Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: Shri Rama Kanta Panda & Shri Laliet Kumar
Per Shri Laliet Kumar, J.M. This appeal is filed by the assessee, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 30.08.2018 for the AY 2013-14, on the following grounds
The order of the learned Commissioner of Income Tax (Appeals) is against the law, weight of evidence and probabilities of case. 2. The learned Commissioner ought to have appreciated that the expenditure incurred for development of a new product subsequently, the project was abandoned as not feasible, therefore, erred in not allowing the claim of expenditure in respect of the said project. 3.The learned Commissioner erred in assuming the expenditure is in the nature of capital expenditure, therefore, further erred in confirming the addition made by the Assessing Officer, amounting to Rs.52,0 1,500/-, 4.The learned Commissioner ought to have appreciated that the assessee, in the course of its business intended to develop a new product which proved to be not feasible subsequently, therefore, claimed the expenditure of Rs.52,01,500/ - as an allowable expenditure, therefore,
2 ITA.No.1421/Hyd/2019 the CIT erred in confirming the order of the Assessing Officer, wherein, such expenditure was disallowed. 5. The learned commissioner erred in confirming the order of the Assessing Officer in which the addition was made considering the expenditure as neither revenue nor capital but as a capital loss by the Assessing Officer. 6. the learned commissioner ought to have appreciated that the character of the expenditure does not change for the purpose of Income Tax even if it is capitalized in the books of accounts but claimed in the computation of income, therefore, ought to have deleted the addition of Rs.52,01,500/-
The assessee has filed a petition for delay in referring the present appeal for the period of 272 days and the reasons given in the assesses appeal are as under:-
The young promoters were caught in Catch 22 Situation having invested huge money into development and sourcing for funds though VC's Investors which have literally dried up for Indian Based Companies, specially Hyderabad based companies 2. However, the assessee could not infuse further funds and the operations dried up during the period 2016-17 3. The founders of the company tried for their best to run the company 4. However, the employees of the company left the company on account of non payment of the salaries and better opportunities and the assessee company existed only on paper 5. Further, the Directors being technical persons opted for private employment for the survival. In this scenario the order of the CIT(A) was received on 19.10.2018. Reasons for Delay 1. Keeping the circumstances mentioned above, the company operations were not looked into on a day to day basis as earlier 2. The directors, who have pumped in huge money were working out to pay the funds brought into the company, their debts, etc
Therefore, the appeal could not be filed in the stipulated period. As the demand was outstanding and also proceedings ujs 271(1)(c) were also pending, the Accountant of the assessee company pursued the Directors and the appeal was filed with a delay of 272 days 3. The ld. AR for the assessee has submitted that delay in filling the appeal may be condoned . The Ld.DR for the revenue has not objected to the condonation of delay in filing the appeal by the assessee
3 ITA.No.1421/Hyd/2019 4. We have heard the rival contention the parties and perused the material available on record . In this connection, the assessee has filed an affidavit for condonation of the said delay wherein, it was, inter-alia, affirmed that due to reasons beyond the control of the assessee, as the employees of the assessee have left the project and there was nobody responsible persons available in the office of the assessee for the purpose of percent the appeal, therefore there was a delay in filing the appeal. In our view the assessee has shown the plausible reason for not pursuing the appeal before us in time, nor it is the case of the revenue that the assessee will gain anything on account of delayed filing the appeal. Therefore we are of the opinion that the delay in filing the appeal is required to be condoned. We rely on Case law Collector Land Acquisition Vs. Mst. Katiji & Ors, 1987 AIR 1353 (SC) and University of Delhi Vs. Union of India, Civil Appeal No. 9488 & 9489/2019 dated 17 December, 2019, hold that such a delay; supported by cogent reasons, deserves to be condoned so as to make way for the cause of substantial justice. We accordingly hold that revenue’s impugned delay in filing these appeals is neither intentional nor deliberate but due to the circumstances beyond its control. The same stands condoned. Cases are now taken up for adjudication on merits.
The Ld.AR for the assessee had drawn our attention to the written submission filed by the assessee in support of the case on merit, it was submitted by the Ld.AR in the written submission that
“The assessee is in the business of development of software and selling. The learned Assessing Officers assumption that it is only in the trading of software is not correct, therefore, claiming of expenditure on the software 365 which is abandoned on account of non feasibility is revenue expenditure. The expenditure claimed is allowable u/ s 37 of the IT Act. further, the learned Assessing Officer observed in Para 3.9 that the expenditure is not connected to the regular business of income and also observed that the expenditure is neither revenue expenditure nor capital expenditure and treated the same as capital loss, not directly related to
4 ITA.No.1421/Hyd/2019 the business transaction and with this presumption the expenditure is disallowed and added to the income returned.
