 2002-03, where the Tribunal held that the assessee is

entitled for depreciation on IPRs u/s.32(1)(i) of the Act.

8.1 The Ld.DR, on the other hand, supporting the order of the AO,

submitted that the issue is covered in favour of the assessee by the decision

of ITAT in the assessee’s own case for the earlier assessment years.

8.2 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. We find that an

identical issue has been considered by the Tribunal in the assessee’s own

case for the AY 2002-03 in ITA No.1540//Mds/2006, where the Tribunal

after considering relevant facts held that IPR is eligible for depreciation

u/s.32(1)(i) of the Act. Therefore, consistent with view taken by the co-

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ordinate Bench, we are of the considered view that there is no error in the

reasons given by the Ld.CIT(A) to delete additions made towards

disallowance of depreciation on IPR and thus, we are inclined to uphold the

findings of the Ld.CIT(A) and reject the ground taken by the Revenue.

of the Revenue’s appeal is expenditure on purchase of software treated as

Revenue expenditure. The AO has disallowed a sum of Rs.18,24,821/-

towards expenditure incurred for purchase of software as capital in nature,

since, the assessee derived enduring benefit, but has allowed depreciation.

The Ld.CIT(A) by following the decision of CIT v. Southern Roadways Ltd.

reported in 288 ITR 15, allowed relief and held that expenditure incurred

for purchase of software is Revenue in nature.

9.1 The Ld.Counsel for the assessee submitted that the assessee has

incurred expenditure for accreditation of software for improving the

efficiency of existing system with a view to keep business pace with latest

technology. Therefore, the same does not give any enduring benefit to the

assessee and thus, cannot be considered as capital expenditure.

9.2 The Ld.DR, supporting the order of the AO, submitted that

expenditure incurred by the assessee for purchase of software is capital in

nature, because it gives enduring benefit and thus, the Ld.CIT(A) is erred

in deleting additions made towards capital expenditure.

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 15 ::

9.3 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. Although, the

assessee has purchased software to replace with existing software in a

computer system, but same does not give any enduring benefit, because

the life of software is very short. Therefore, the same cannot be considered

as capital in nature. We find that the jurisdictional high Court of Madras in

the case of Southern Roadways Ltd., (supra) has considered an identical

issue and held that there is an enduring benefit, it does not result in

acquisition of any capital asset and merely enhanced the productivity or

efficiency of the system and thus, it cannot be considered as capital in

nature. The Ld.CIT(A) after considering relevant facts and also by following

the decision in the case of Southern Roadways Ltd., (supra) has rightly

deleted the additions made by the AO and thus, we are inclined to uphold

the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.

of the Revenue’s appeal is unexplained credit in the name of M/s.Penta

Media Graphics Ltd. The AO has made additions towards credits in the

name of M/s.Penta Media Graphics Ltd., for the reason that the assessee

could not furnish full details in respect of balance payable to M/s.Penta

Media Graphics Ltd. The Ld.CIT(A) allowed relief to the assessee on the

basis of reconciliation filed by the assessee along with ledger account of

M/s.Penta Media Graphics Ltd., in the books of the assessee and vice-versa.

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 16 ::

10.1 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. Admittedly, the

assessee could not file any evidences including confirmations from the party

before the AO to justify credit in the name of M/s.Penta Media Graphics Ltd.

Before the Ld.CIT(A), the assessee claims to have filed reconciliation along

with ledger account of M/s.Penta Media Graphics Ltd., in the books of

accounts of the assessee and vice-versa. The assessee further claimed that

it has reconciled difference between ledger account of M/s.Penta Media

Graphics Ltd., in their books of accounts with creditors books and explained

the difference of Rs.3 lakhs. The Ld.CIT(A) after considering relevant facts

deleted the additions made by the AO. We find that although, the assessee

has filed reconciliation and further evidences first time before the

Ld.CIT(A), the Ld.CIT(A) has allowed relief to the assessee without

confronting those evidences to the AO for his rebuttal. No doubt, the

assessee has filed details of ledger account along with confirmation from

the party and explained the credit. But, the Ld.CIT(A) should have

confronted those evidences to the AO for his comments before allowing the

relief to the assessee. Therefore, we are of the considered view that the

issue needs to go back to the file of the AO to verify additional evidences

filed by the assessee including confirmations from the party and

reconciliation of difference between the ledger account of party in the books

of accounts of the assessee and in the books of creditors. In case, the

assessee is able to explain credit with necessary evidences, then the AO is

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 17 ::

directed to delete additions made towards credits in the name of M/s.Penta

Media Graphics Ltd.

