EDGEVERVE SYSTEMS LIMITED,BANGALORE vs. ACIT, CIRCLE-2(2)(1), BANGALORE

Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.

The learned AR before us filed paper book 1 to 940 and a compilation of case law running from pages 941 to 1093.

The learned AR before us submitted that the lower authorities erred in treating the software expenses claimed by the assessee as revenue expenditure as capital in nature. It was argued that the assessee had incurred expenditure towards application software, which was used for smooth conduct of day-to-day business and did not result in acquisition of any enduring asset. The ld. AR pointed out that the software licenses were for a limited period, mostly up to two years, and were routine business tools requiring periodic renewal. Reliance was placed on judicial precedents, including the decision of the jurisdictional High Court in CIT v. IBM India Ltd.(supra), wherein it was held that expenditure on application software with a short useful life is allowable as revenue expenditure. The ld. AR further contended that all relevant documents evidencing the nature and duration of software licenses were - 294/Bang/2025 Page 7 of 53 already placed on record before the AO, and therefore the remand by the learned CIT(A) was unwarranted. On facts and in law, it was prayed that the software expenses be allowed as revenue expenditure as claimed by the assessee in the return of income.

Per contra, the ld. DR said that the lower authorities were correct in treating the software expenses as capital in nature. According to him, the software purchased by the assessee was not just for minor or routine use but was important for running the business and helped the assessee over a longer period of time. Because of this long-term benefit, the expenditure should be treated as capital expenditure and not as a regular business expense. He further explained that just because the software was obtained through a license, or because the license had to be renewed after some time, it does not automatically mean that the expense is revenue in nature. If the software strengthens or forms part of the business set-up and helps in earning income over several years, it should be considered a capital asset. Accordingly, the ld. DR requested that the decision of the lower authorities be upheld and that the software expenditure should not be allowed as a revenue expense.

We have heard the rival contentions of both the parties and perused the materials available on record. The issue before us relates to the allowability of software licence expenditure claimed as revenue expenditure and the correctness of the action of the learned CIT(A) in remanding the matter to the file of the Assessing Officer for fresh adjudication 18.1 From the records, it is evident that the assessee incurred expenditure towards application software licences which were used in the regular course of its business. The licences were for limited periods, mostly up to two years, and required renewal thereafter. The assessee - 294/Bang/2025 Page 8 of 53 did not acquire ownership, source code, or any proprietary rights in the software. It was merely granted a restricted right to use the software, without any right to modify, duplicate, or transfer the same. The supporting documents such as purchase orders, invoices, and detailed break up of software with licence period were furnished before the Assessing Officer during the assessment proceedings. These facts clearly show that the expenditure was incurred to facilitate efficient conduct of business and did not result in creation of any enduring asset in the capital field. 18.2 The Assessing Officer treated the expenditure as capital in nature mainly by relying on the classification under Appendix I of the Income- tax Rules and Accounting Standard–26, without properly examining the nature, utility, and duration of the software licences. Such an approach, in our view, is not sustainable in law. The issue whether software expenditure is capital or revenue has to be decided based on the functional test and the real nature of the advantage obtained, and not merely on the basis of depreciation rates prescribed in the Rules. The Hon’ble jurisdictional High Court in CIT v. IBM India Ltd. and CIT v. Toyota Kirloskar Motor Pvt. Ltd. (Supra) has clearly held that expenditure on application software with a short useful life and requiring frequent upgradation or renewal is allowable as revenue expenditure. The facts of the present case squarely fall within the ratio laid down in these decisions. 18.3 Coming to the action of the learned CIT(A), we find that the learned CIT(A) has accepted the legal position that application software expenditure may be revenue in nature depending on facts and has also noted that the Assessing Officer did not examine the relevant agreements and documents in detail. However, despite the fact that all - 294/Bang/2025 Page 9 of 53 primary facts and documentary evidence were already on record and no further investigation was required, the learned CIT(A) chose to remand the matter back to the Assessing Officer for fresh adjudication. 18.4 In this context, it is necessary to examine the powers of the learned CIT(A). Prior to 1.6.2001, the ld. CIT(A) had expressed powers under section 251 of the Act to set aside the assessment and remand the matter to the Assessing Officer. However, by the Finance Act, 2001, with effect from 1.6.2001, the power to set aside or remand the assessment to the Assessing Officer has been withdrawn. From assessment years commencing on or after 1.6.2001, the ld. CIT(A) is required to adjudicate the issues on merits and can either confirm, reduce, enhance, or annul the assessment. Remand to the Assessing Officer is permissible only in limited situations, such as for calling for a remand report or for verification of additional evidence admitted under Rule 46A, but not for setting aside the issue for fresh decision when all relevant material is already available on record. It is also pertinent note that vide Finance Act 2024 a proviso inserted below to section 251(1)(a) of the Act confirming power to commissioner/joint commissioner of appeal in respect of setting aside the assessment and refer back the case to the AO for fresh assessment, but such power can only be exercised when the assessment made under section 144B of the Act. 18.5 In the present case, the assessment year involved is A.Y. 2017- 18, much after the withdrawal of remand powers. The assessee had already furnished complete details regarding the nature and duration of software licences before the Assessing Officer. Therefore, there was no legal justification for the learned CIT(A) to remand the issue back to the Assessing Officer for fresh adjudication. The learned CIT(A) ought to - 294/Bang/2025 Page 10 of 53 have decided the issue conclusively on merits based on the materials available on record. 18.6 On merits, considering the nature of the software, the limited licence period, the absence of any enduring benefit, and the binding judicial precedents of the Hon’ble jurisdictional High Court, we hold that the software licence expenditure incurred by the assessee is allowable as revenue expenditure. Consequently, the disallowance made by the Assessing Officer is deleted. In view of this conclusion, the alternative claim made by the assessee relating to allowance of depreciation does not survive. Accordingly, on facts and in law, we allow the grounds raised by the assessee and direct the Assessing Officer to allow the software expenditure as revenue expenditure as claimed in the return of income. Hence, the ground raised by the assessee is hereby allowed.

