DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 6(1)(2), BANGALORE vs. M/S. SOBHA RENAISSANCE INFORMATION TECHNOLOGY PRIVATE LIMITED, BANGALORE

Ld. AO noted that assessee incurred expenses of Rs.26,79,33,501/- relating to product development which was capitalised along with opening work in progress amounting to Rs.99,523/-, totalling to Rs.27,78,52,249/-. Ld.AO also noted

Ld.AO rejected submissions advanced by assessee. Ld. AO was of the opinion that, assessee could not explain whether, such expenditure is based on specific requirement of client and had nexus with revenue if any on account of sale of product. Ld. AO held that assessee’s activity of product development did not fall within the meaning of scientific research as given under section 43 (4) of the Act. Ld.AO accordingly, disallowed the claim of assessee.

Aggrieved by order of Ld.AO assessee preferred appeal before Ld.CIT(A). Ld.CIT(A) decided the issue in favour of assessee by observing as under: Findings In the case of CIT Vs. Talisma Corporation the assessee was engaged in development and sale of software projects incurred certain product development cost which mainly included salary and other general administrative expenses. The Hon’ble Karnataka High Court has held that in view of fact that said expenditure was in respect of scientific research and was incurred in relation to business carried on by the assessee, it was to be allowed as deduction under section 35(1)(iv) even if expenditure was capital in nature. The SLP filed by the revenue against the above decision has been dismissed by the Supreme Court [Special Leave to Appeal (C) . .CC No.(s) 8116/2014[ In the case of Tejsa Networks Ltd. Vs. ACIT, the Karnataka High Court has held that in case product development expenditure is treated as capital in nature, the same should be allowed as a deduction under section 35( i)(iv) of the Act. In the case of DCIT Vs. TCIL Bell South Ltd., the Delhi ITAT held that the software development process consisted of a whole series of processes wherein systems analysis and design constituted the research activity and the programming quality, control, debugging and testing, etc. constituted the development activity. The ITAT held that the software development process constituted scientific research activity and the expenditure incurred was admissible under section 35(1 )(iv) of the Act. The facts of the appellants case are similar to those of Talisma Corporation and Tejas Networks. Following the decisions of the jurisdictional High Court as well that of the ITAT, Delhi in the above cited cases, the appellants claim for deduction u/ s 35 is allowed. This ground of appeal

At this juncture, Ld.AR submitted that, identical issue in earlier assessment year has been remanded by this Tribunal. He placed reliance on pages 59-94 of paper book, wherein relevant orders for assessment year 2005-06 and 2009-10 are placed.

We have perused submissions advanced by both sides in light of records placed before us. 10. We note that, assessee has been incurring expenses in assessment year 2005-06 in against which, deduction was claimed in computation of income. Ld.AO, identically disallowed claim, by holding it to be capital in nature. Assessee also made similar alternate claim before authorities below for assessment year 2005-06, that it should be given deduction under section 35 (1) (iv) of the Act, in respect of expenditure on scientific research related to business carried on by assessee. We note that, this Tribunal, while considering the claim remanded the issue to Ld.CIT(A) by observing as under. “It is clear from the finding of the learned CIT (Appeals) that it has not gone into the factual issue whether this expenditure pertains to the R & D activity of the assessee as per the provisions of section 35(1)(iv) r.w.s. 43(4)(ii)(a) of the Act wherein the definition of scientific research has been provided. Since the proper record and other details are not available before us in respect of the actual nature of the expenditure in question therefore we cannot give a conclusive finding regarding the real nature of the expenditure incurred by the assessee whether it is incurred on R&D activity of the assessee or not. Therefore in the facts and circumstances of the case, as well as in the interest of justice, we set aside this issue to the record of CIT (Appeals) for limited purpose of verifying the real nature of the expenditure incurred by the assessee whether it is for the R & D activity of the assessee. The CIT (Appeals) has to decide this issue after verification and examination of the relevant record and in the light of the decision of Hon’ble jurisdictional High Court in the case of Talisma Corporation Pvt. Ltd. (Supra). Needless to say the assessee shall be afforded an opportunity of hearing.”

We note that, in appeal before us, the Ld.AR relied on decision of Hon’ble Karnataka High Court in case of Talisma Corporation Pvt.Ltd., reported in (2013) 40 Taxmann.com 400. We note that facts and issue considered by this Tribunal in assessment year 2005-06 are same with the year under consideration. Therefore, respectfully following the view taken by this Tribunal in assessment year 2005-06 in assessee’s own case, we remand this issue to Ld.CIT(A). Ld.CIT(A) is directed verify whether, assessee acquires any copyright/ownership in respect of products sold developed. Ld.CIT(A) is directed to decide the issue based on documents/evidences filed by assessee in light of decision by Hon’ble Karnataka High Court in case of Talisma Corporation Pvt.Ltd., (supra). Accordingly, grounds raised by revenue stands allowed for statistical purposes. In the result appeal filed by revenue stands allowed for statistical purposes. Order pronounced in the open court on 29th Sept, 2020