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

आदेश / O R D E R

PER INTURI RAMA RAO, ACCOUNTANT MEMBER:

These are appeals filed by the Revenue directed against

different orders of the Commissioner of Income Tax (Appeals)-8,

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Chennai (‘CIT(A)’ for short) dated 29.01.2016 for the Assessment

Years (AY) 2002-03, 2003-04 & 2006-07.

Since, the identical facts and issues are involved in these 2.

appeals, we proceed to dispose of the same vide this common order.

assessment year 2002-03 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 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.

3.1. 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

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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.

4.1. 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

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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

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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%.

Revenue is in appeal before us challenging the correctness of the

order of the CIT(A). The grounds of appeal No.1 & 5 are general in

nature therefore, does not require any adjudication.

ld. CIT(A) in allowing claim for deduction of profit u/s. 10A of the Act.

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

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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

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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

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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.

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considered view, rightly held that the assessee is eligible to claim depreciation at 60%.

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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.

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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.

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.

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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

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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).

therefore, does not require any adjudication.

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 ITA No.1346/CHNY/2016, 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

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

allowed for statistical purpose.

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

considering the nature of expenditure.

assessment year 2002-2003 in ITA No.1346/CHNY/2016, 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.3 & 3.1 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 ITA No.1346/CHNY/2016, 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,

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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.

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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.

3.1. 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

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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.

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

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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’’.

Revenue is in appeal before us challenging the correctness of the

order of the CIT(A).

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.

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Identical issue was raised by the Revenue for the 34.

assessment year 2002-2003 in ITA No.1346/CHNY/2016, 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.

record. From the perusal of the order of the ld. CIT(A), it is clear that

ld. CIT(A) allowed the claim considering the approval granted by

DSIR. However, ld. CIT(A) had not addressed reasons of the

Assessing Officer that no research activities was carried on. Further

very fact that expenditure was incurred in the form of salary and

overheads only goes to suggest that there is no research activities

carried out. In the absence of any capital assets employed for the

purpose of research activities, this issue requires to be adjudicated

with reference to the evidence of research activities if any carried on

by the assessee. Thus, in our considered opinion, the ld. CIT(A) has

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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 ITA Nos.1346, 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.

Sd/- Sd/- (जॉज� माथन) (इंटूर� रामा राव) (GEORGE MATHAN) (INTURI RAMA RAO) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai �दनांक/Dated: 20th January, 2020. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF