DCIT, CHENNAI vs. LASER SOFT INFOSYSTEM PVT. LTD., CHENNAI

3. The CIT(A) erred in deleting the disallowance of Rs.7,44,960/- made by the AD in respect of treating the expenditure on purchase of software as capital expenditure.

3.1. The CIT(A) erred in not appreciating that as per old Appendix I and new Appendix I of IT Rules, computer software along with computer has been treated as capital

ITA No.1346 to 1348/16 :- 3 -: asset and depreciation at a higher rate of 60 per cent has been allowed considering the life and durability of the computer software. When the statute specifically provides for treating the computer software as a capital asset and allowing depreciation thereon, the expenditure incurred towards purchase of computer software cannot be treated as revenue expenditure.

4. The CIT(A) erred in allowing 60% depreciation instead of 25% depreciation on the development software and thereby ignoring the fact that the assessee after developing the software is selling the same as licenses and the licenses are covered under the head intangible assets.

4.1. It is submitted that the CIT(A)’s relied upon decision of the ITAT in assessee’s own case for AY.2007-08 which has not become final and against which the Department’s appeal is pending before the Hon’ble High Court of Madras vide TCA No.607 of 2013’’.

The brief facts of the case are as under: 5.

The Respondent- assessee namely M/s. Lazer Soft Infosystem Pvt. Ltd is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of development and export of computer software. The return of income for the AY 2002-03 was filed on 30.10.2002 disclosing total income of �1,52,84,490/- and the same was revised with total income of �1,19,34,318/-. Subsequently, notice u/s.148 of the Act was issued on 18.03.2009. In response to which, the return of income was filed on 16.04.2009 disclosing income of �1,19,34,318/-. Against the said

ITA No.1346 to 1348/16 :- 4 -: return of income, the assessment was completed by the Income Tax Officer, Company Ward II(1) Chennai (hereinafter called “AO”) vide order dated 29.12.2009 passed u/s. 143(3) r/w s. 147 of the Income Tax Act, 1961 (in short ‘the Act’) at total income of Rs.5,03,05,487/-.

While doing so, the AO denied exemptions u/s.10A of the Act on the ground that unit was formed by reconstruction of already existing unit as old plant and machinery already used in the business is 28% and the employees old unit were re-deployed. The Assessing Officer also disallowed the claim for purchase of software of �18,62,398/- by holding it to be capital and allowed depreciation @60% thereon.

The Assessing Officer apportioned the common expenditure of �2,00,00,000/- towards software development capitalized in the books of accounts and allowed depreciation @25% thereon, as against claim of 60%.

Being aggrieved, an appeal was preferred before ld. CIT(A), 6. who vide impugned order allowed the claim for exemption of profit u/s.10A of the Act by holding that there is no contravention of Explanation 2 to Sub Section 80I(2) of the Act applicable for the purposes of Explanation u/s.10A(2) of the Act as the value of old machinery used is less than 20% of the total value of the machinery.

As regards to other conditions are concerned, the ld. CIT(A) held that ITA No.1346 to 1348/16 :- 5 -: mere transfer or re-deployment of man power of existing unit cannot be construed as reconstruction. As regards to the purchase of software, considering the details filed before him, came to conclusion that expenditure was incurred in the form of renewal of subscription for licence to use and accordingly held that it is revenue expenditure placing reliance on the decision of Hon’ble Jurisdictional High Court in the cases of Southern Roadways Ltd, 304 ITR 84 and Karur Vysa Bank (2015) 54 taxmann.com 324. As regards to the capitalization of common expenditure of �2,00,00,000/- towards software development expenditure, the ld. CIT(A) while confirming the action of the Assessing Officer directed with to allow depreciation @60% instead of 25%.