On the above identified intangible assets, the assessee claimed depreciation under section 32 of the Act from F.Y. 2014-15 relevant to A.Y. 2015-16 till the year under consideration in the following manner: A.Y. Opening WDV Addition Total assets Depreciation Closing WDV (Rs.) during the (Rs.) at 25% (Rs.) (Rs.) year (Rs.) 2015 - 412,05,36,13 412,05,36,13 103,01,34,0 309,04,02,09 -16 2 2 33 9 2016 309,04,02,09 3035,54,78,4 3344,58,80,5 836,14,70,1 2508,44,10,4 -17 9 80 79 45 34 2017 2508,44,10,4 - 2508,44,10,4 627,11,02,6 1881,33,07,8 -18 34 34 09 25 21.1 Thus, during the year under consideration, the assessee claimed depreciation on the WDV of the intangible assets for Rs. 627,11,02,609/- only.

During the assessment proceedings, the AO observed that the valuation assigned to technology, business contracts and goodwill appeared artificial and unjustified. According to the AO, the Finacle and Edge-services business was primarily dependent on employees who were - 294/Bang/2025 Page 12 of 53 transferred along with the business, and the skills, technical know-how and experience resided with such employees rather than in separately identifiable intangible assets. Therefore, assigning large standalone values to technology and business contracts was held to be prima facie unreasonable and done only with the intention of inflating the cost of assets to claim higher depreciation and thereby reduce taxable income. 22.1 The AO further held that technology and business contracts do not qualify as “intangible assets” within the meaning of Explanation 3 to section 32(1) of the Act. While such contracts may generate revenue, they do not confer any enduring ownership rights or permanency so as to be treated as identifiable, non-monetary intangible assets. Their execution depends on employees’ skills and technological capabilities, and hence no independent ownership right is created in favour of the assessee. 22.2 With respect to goodwill, the AO observed that the assessee had already acquired the trademark or trade name, and therefore the separate valuation of goodwill was arbitrary and unnecessary. According to the AO, the valuation of goodwill closely resembled the valuation of the trademark, and assigning value to goodwill was done only to claim depreciation by inflating the actual cost of intangibles. 22.3 The AO also noted that the transfer was in the nature of a succession of business within the meaning of section 170 of the Act. The intangible assets in question were self-generated in the hands of the transferor and were never reflected in its books nor used for claiming depreciation. Accordingly, applying the fifth proviso to section 32(1) of the Act, the AO held that depreciation in the hands of the successor cannot exceed the amount what would have been allowable to the predecessor. Since no depreciation was allowable or claimed by Infosys - 294/Bang/2025 Page 13 of 53 Ltd on such intangibles, no depreciation could be allowed to the assessee. 22.4 The AO further observed that the valuation exercise was primarily undertaken to comply with accounting requirements under AS-26 and Indian GAAP, which by itself does not confer eligibility to claim depreciation under the Income-tax Act. The AO also referred to judicial precedents and held that the Hon’ble Supreme Court decision in Smifs Securities Ltd reported in 348 ITR 302 was limited to the issue of goodwill being an intangible asset and does not override the restriction contained in the fifth proviso to section 32(1) of the Act. 22.5 In view of the above facts and circumstances, the AO concluded that the intangible assets claimed by the assessee were not eligible for depreciation under section 32(1) of the Act. Accordingly, the AO disallowed the depreciation claimed on intangible assets in relation BTA- 2 and added the amount of ₹5,69,16,52,215/- to the total income of the assessee. The assessee’s alternative claim for enhanced deduction under section 10AA of the Act on account of increased profits was also rejected for want of direct nexus.

The aggrieved assessee preferred an appeal before the learned CIT(A).