The expenditure is incurred for the development of software is mainly on account of payment of salaries to the technical personal. In a continuous business in a particular project is abandoned on account of non commercial value of the product, the expenditure incurred on the project is to be claimed as revenue expenditure, therefore, allowable u/ s 37 of the IT Act. it is also pertinent to note that the expenditure has not been incurred for setting of a new business but the expenditure is incurred only in respect existing business, however, for bringing up a new product, which if successful would have brought much revenue to the assessee. In the case of Idea Cellular Ltd Vs Addl.CIT (ITA No.3260 & 3493/2008, dt: 13.05.2014), the Hon'ble ITAT Mumbai held that the expenditure on abandoned project (in relation to the existing business) is allowable as revenue expenditure (copy enclosed). Similar view has been taken in the following judicial pronouncements. i. Asia Power Project (P) Ltd Vs Dy.CIT 49taxmann.com 428 (Karn), 226 Taxmann 136. ii. ITO Vs Abdul.G. Nadiadwala (2014) 29 ITR (T) 528, (Mum-Trib). iii. Gujarat Green Revolution Co. Ltd Vs ACIT 145 ITD 161 Ahmedabad (2013) & 26 ITR (T) 567 (Ahmedabad-Trib). iv. KJS India Pvt Ltd Vs DCIT and Vice Versa (copy enclosed). Considering the above submissions the learned CIT opined that the assessee abandoned the project is a self serving argument without any basis or any evidence. During the period relevant to the subject assessment year before the Assessing Officer and also the Appellate Commissioner the assessee submitted list of employees and details of their monthly salary and the assessee also submitted details of expenditure incurred in the form of salaries towards the product development. The aggregate amounts spent towards salaries is including spent towards product development Rs.1,18,64,158/- out of that amount spent towards product development is at Rs.52,01 ,500/-. As seen from the P&L account only an amount of Rs.68,53,675/- is debited towards salaries wages and incentives. This fact was never denied in their proceedings by the Assessing Officer and Appellate Commissioner.”
On the other hand, the ld. DR relied upon the order passed by the ld.CIT(A).
We have gone through the order passed by the ld.CIT(A). As a matter of fact, the assessee had filed balance sheet and profit and loss account of the year under consideration. In the balance sheet, the assessee has not mentioned that the amount claimed
5 ITA.No.1421/Hyd/2019 by the assessee as written off on account of the abandonment of development of software. In our view, once the assessee has considered the inclusion of development of the software in the balance sheet, than the amount spent by the assessee for the development of that software cannot be considered as revenue expenditure in the eyes of law. The profit and gains of the business or profession are required to be dealt in accordance with section 28 to 44 DB of the act. Whereas the capital gains are required to be computed under Chapter E commencing from section 45 of the ACT. For the purposes of creating an expenditure as allowable expenditure, the assessee is required to fulfil various ingredients as provided under section 37 of the act. Section 37 of the Act provides :- Any expenditure and not being in nature of capital expenditure or expenses of the assessee laid out appended only on exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head profit and gains the business of the profession.
In the present case the assessee had suspended the expenditure on development of the software, which is in its nature is capital expenditure and therefore the same cannot be allowed or allowable under section 37 of the act.
In the present case, though the nature of expenditure are primarily in the nature of salary however that salary expenses were laid by the assessee for the purposes of developing a capital asset in the form of the software for its own purposes . Therefore the expenditure in question was capital in nature and is not allowable. Moreover, there is nothing on record to show that the assessee has booked the expenditure in the profit and loss account . We do not find any error in the reasoning given by the Ld. CIT(A) at page 9 to 12 in paragraph 6. The Ld. CIT(A) had given the following reasons for declining the expenditure while
6 ITA.No.1421/Hyd/2019 computing the income chargeable under the head profit and gains of the business “6. The AO noted that the appellant has claimed deferred revenue expenditure as a revenue expenditure, whereas the same was capitalized in the balance sheet as "other current assets". On questioning by the AO the appellant stated that the expenditure was intended for development of a product and the expenditure in relation to the development mainly comprised of salaries of professionals. The project of development was abandoned at the level 6 of the developmental stage and therefore, the same was claimed as revenue expenditure.
The AO in para 3.3 to 3.5 has observed the developmental stage of the software and also noted that the appellant is in the business of selling software and not in the development of software as such. The AO further noted that the expenditure is not eligible ii]». 35(1) and also there is no certification from the competent authority. The AO further noted that the expenditure which is to be claimed over the years are already specified under the Income Tax Act and elaborated the same in the para 3.8 of his order. The AO thus came to the conclusion that the expenditure was for the development of capital asset and the write off of the same is a capital loss and not revenue expenditure as allowed under the Income Tax Act, 1961.