The Assessing Officer disallowed the claim primarily on the ground that used machinery employed in the new business is 28% and transfer of employees of the existing unit to the new unit holding it to be ITA No.1346 to 1348/16 :- 6 -: reconstruction of already existing business. Accordingly, he denied exemption u/s.10A of the Act. The ld. CIT(A) considering the value of plant and machinery purchased prior to the setting up of new unit had came to conclusion that value of old machinery is less than 20% and transfer of the employees from the existing unit to new unit cannot be construed as reconstruction of existing business. This finding of the ld. CIT(A) is contrary to the finding of the Assessing Officer that the total value of old machinery employed by the assessee is �60,48,386/- and new machinery is only �24,52,200/-. This variation in the value of the old machinery and new machinery has bearing on the issue on hand. The ld. CIT(A) had not addressed the reason, given by the Assessing Officer nor was it the case of the assessee company that the total value of asset adopted by the Assessing Officer is incorrect. In view of the discrepancies in the total value of fixed assets adopted by ld. CIT(A) and Assessing Officer, we are of the considered opinion that the matter should be remitted back to the file of ld. CIT(A) for fresh adjudication on the merits of the appeal after affording due opportunity of hearing to the appellant in accordance with law. Thus, the grounds of appeal Nos. 2 to 2.2 filed by the Revenue are partly allowed for statistical purposes.

Grounds of appeal No.3 & 3.1 challenges the decision of 9. ld. CIT(A) in allowing the cost of software as revenue expenditure

ITA No.1346 to 1348/16 :- 7 -: considering the nature of expenditure. From the perusal of the assessment order, it is clear that assessee company had failed to furnish any details as to the nature of expenditure incurred before the Assessing Officer. The ld. CIT(A) considering fresh evidence filed before him came to conclusion that expenditure was incurred wholly towards renewal of subscription for software. Accordingly, allowed the same as revenue expenditure placing reliance on the decisions of Jurisdictional High Court in the cases of Southern Roadways Ltd (supra) and Karur Vysa Bank (supra). From the perusal of para 4.3 of the order of ld. CIT(A), it is clear that ld. CIT(A) had considered additional evidence in violation of provisions of Rule 46A of Income Tax Act, 1962. Therefore, we are of the considered opinion that this issue should be remitted back to the file of the ld. CIT(A) for de novo assessment in accordance with law. Accordingly, the grounds of appeal Nos.3 & 3.1 of the Revenue are partly allowed for statistical purpose.

Grounds of appeal No.4 & 4.1, challenges the decision of 10. the ld. CIT(A) in allowing depreciation @60% as against 25% allowed by the Assessing Officer, as the allocated common expenditure of �2,00,00,000/-. The Assessing Officer disallowed a sum of �2,00,00,000/- by allocating common expenditure towards

ITA No.1346 to 1348/16 :- 8 -: development of software. Admittedly, assessee derives income in the form of licence fees for software so developed. But from the material on record, it is not clear whether it is application software embedded recorded on CD or disc, tape, perforated media or other information storage devices or in the nature of an intangible asset. Other issues are also remanded back to the file of the ld. CIT(A), we remit this issue also back to the file of the ld. CIT(A) with a direction that issue shall be adjudicated afresh keeping in view of the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Computer Age Management Services P. Ltd in T.C.A Nos.409, 410 and 412 of 2019 & CMP Nos. 13651 & 13674 of 2019, dated 08.07.2019, wherein it was held as follows:-

‘’8. The question would be as to whether the software application, which was acquired by the assessee would fall under Entry 5 of Part A of New Appendix I, which states that computers including computer software are entitled to depreciation at 60%. Note 7 of the Appendix defines the expression -computer software- to mean any programs recorded on CD or disc, tape, perforated media or other information storage devices.

9. The case of the Revenue is that software are licences and that they are intangible assets and would fall under Part B of New Appendix I, which deals with knowhow, patents, copyrights, trademarks, licenses, francises or any other business or commercial rights of similar nature.

10. We find that Part B of New Appendix I is a general entry whereas Entry 5 of Part A of New Appendix I is a specific entry read with Note 7. In the instant case, the Tribunal, in our

ITA No.1346 to 1348/16 :- 9 -: considered view, rightly held that the assessee is eligible to claim depreciation at 60%.