Before the learned CIT(A), the assessee submitted that during the relevant assessment year, the Finacle and Edgeservices businesses were transferred by Infosys Limited to the appellant pursuant to a duly executed Business Transfer Agreement. The transfer was carried out on a going concern basis for a lump-sum consideration, and the appellant acquired all assets, liabilities, rights, and obligations relating to the said businesses. As part of this transfer, identifiable intangible assets such as developed technology, trademarks, business/customer contracts and - 294/Bang/2025 Page 14 of 53 goodwill were acquired and duly recorded in the books of accounts at fair value based on an independent valuation report. 24.1 The appellant claimed depreciation on such intangible assets under section 32(1)(ii) of the Act. However, the AO/NFAC disallowed the depreciation primarily on the ground that the said assets do not qualify as “intangible assets” under section 32(1)(ii), that the valuation was artificial, and that the transaction was structured only to claim higher depreciation. The appellant claimed that the findings of the lower authorities are contrary to facts, accounting principles, statutory provisions and settled judicial precedents. 24.2 It is submitted that section 32(1)(ii) of the Act allows depreciation on intangible assets such as know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, provided the assets are owned wholly or partly by the assessee and are used for the purposes of business. 24.3 The section does not require that such intangible assets should have been self-generated or separately paid for. Once ownership and business use are established, depreciation is a statutory allowance and cannot be denied based on subjective notions regarding intention or motive. 24.4 In the present case, there is no dispute that the appellant is the owner of the impugned intangible assets, the assets were acquired for running the business and the assets were used in the business during the year. Therefore, the basic conditions of section 32(1)(ii) of the Act stand fully satisfied. 24.5 The assessee argued that the allegation of the AO that the transaction was structured only to claim depreciation is completely unfounded. The transfer of Finacle and Edge-services businesses by the - 294/Bang/2025 Page 15 of 53 parent company to it was driven by strong commercial and business considerations. The objective was to enable the appellant to operate, scale and market the products and services in a more focused and seamless manner across global markets. 24.6 The transfer was not undertaken for tax benefits but for operational efficiency, market positioning and strategic alignment. The valuation of assets was not carried out by the assessee internally but was entrusted to an independent professional valuer, thereby eliminating any allegation of manipulation or inflation of values. Mere reduction of tax liability because of a legitimate business transaction cannot be equated with tax avoidance. It is a settled principle that tax planning within the framework of law is permissible. 24.7 The appellant further submitted that AS-26 mandates that intangible assets acquired in a business combination must be recorded at fair value. Accordingly, the valuation exercise was undertaken only to comply with mandatory accounting standards and statutory requirements under the Companies Act. The assignment of fair value by an independent valuer cannot be brushed aside merely on suspicion. Once fair value is determined in accordance with accounting standards, the same constitutes the “actual cost” for the purposes of section 32 of the Act. The lower authorities have erred in holding that compliance with accounting standards does not entitle the assessee to depreciation under the Income-tax Act. On the contrary, accounting recognition of assets is a necessary foundation for claiming depreciation. 24.8 The assessee submitted that developed technology acquired from Infosys Limited represents a valuable bundle of rights, embedded knowledge, source codes, system architecture, product design, functional capabilities and technical documentation. Without acquisition - 294/Bang/2025 Page 16 of 53 of such technology, the assessee would have been required to redevelop the same from scratch, involving huge time, cost and risk. The finding of the AO that technology resides only in employees is factually incorrect. No separate payment was made to employees, and employees are not assets owned by the assessee. Further, in the software industry, employee turnover is high, and therefore business continuity cannot depend solely on individuals. Technology acquired is independent of employees and continues to exist even if employees leave. Therefore, technology is clearly an identifiable intangible asset. 24.9 Without prejudice, technology squarely falls within the definition of “know-how” as provided in Explanation 4 to section 32(1) of the Act. Know-how includes industrial information or techniques likely to assist in manufacture or processing of goods. Software products are goods once embedded in tangible media or electronic form, and hence developed technology qualifies as know-how eligible for depreciation. The rejection of depreciation on technology is thus legally untenable. 24.10 Furthermore, the assessee submits that trademarks are specifically listed under section 32(1)(ii) of the Act. There is no dispute regarding ownership or use of trademarks by the assessee. The AO has not provided any cogent reason for disallowing depreciation on trademarks. Once the statute expressly includes trademarks, depreciation cannot be denied on conjectures or overlapping concepts with goodwill. The disallowance of depreciation on trademarks is therefore liable to be deleted outrightly. 24.11 Regarding the business contract, the assessee submitted that business contracts acquired as part of the transfer confer enforceable rights, assured revenue streams and commercial advantages. These contracts enable the assessee to carry on business and are valuable - 294/Bang/2025 Page 17 of 53 tools of trade. The expression “any other business or commercial rights of similar nature” has been interpreted by Hon’ble Courts in a wide and purposive manner. Any right which facilitates carrying on the business and generates economic benefit qualifies under section 32(1)(ii) of the Act. The conclusion of the AO that business contracts are dependent on employees is misconceived. Without contracts, employees have no role to play. The contracts exist independently and are valuable commercial rights. Alternatively, even if business contracts are not viewed independently, they form an integral part of goodwill. In such a situation also, depreciation is allowable as held by the Hon’ble Supreme Court. 24.12 Regarding Goodwill, the assessee submitted that goodwill represents the excess consideration paid over the net value of identifiable assets and reflects reputation, customer relationships, brand value and future earning potential. The Hon’ble Supreme Court in Smifs Securities Ltd (surpa) has categorically held that goodwill falls within the expression “any other business or commercial rights of similar nature” and is eligible for depreciation under section 32(1)(ii) of the Act. The AO’s attempt to distinguish goodwill from trademark or to allege inflation of value is contrary to settled law. Further, the amendment made by Finance Act, 2021 denying depreciation on goodwill is prospectively and therefore, it establishes that depreciation on goodwill was allowable for all earlier years. 24.13 The assessee also submitted that the lower authorities have wrongly invoked the 5th proviso to section 32 of the Act relating to succession. The proviso applies only where depreciation is allowable to both the predecessor and successor. In the present case, the intangible assets were recognized for the first time by the assessee upon acquisition. Infosys Limited had not claimed depreciation on such assets - 294/Bang/2025 Page 18 of 53 as they were self-generated and not recorded in its books. Therefore, the 5th proviso to section 32(1) of the Act has no application, and thus, the claim of depreciation in the hands of the assessee cannot be restricted or denied on this basis. 24.14 Without prejudice to the above submissions, the assessee submitted that if depreciation is disallowed and income is enhanced, such enhanced profits attributable to SEZ units must be considered for deduction under section 10AA of the Act. The denial of such consequential benefit is unjustified and contrary to law.

However, the learned CIT(A) after considering the assessment order and assessee’s submission found the that the business contract, technology, trademark and goodwill on merits are intangible assets and eligible for depreciation under section 32(1)(ii) of the Act. However, confirmed the disallowance of depreciation in the case of the assessee by referring to 6th proviso to section 32(1) of the Act. The learned CIT(A) also doubted the valuation of intangible assets. The finding of the learned CIT(A) is summarised in following paragraphs. Regarding the Business contract 25.1 The learned CIT(A) observed that business contracts are intangible in nature, as they are identifiable, non-monetary and arise out of contractual or legal rights. Such contracts provide future economic benefits to the holder in the form of assured revenue, continuity of customers and smooth running of business. Without acquisition of these contracts, the assessee would have been required to start the business from scratch and undergo a long gestation period. 25.2 Relying upon the principles laid down by the Hon’ble Delhi High Court in Areva T & D India Ltd. 345 ITR 421 and the Hon’ble Supreme Court in Techno Shares and Stocks Ltd. 327 ITR 323, the - 294/Bang/2025 Page 19 of 53 learned CIT(A) held that business contracts form part of “business or commercial rights of similar nature” as envisaged under section 32(1)(ii) of the Act. These rights function as tools of trade which enable the assessee to carry on business without interruption. Accordingly, on merits, business contracts qualify as intangible assets eligible for depreciation. 25.3 With regard to technology, the learned CIT(A) noted that technology is the backbone of modern software businesses and plays a crucial role in enabling the assessee to deliver products and services to clients. Developed technology acquired under the BTA is a valuable right that provides competitive advantage and commercial benefit. 25.4 The contention of the Assessing Officer that technology resides only in employees was not accepted. The learned CIT(A) observed that employees are not assets of the company, and technology continues to exist independently even if employees leave the organisation. The assessee acquired technology for valuable consideration, and such technology is clearly an intangible asset. 25.5 The learned CIT(A) further observed that expenditure incurred on research and development after acquisition does not negate the existence or value of already developed technology. Research and development are meant to enhance or innovate new solutions and does not diminish the value of the acquired technology. Therefore, technology falls within the expression “business or commercial rights of similar nature” under section 32(1)(ii) of the Act, and depreciation on technology is allowable on merits. Regarding Trademarks 25.6 The learned CIT(A) noted that trademarks are specifically mentioned in section 32(1)(ii) of the Act and are expressly eligible for - 294/Bang/2025 Page 20 of 53 depreciation. There is no dispute regarding ownership or use of trademarks by the assessee. Therefore, on merits, depreciation on trademarks is allowable, and the Assessing Officer was not justified in denying the same without any cogent reasoning. Goodwill and its distinction from Trademarks 25.7 The learned CIT(A) examined the Assessing Officer’s observation that goodwill and trademarks are similar and that there was no necessity to acquire goodwill separately. After analysing statutory provisions and judicial precedents, the learned CIT(A) held that goodwill and trademark are distinct assets. 25.8 Goodwill represents the reputation, customers loyalty, brand strength and future earning potential of a business, whereas a trademark is a legally protected symbol or mark identifying goods or services. 25.9 The learned CIT(A) further relied upon the decision of the Hon’ble Supreme Court in Smifs Securities Ltd.(supra), wherein it was held that goodwill falls within the expression “any other business or commercial rights of similar nature” and is therefore eligible for depreciation under section 32(1)(ii) of the Act. It was also noted that the amendment introduced by the Finance Act, 2021 denying depreciation on goodwill is prospective and applicable only from assessment year 2021-22 onwards. Accordingly, for the year under consideration, goodwill is eligible for depreciation on merits. Valuation of Intangible Assets 25.10 The learned CIT(A) observed that the Assessing Officer had doubted the valuation of intangible assets on the ground that the transaction was structured to reduce tax liability. However, no concrete - 294/Bang/2025 Page 21 of 53 evidence was brought on record establishing that the valuation was artificially inflated. 25.11 It was noted that if the Assessing Officer had doubts regarding valuation, the correct course of action was to invoke Explanation 3 to section 43(1) and determine the actual cost of acquisition based on accepted valuation principles. The Assessing Officer, however, did not undertake such an exercise and merely rejected the valuation without conducting a detailed examination of the BTA and valuation report. 25.12 At the same time, the learned CIT(A) also noted that the valuation report relied heavily on management inputs and assumptions without independent verification by the valuer. Since the transaction was between related parties, the valuation could not be said to be completely free from arbitrariness. Thus, while the existence of intangible assets was accepted, the valuation aspect remained questionable. Proviso to Section 32 of the Act 26. The most crucial issue considered by the learned CIT(A) was the applicability of the sixth proviso to section 32 of the Act. It was held that acquisition of Finacle and Edge-services businesses under the BTA amounts to succession within the meaning of section 170 of the Act. 26.1 Relying on decisions of the Hon’ble Jurisdictional Tribunal in United Breweries Ltd., the Hon’ble Mumbai Tribunal in Archroma India Pvt. Ltd. in and other judicial precedents, the learned CIT(A) held that the sixth proviso to section 32 applies to cases of business acquisition through slump sale or business transfer agreement. 26.2 The proviso mandates that depreciation allowable to the successor cannot exceed the depreciation that would have been - 294/Bang/2025 Page 22 of 53 allowable had the succession not taken place. Since Infosys Ltd, the predecessor, had not claimed depreciation on these intangible assets, the allowable depreciation in the hands of the appellant is effectively restricted to nil.