During the course of appeal, the appellant stated that it had developed the product and the same was to be used for its own self and the idea was to customize it for others and earn revenue.
The appellant further gave a narration regarding the product under "It" consideration which was named as "service 365" and therefore as the appellant
was in the business of development of software, therefore the same should be allowed u/s. 37(1) of the Income Tax Act, 1961 as it mainly complied of salaries of staff. The appellant cited certain case laws in this regard. The appellant further filed the balance sheet and profit and loss account and the computation of income in this regard. It is seen that the appellant as on 31.03.2013 has identified a sum of Rs. 52,01,500/- as other current asset in the balance sheet and itemized it with a narration of deferred revenue expenditure.
It is seen that the appellant has very clearly identified that the expenditure incurred as on 31.03.2013 as deferred revenue expenditure and no such expenditure was itemized for the balance sheet ending 31.03.2012. Therefore, the development took place in the present F.Y.
7 ITA.No.1421/Hyd/2019
However, it claimed the same as a revenue expenditure while computing the taxable income as per Income Tax Act. It is seen that the balance sheet has been signed by the Directors on 25.08.2013 and there is no mention of abandoning the project in the notes to accounts or in the Directors Report or in the independent Auditors Report.
Thus, the amount quantified under the schedule 10A of the balance sheet was good and just and the project as on 31.03.2013 was considered on and even while signing the Audit Report and balance sheet the same situation continued.
The Form 3CD was also signed on the even date i.e 25.08.2013. The return has been filed by the appellant on 31.03.2015, which was much after the due date of filing the return of income. It is seen that the appellant has paid self assessment tax only on 27.03.2015 of Rs. 2,45,230/- that too on the tax liability arising out of defaults on account of TDS cumulating to Rs. 45,96,439/-. Therefore, the appellant decided to claim "the other current assets" as revenue expenditure, in order to reduce the income for the year and to find a matching expenditure to the disallowance vi] s. 40(a)(ia) for non-payment of TDS. The appellant has created a product and has stated it to be part of current assets as on 25.08.2013 on the date of signing of the balance sheet and no remarks adversely were made regarding this "other current asset" . Thus, this is nothing but an afterthought to claim the same as revenue expenditure for the same year, while computing the income for the year under consideration. The whole statement that the same has been abandoned is a self serving argument without any basis or any evidence, the appellant has created a self serving story by defining various jargons in the form of stages to pass on a write off of capital asset in the computation of income as revenue expenditure. There is no basis or evidence for such a write off on a prima facie basis \ ever produced by the appellant during the course of assessment proceedings and appeal proceedings. Further, the appellant itself has not written off the same as on 31.03.2013 which is evident from the balance sheet and the profit and loss \ account.
Therefore, this amount irrespective of the nature cannot be a revenue charge for the year under consideration as per the evidence available on record and the admission of no such abandonment which can be seen from the various reports of compliance and reporting available on record. Therefore, it is held that this write off irrespective of the nature is not allowable for the current year under consideration.
8 ITA.No.1421/Hyd/2019 Without prejudice to the above, it is important to note that the write off is only capital in nature as the appellant itself has admitted that it was creating an asset for its own purpose and thus was in the process of creating more towards an "Intangible Asset'. Therefore, the nature of the asset being capital in nature, the write off even in the subsequent year will be a capital loss. The claim of the appellant that the quantum mainly constituted of salaries has no bearing on the nature of the asset as most of the intangibles do not require material but intellectual input and that is the reason the categorization of products are in that nature. Though the creation envisaged could be categorized as tangible or intangible but just because the input for such creation is salary that does not qualify for a write off of such assets as revenue expenditure.
In view of the above the ground no. 2,3,4 and 5 are dismissed accordingly. The ground no. 6,7 and 8 has been withdrawan as not pressed by the appellant. The ground no. 1 and 9 are general in nature and needs no adjudication.
To sum up the appeal is dismissed.”
We do not find any error in the order and accordingly, appeal of the assessee is dismissed.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the Open Court on 23rd June, 2022.
Sd/- Sd/- (RAMA KANTA PANDA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated 23rd June, 2022. Thirumalesh/sps
9 ITA.No.1421/Hyd/2019
Copy to:
S.No Addresses 1 Dataformix enterprise solutions Private Limited 1-33-47, RTC Colony, Gunrock, Tirumalgiri Secunderabad-500 0074 2 ITO,Ward-17(1),Signature Towers,Kondapur Hyderabad-500 004 3 CIT(A)-5 and Pr.CIT, Hyderabad 4 DR, ITAT Hyderabad Benches 5 Guard File
By Order