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Facts
The assessee, a private limited company engaged in software development, filed its return for Assessment Year 2014-15. The Assessing Officer made additions/disallowances, including professional fees for patent drafting, translation expenses for software development, and disallowance under Section 14A.
Held
The Tribunal held that the expenditure on patent drafting and translation expenses for software development are revenue expenditures. The disallowance under Section 14A was limited to the extent of exempt income earned.
Key Issues
Whether professional fees for patent drafting and translation expenses for software development are revenue or capital expenditure, and the extent of disallowance permissible under Section 14A.
Sections Cited
143(3), 143(2), 142(1), 14A, 37(1)
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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI MANISH BORAD & SHRI S. S. VISWANETHRA RAVI
Assessment Year : 2014-15 Linguanext Technologies Vs. ITO, Ward-14(3), Pune. Private Limited, 401, Galore Tech Park, Behind Maratha Mandir, Bavdhan, Pune- 411021. PAN : AABCL7322G Appellant Respondent Assessee by : Shri Kishore Phadke Revenue by : Shri Manoj Tripathi Date of hearing : 17.03.2025 Date of pronouncement : 20.03.2025 आदेश / ORDER
PER MANISH BORAD, AM:
This appeal filed at the instance of assessee is directed against the order of Ld. Addl/JCIT(A)-6, Chennai [‘Ld. CIT(A)’] dated 19.11.2024 which is arising out of the assessment order u/s 143(3) of the Act for Assessment Year 2014-15 framed on 29.12.2016 by the ITO, Ward-14(3), Pune.
Brief facts of the case are that the assessee is a private limited company and engaged in software development business. Return 2014-15 furnished on 29.11.2014 declaring income of Rs.8,74,700/-. The case selected for scrutiny through CASS followed by validly serving notices u/s 143(2) and 142(1) of the Act. Information called for by Ld. Assessing Officer was duly supplied and the assessment was completed assessing income of Rs.30,64,753/- after making following additions/disallowances :- (i) Disallowance of professional fees for patent drafting at Rs.15,69,849/-. (ii) Disallowance of translation expenses for software development at Rs.5,17,630/-. (iii) Disallowance u/s 14A of the Act at Rs.1,02,574/-.
Aggrieved assessee preferred an appeal before Ld. CIT(A) furnishing details/written submission but failed to succeed. Now the assessee is in appeal before this Tribunal challenging the additions affirmed by Ld. CIT(A).
Ld. Counsel for the assessee vehemently argued referring to the written submission filed before Ld. CIT(A) and also referring to the documents filed in the paper book – 1 containing 98 pages along with referring to the decisions in support of the claim that the expenditure incurred towards patent drafting and translation expenses for software development are revenue expenditure. So far 14A of the Act is concerned, it is stated that even though Ld. Assessing Officer had failed to record any satisfaction prior to making the alleged disallowance but even otherwise in view of the settled judicial precedent disallowance u/s 14A of the Act cannot exceed exempt income earned during the year.
On the other hand, Ld. DR vehemently argued supporting the orders of both the lower authorities.
We have heard rival contentions and perused the record records placed before us and carefully gone through the decisions referred and relied by Ld. Counsel for the assessee.
Ground no.1 is general in nature which needs no adjudication.
Ground no.2 relates to disallowance of professional fees paid for drafting application for patents at Rs.15,69,849/- treated as capital expenditure by both the lower authorities. We observe that during the year assessee incurred Rs.15,69,849/- as legal charges for filing patent application. Ledger Account of patent, copyright and trademark expenses is placed at page no.70 to 71. Ledger Account of expenditure towards professional charges incurred for the professional services mainly includes the amount charged by M/s Evalue Serve against the invoices raised for patent drafting, USPTO charges. Undisputedly, the patent for which the alleged expenditure was incurred has not been registered till date. It has been stated before us by Ld. Counsel for the assessee that the assessee has followed Accounting Standard 26 and since the patent for which the expenditure was incurred has not been capitalized in the financial statement considering the non- satisfaction of recognition and measurement criteria, the alleged amount has been claimed as ‘revenue expenditure’. We also observe that the alleged expenditure incurred has not created new asset during the year for which it is claimed.
We therefore considering the facts of the case and also considering that the genuineness of the expenditure is not in dispute, are of the view that since the expenditure in question before us has been incurred in the regular course of business and no specific intangible asset has been created, therefore, the assessee deserves the deduction of the alleged expenses of Rs.15,69,849/- u/s 37(1) of the Act and it has been rightly claimed as ‘revenue expenditure’. Thus, ground no.2 raised by the assessee is allowed.
Ground no.3 relates to the translation expenses for software development. This claim of the assessee has been denied by Ld. Assessing Officer treating it to be a capital expenditure. We observe that the assessee in the business of providing solutions for enterprise application language localization across all industry verticals for which the assessee requires experts who can translate various words into the customers specified language. The translation expenses is specific to each sale as the dictionary prepared for one customer once is hardly of any use in any other sale. We also observe that no new asset came into existence and the expenditure is customer specific and has no enduring benefit. Further, the intention of the expenditure is to facilitate sales and not develop software. Therefore, since the alleged expenditure towards translation expenses for software development has been incurred in the regular course of business for the year under consideration, the same is hereby treated as ‘revenue expenditure’ and the claim made by the assessee deserves to be allowed. Finding of Ld. CIT(A) is reversed and ground no.3 of the assessee is allowed.
Ground no.4 relates to disallowance u/s 14A of the Act. Though the assessee has claimed that Ld. Assessing Officer has not made proper satisfaction, we however considering the fact that the assessee had earned dividend income from mutual funds investments only at Rs.1210/- therefore, in light of the decisions of the Co-ordinate Bench of Delhi Tribunal in the case of Joint