The learned CIT(A) further held that the sixth proviso applies not only in the year of acquisition but also in subsequent years, including the year under appeal. The reliance placed by the assessee on Smifs Securities Ltd.(supra) was held to be misplaced, as that decision only dealt with the nature of goodwill as an intangible asset and did not override the restriction imposed by the proviso to section 32 of the Act. Final Conclusion 28. In view of the above discussion, the learned CIT(A) concluded that although business contracts, technology, trademarks and goodwill qualify as intangible assets on merits under section 32(1)(ii) of the Act, the claim of depreciation is hit by the sixth proviso to section 32 of the Act due to the nature of succession involved in the present case. Accordingly, the learned CIT(A) upheld the Assessing Officer’s action in disallowing depreciation on intangible assets and dismissed the appeal on this ground.

Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

Before us the learned AR submitted that the Appellant acquired the Finacle and Edge-Services divisions under duly executed Business Transfer Agreements after carrying out independent third-party valuation and purchase price allocation. Based on such valuation, the total purchase consideration was allocated to identifiable intangible assets such as business contracts, technology, and goodwill, and depreciation was claimed under section 32 of the Act.

In view of the above facts and legal position, the learned AR submitted that the invocation of the sixth proviso to section 32(1) of the Act is wholly incorrect, both on facts and in law. There is no succession of business under section 170 of the Act, there is no aggregate claim of depreciation, and the year under consideration is not the year of succession. Accordingly, the learned AR prayed that the Hon’ble Tribunal may allow the claim of depreciation on intangible assets as claimed by the assessee and grant appropriate relief.

Per contra, the ld. DR submitted that the ld. Commissioner (Appeals) was correct in restricting the depreciation claim by applying - 294/Bang/2025 Page 26 of 53 the sixth proviso to section 32(1) of the Act. According to the DR, the Appellant had taken over running business divisions of the transferor, along with all the related assets, customers, contracts, and technology. Such a transfer, in substance, amounted to succession of business under section 170 of the Act, even if it was described as a transfer of divisions under Business Transfer Agreements. 32.1 The ld. DR explained that the Finacle and Edge-Services divisions were independent and functional business units. When these divisions were transferred, the Appellant stepped into the place of the transferor and continued the same business activity without interruption. Therefore, the essential character of succession—continuity of business—was present in the transaction. 32.2 The ld. DR further argued that once the transaction is treated as succession, the sixth proviso to section 32(1) of the Act automatically applies. This proviso restricts depreciation in the year of succession so that the total depreciation claimed by both the predecessor and the successor together does not exceed the depreciation that would have been allowable had the succession not taken place. 32.3 According to the ld. DR, the fact that the transferor may not have claimed depreciation on the intangible assets in its books is not decisive. What matters is that depreciation was otherwise allowable on those assets in the hands of the transferor. Therefore, the safeguard under the proviso must still be applied to prevent excessive depreciation. 32.4 The ld. DR also contended that the Appellant cannot avoid the application of section 170 merely by splitting the transfer into multiple agreements or spreading it over different years. In substance, the Appellant acquired key revenue-generating businesses of the transferor.