11. In the decision rendered by a Division Bench of this Court in the case of CIT Vs. M/s.Cactus Imaging India Private Limited [reported in (2018) 406 ITR 406], to which, one of us (TSSJ) was a party, an identical question came up for consideration wherein the object was printer (computer printer). This Court, after taking into consideration as to how the entries would be interpreted, referred to the decision in the case of Bimetal Bearings Ltd. Vs. State of Tamil Nadu [reported in (1991) 80 STC 167] and held as hereunder :

ITA No.1346 to 1348/16 :- 10 -: would fall within the description by the force of words used, it is impermissible to ignore the word description. Thus, going by the usage of the equipment purchased by the petitioner, we have to take a decision.”

Thus, the grounds of appeal Nos.4 & 4.1 of the Revenue are partly allowed for statistical purpose.

In the result, the appeal of the Revenue in ITA 11.

No.1346/CHNY/2016 for assessment year 2002-03 is partly allowed for statistical purpose.

Now, we take up appeal of the Revenue in ITA 12. No.1347/CHNY/2016 for assessment year 2003-2004 for adjudication. The Revenue has raised the following grounds of appeal: 13.

‘’1. The order of the CIT(A) is contrary to the law and facts and circumstances of the case.

ITA No.1346 to 1348/16 :- 11 -:

2. The CIT(A) erred in deleting the disallowance on the claim of deduction u/s.1OA of Rs.1,95,41,396/-.

2.1. The CIT(A) erred in not considering the findings of the AO that the new Software Technology Parks of India (STPI) unit is only an extension of existing business with the old machinery and also with old employees and hence deduction under section 1OA is not allowable in view of provisions of sub- section (2)(ii) of section 10A.

2.2. Having regard to the decision of Hon’ble High Court of Kerala in the case of Chembra Peak Estates Ltd. v.CIT [1972] 85 ITR 401, the CIT(A) ought to have upheld the action of the AO in disallowing the claim on deduction u/s.1OA as the assessee setup the STPI unit by splitting up and reconstruction of the existing unit.

3. The CIT(A) erred in deleting the disallowance of Rs.3,90,421/- made by the AO in respect of treating the expenditure on purchase of software as capital expenditure. 3.1. The CIT(A) erred in not appreciating that as per old Appendix I and new Appendix I of IT Rules, computer software along with computer has been treated as capital asset and depreciation at a higher rate of 60 per cent has been allowed considering the life and durability of the computer software. When the statute specifically provides for treating the computer software as a capital asset and allowing depreciation thereon, the expenditure incurred towards purchase of computer software cannot be treated as revenue expenditure.

4. The CIT(A) erred in allowing 60% depreciation instead of 25% on the development software and thereby ignoring the fact that the assessee after developing the software is selling the same as licenses and the licenses are covered under the head intangible assets.

4.1. It is submitted that the CIT(A)’s relied upon decision of the ITAT in assessee’s own case for AY.2007-08 which has not become final and against which the Department’s appeal is pending before the Hon’ble High Court of Madras vide TCA No.607 of 2013.

5. The CIT(A) erred in deleting the disallowance on provision for travel expenses of Rs.31,00,492/-.

ITA No.1346 to 1348/16 :- 12 -:

5.1. The CIT(A) erred in not appreciating that expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure and hence provision for travel expenses is not allowable as revenue expenditure.

The Brief facts of the case are as under:- 14.

The return of income for the AY 2003-04 was filed on 01.12.2003 disclosing total income of �2,43,78,380/-. Against the said return of income, the assessment was completed by the Assessing Officer vide order dated 30.03.2006 passed u/s. 143(3) of the Act’) at total income of Rs.4,51,46,920/-. The assessment was rectified on 09.08.2006 at total income of �3,22,53,810/-.

Subsequently, the assessment was reopened by issue of notice u/s.148 of the Act on 25.03.2008 for the purpose of withdrawing excess deduction allowed u/s.10A of the Act and assessment was completed vide order dated 03.12.2010 passed u/s.143(3) r.w.s 147 of the Act at total income of �7,06,91,340/-.