of the Revenue’s appeal is additions towards credits in respect of M/s.RS &

Co. Inc. and M/s.Pentafour Software Solution Inc. The AO has made

additions towards creditors in absence of confirmation form the party. The

Ld.CIT(A) deleted the additions made by the AO on the basis of subsequent

payment made by the assessee to the creditors.

11.1 We have heard both the parties, and perused the materials available

on record and we find that the assessee has filed details of ledger account

along with payment to creditors in subsequent FY before the Ld.CIT(A) and

the Ld.CIT(A) has forwarded additional evidences filed by the assessee to

the AO and the AO could not rebut the details filed by the assessee in the

Remand Report, except saying that letter sent have not been served or

replied by the parties. We find that confirmation of settlement of credit

subsequently from creditors were already produced before the Ld.CIT(A).

Notices by the AO being returned/unserved cannot be the reason to hold

the credit, is not genuine. Creditors are carried over from FY 2001-02 and

are not credits/appearing for the first time during the year. Therefore, we

are of the considered view that there is no error in the reasons given by

the Ld.CIT(A) to delete the additions towards credits in the name of M/s.RS

& Co. Inc. and M/s.Pentafour Software Solution Inc., and thus, we are

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 18 ::

inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken

by the Revenue.

of the Revenue’s appeal is allocation of disallowance of expenses among

STP Units and non-STP Units in the ratio of 90% and 10% on the basis of

income of the assessee. The AO has disallowed certain liabilities amounting

to Rs.6,64,02,188/- u/s.43B of the Act, as per Tax Audit Report and

allocated said disallowances to STP Units and non-STP Units on the basis of

income derived by the assessee. The Ld.CIT(A) directed the AO to allocate

sec.43B disallowance in the ratio of 90% under STP Units and 10% under

non-STP units on the basis of turnover of STP Units & non-STP Units.

12.1 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. The AO has

allocated disallowance of certain liabilities u/s.43B of the Act, to STP Units

& non-STP Units, on the basis of income, whereas, the Ld.CIT(A) has

directed the AO to allocate said disallowance on the basis of export turnover

and domestic turnover. The short dispute between the assessee and the

Revenue on allocation of disallowance on said expenses is whether it should

be on the basis of income or turnover. In our considered view, turnover

would be the appropriate ratio for allocation of expenses to STP Units &

non-STP Units instead of income. Because, income of STP Units & non-STP

Units may depend upon various factors including fixed overhead expenses

and other parameters. Therefore, we are of the considered view that there

ITA Nos.121 & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 19 ::

is no error in the reasons given by the Ld.CIT(A) to allocate disallowance

of expenses u/s.43B of the Act, to STP Units & non-STP Units on the basis

of export turnover and domestic turnover and thus, we are inclined to

uphold the findings of the Ld.CIT(A) and reject the ground taken by the

Revenue.

is partly allowed for statistical purposes.

is partly allowed and appeal filed by the Revenue in ITA No.449/Chny/2011

is partly allowed for statistical purposes.

Order pronounced on the 11th day of November, 2022, in Chennai.

Sd/- Sd/- (वी. दुगा� राव) (जी. मंजूनाथा) (G. MANJUNATHA) (V. DURGA RAO) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 11th November, 2022. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 4. आयकर आयु�/CIT 2. ��यथ�/Respondent 5. िवभागीय �ितिनिध/DR 3. आयकर आयु� (अपील)/CIT(A) 6. गाड� फाईल/GF