We have heard the rival contentions of both the parties and perused the materials available on record. The issue before us is whether the assessee is entitled to depreciation under section 32(1)(ii) of the Act on intangible assets such as technology, business contracts, trademarks and goodwill acquired under Business Transfer Agreements entered into with its holding company, and whether such claim is barred by the sixth proviso to section 32(1) read with section 170 of the Act. 36.1 At the outset, we note that the learned CIT(A) has given a clear and categorical finding that the assets acquired by the assessee, namely technology, business contracts, trademarks and goodwill, are “intangible assets” within the meaning of section 32(1)(ii) of the Act and are otherwise eligible for depreciation on merits. This finding has not been disturbed by the Revenue, and in fact, the learned CIT(A) has accepted the assessee’s contentions on the nature and eligibility of these assets. Therefore, the foundational objection of the Assessing Officer that these assets do not qualify as intangible assets does not survive. Once the assets are held to be eligible intangible assets under section 32(1)(ii) of - 294/Bang/2025 Page 28 of 53 the Act, depreciation becomes a statutory allowance and can be denied only if there is a clear legal prohibition. 36.2 The sole reason for sustaining the disallowance by the learned CIT(A) is the application of the sixth proviso to section 32(1) of the Act by treating the transaction as a case of succession under section 170 of the Act. We therefore proceed to examine whether, in the facts of the present case, section 170 and consequently the sixth proviso to section 32(1) of the Act are applicable. 36.3 Section 170 of the Act contemplates succession to a business as a whole. Succession, in its legal sense, implies that the transferor goes out of business and the transferee steps into its place, taking over the entire business with continuity of identity. It also implies that the whole business is transferred and not merely a part of it. 36.4 In the present case, the facts clearly demonstrate that there was no succession to the business of Infosys Limited as a whole. Infosys Limited continues to exist and continues to carry on its software development business even after the transfer. Only certain product divisions and service divisions were transferred to the assessee under separate Business Transfer Agreements executed in different financial years. The Edge suite of products was transferred during FY 2014-15, whereas Finacle and Edge-Services divisions were transferred during FY 2015-16. These transfers were in piecemeal and spread over time. After the first transfer, both the transferor and the transferee continued to carry on business in a truncated and split form. The software development business as a whole, including development of new products, remained with Infosys Limited. 36.5 Therefore, the essential condition for invoking section 170 of the Act, namely succession to a business as a whole, is not satisfied. The - 294/Bang/2025 Page 29 of 53 transaction is only a transfer of specific divisions or assets and not a succession of the entire business. In such circumstances, section 170 of the Act has no application, and consequently, the sixth proviso to section 32(1) of the Act, which is attracted only in cases of succession, amalgamation or demerger, cannot be invoked. 36.6 Even otherwise, we find that the sixth proviso to section 32(1) of the Act operates only where depreciation is allowable to both the predecessor and the successor and where there is an aggregate claim of depreciation in the same year. In the present case, the intangible assets were not recorded in the books of the transferor, and no depreciation was ever claimed or allowable to Infosys Limited on such assets, as they were self-generated. The assets were recognised for the first time in the hands of the assessee upon acquisition and valuation. Since, there was no depreciation claimed or allowable in the hands of the predecessor, there is no question of any aggregate deduction of depreciation in the same year. In the absence of aggregate deduction, the sixth proviso to section 32(1) of the Act does not get triggered at all. 36.7 We also find merit in the alternative submission of the learned AR that even assuming, without admitting, that the transaction amounted to succession, the restriction under the sixth proviso to section 32(1) can apply only in the year of succession and not in subsequent years. The assessment year under consideration before us is not the year of alleged succession. Judicial precedents have consistently held that the proviso restricts only the overall quantum of depreciation in the year of succession and has no role to play in later years. Therefore, on this ground also, the application of the proviso by the lower authorities is legally unsustainable. In this regard, we place our reliance on the judgment of Hon’ble Karnataka High Court in the case of Padmini