Being aggrieved, an appeal was preferred before ld. CIT(A), 15. who vide impugned order allowed the claim of the assessee for ITA No.1346 to 1348/16 :- 13 -: deduction u/s.10A of the Act following his order for assessment year 2002-2003. As regards to the capitalization of allowability of software expenses as revenue expenditure, the ld. CIT(A) following his earlier order allowed depreciation @60% and similarly capitalization of common expenditure allowed depreciation @60%. As regards to the disallowance of Travel expenses, the ld. CIT(A) sustained the addition to the extent of �3,99,508/-.

Being aggrieved by the above decision of the CIT(A), the 16.

Revenue is in appeal before us challenging the correctness of the order of the CIT(A).

Grounds of appeal No.2 to 2.2, challenges the decision of 18. ld. CIT(A) in allowing claim for deduction of profit u/s. 10A of the Act.

Identical issue was raised by the Revenue for the 19. assessment year 2002-2003 in , wherein, we remitted the issue back to the file of the ld. CIT(A) for de novo adjudication for the reasons stated therein. On parity of reasoning, the issue in present grounds of appeal are also remitted back to the file of the CIT(A) for fresh adjudication. Thus, the grounds of appeal

ITA No.1346 to 1348/16 :- 14 -:

No.2 to 2.2 of the Revenue for assessment year 2003-2004 are partly allowed for statistical purpose.

Grounds of appeal No.4 & 4.1, challenges the decision of 22. the ld. CIT(A) in allowing depreciation @60% as against 25% allowed by the Assessing Officer.

Identical issue was raised by the Revenue for the 23. assessment year 2002-2003 in , wherein, we remitted the issue back to the file of the ld. CIT(A) for de novo adjudication for the reasons stated therein. On parity of reasoning,

ITA No.1346 to 1348/16 :- 15 -: the issue in present grounds of appeal are also remitted back to the file of the CIT(A) for fresh adjudication. Thus, the grounds of appeal No.4 & 4.1 of the Revenue for assessment year 2003-2004 are partly allowed for statistical purpose.

Grounds of appeal No.5 & 5.1, challenges the decision of ld. 24.

CIT(A) in allowing provision for travel expenses.

The Assessing Officer disallowed provision for travel 25. expenses on the ground that it is mere provision. Even before the ld. CIT(A) no details were filed establishing that expenditure was actually incurred and payment was not made. From the perusal of the order of the ld. CIT(A), it is clear that ld. CIT(A) allowed the claim partly in mere fact that this provision was reversed in the subsequent year. In our considered opinion this provisional deduction cannot be allowed as deduction. The provisional deduction can be allowed as deduction provided liability is crystallized. Thus, the reasoning of the ld. CIT(A) is not acceptable. Accordingly, this issue is remitted back to the file of the ld. CIT(A) for de novo adjudication. Thus, the grounds of appeal Nos. 5 & 5.1 filed by the Revenue are partly allowed for statistical purposes.

ITA No.1346 to 1348/16 :- 16 -:

In the result, the appeal of the Revenue in ITA 26.

No.1347/CHNY/2016 for assessment year 2003-04 is partly allowed for statistical purpose.

Now, we take up appeal of the Revenue in ITA 27.

No.1348/CHNY/2016 for assessment year 2006-2007 for adjudication.

‘’1. The order of the CIT(A) is contrary to the law and facts and circumstances of the case.

2.1. The CIT(A) erred in not appreciating that as per old Appendix I and new Appendix I of IT Rules, computer software along with computer has been treated as capital asset and depreciation at a higher rate of 60 per cent has been allowed considering the life and durability of the computer software. When the statute specifically provides for treating the computer software as a capital asset and allowing depreciation thereon, the expenditure incurred towards purchase of computer software cannot be treated as revenue expenditure.

3. The CIT(A) erred in deleting the disallowance on the claim of deduction u/s.35 of Rs.4,29,84,248/-.

3.1. The CIT(A) erred in not appreciating the fact that deduction under section 35 is not intended for an assessee, who does not develop the in-house scientific research activities.

3.2 The CIT(A) erred in not appreciating the fact that during survey, there was no evidence found supporting the claim of stated scientific research activities. During the scrutiny proceedings also the assessee company has not given any ITA No.1346 to 1348/16 :- 17 -: details and hence the impugned expenditure had nothing to do with scientific research. Thus provisions of section 35(1)(i) has no application to the present assessee’s case.

3.3. The CIT(A) erred in holding that the assessee company has undertaken research activities merely based on DSIR Approval dated 23.03.2003 and in the absence of any supporting documents.

4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the CIT(A) may be set aside and that of the Assessing Officer restored’’.

The brief facts of the case are as under:- 29.

The return of income for the AY 2006-07 was filed on 28.11.2006 disclosing total income of �1,38,13,060/-. Against the said return of income, the assessment was completed by the Assessing Officer vide order dated 30.12.2008 passed u/s. 143(3) of the Act’) at total income of Rs.2,97,86,641/-. While doing so, the Assessing Officer disallowed deduction u/s.35 of the Act at �4,29,84,248/- on the ground that there was no evidence that assessee had undertaken research activities.

Being aggrieved, an appeal was preferred before ld. CIT(A), 30. who vide impugned order allowed the claim of the assessee by observing as under:-

‘’4.11 I have considered the observations of the Assessing Officer and the submissions made by the appellant. As the appellant rightly pointed out the assessment was completed on the day on which the Managing Director sought time to file the details called

ITA No.1346 to 1348/16 :- 18 -: for by the Assessing Officer. Admittedly, the assessment was completed on the same day as it was getting barred by limitation the very next day i.e.,31. 12.2008. The appellant furnished copy of the DSIR approval dated 23.03.2003 wherein the In-house R&D Unit of the appellant has been recognized for the period up to 31.03.2006. It is also seen that there is force in the contention of the appellant that the expenses were incurred towards research activities and were in the nature of salary, staff welfare expenses and other overhead expenses of the respective projects. The appellant also furnished the breakup of product development cost amounting to Rs. 4,29,84,249/- which shows that the cost was essentially incurred towards salary and other overheads. Further the appellant relied on the case of Talisma Corporation Pvt.Ltd (2013 ) 40 taxmann.com 400 (Karnataka), in support of its contentions, wherein it was observed as follows

The expenditure in respect of the scientific research, even f it is capital in nature as it was incurred in relation to the business carried on by the assessee under section 35(1) (iv) of the Act, the said expenditure is to be deducted.

In view of the above I have no hesitation in holding that the appellant is eligible for the deduction u/s. 35 of the Income Tax Act. The appellant succeeds on this ground’’.

The grounds of appeal No.1 & 4 are general in nature 32. therefore, does not require any adjudication.

Grounds of appeal No.2 & 2.1, challenges the decision of ld. 33.

CIT(A) in allowing the cost of software as revenue expenditure considering the nature of expenditure.

ITA No.1346 to 1348/16 :- 19 -:

Identical issue was raised by the Revenue for the 34. assessment year 2002-2003 in , wherein, we remitted the issue back to the file of the ld. CIT(A) for de novo adjudication for the reasons stated therein. On parity of reasoning, the issue in present grounds of appeal are also remitted back to the file of the CIT(A) for fresh adjudication. Thus, the grounds of appeal No.2 & 2.1 of the Revenue for assessment year 2006-2007 are partly allowed for statistical purpose.

Grounds of appeal No.3 to 3.3, challenges the decision of ld. 35.

CIT(A) in allowing the claim of deduction u/s.35 of the Act.

clearly fell in error in allowing the claim of the assessee. Thus, the grounds of appeal Nos. 3 to 3.3 filed by the Revenue stands allowed.

In the result, the appeal of the Revenue in ITA 37.

No.1348/CHNY/2016 for assessment year 2006-07 is partly allowed for statistical purpose.

To summarize the results, the appeals filed by the Revenue 38. in 1347 & 1348/CHNY/2016 for assessment years 2002-03, 2003-04 and 2006-2007 are partly allowed for statistical purpose.

Order pronounced on 20th day of January, 2020, at Chennai.