Thus, it is evident that 5th proviso to section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. Accordingly, the third substantial question of law is answered in favour of the assessee and against the revenue.

We have heard the rival contentions of both the parties and perused the materials available on record. The issue raised relates to the allowability of foreign taxes paid on income earned from abroad, to the extent such taxes were not eligible for Foreign Tax Credit under section - 294/Bang/2025 Page 34 of 53 90 of the Act and remained unclaimed in the return of income. The assessee has contended that the said foreign taxes were incurred wholly and exclusively for the purposes of its business and are not hit by the provisions of section 40(a)(ii) of the Act and therefore qualify for deduction under section 37(1) of the Act. We note that the assessee has raised this claim for the first time before the Tribunal. It is also evident from the record that the allowability of such foreign tax as business expenditure would require verification of relevant facts, including the nature of income earned abroad, the computation of eligible Foreign Tax Credit under section 90 of the Act, the quantum of foreign tax paid but not eligible for credit, and whether such taxes do not fall within the scope of disallowance under section 40(a)(ii) of the Act. The assessee has relied on judicial precedents to support its claim; however, the application of such precedents would depend upon the factual verification of the assessee’s case. Hence, in the interest of justice, we deem it appropriate to restore this issue to the file of the AO. The AO is directed to examine the assessee’s claim of deduction of foreign tax paid as business expenditure under section 37(1) of the Act, after due verification of facts and supporting documents, and to consider the applicability of the judicial precedents relied upon by the assessee. The AO shall provide reasonable opportunity of being heard to the assessee and thereafter grant appropriate relief in accordance with law, if the claim is found to be admissible. With these directions, the additional ground of appeal

At the outset, we note that the issue raised by the assessee in its grounds of appeal

Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

The learned AR before us pointed out that the AO disallowed the weighted deduction only on the ground that Form No. 3CL was not furnished during the assessment proceedings. It was argued that the - 294/Bang/2025 Page 41 of 53 denial of deduction was purely technical and procedural in nature, without doubting either the incurrence of expenditure or the eligibility of the R&D facility. The learned AR submitted that the assessee had complied with all substantive conditions under section 35(2AB) of the Act, including maintaining separate books of account, getting the accounts audited, and furnishing the audit report to DSIR in Form 3CLA. 53.1 It was further submitted that during the appellate proceedings, the assessee furnished Form No. 3CL issued by DSIR, wherein the expenditure eligible for weighted deduction was duly quantified. The learned AR argued that once Form 3CL is available on record, even if it is produced at the appellate stage, the benefit of weighted deduction cannot be denied. The learned AR emphasized that appellate proceedings are a continuation of assessment proceedings and all legitimate claims supported by evidence should be considered. 53.2 The learned AR strongly contended that Rule 6(7A), which mandates quantification of expenditure by DSIR, is a procedural mechanism and cannot override the substantive provision of section 35(2AB) of the Act. It was argued that section 35(2AB) itself does not restrict the weighted deduction only to the amount quantified by DSIR, unlike section 35(2B) of the Act, where the Act specifically uses the words “expenditure certified by the prescribed authority.” Therefore, the Rule cannot curtail the scope of the deduction granted by the Act. 53.3 In this context, the learned AR relied on settled legal principles that rules framed under the Act cannot go beyond or override the provisions of the Act. Reliance was placed on judgments of the Hon’ble Supreme Court, including Assam Co. Ltd. v. State of Assam reported in 248 ITR 567 and CIT v. Chennappa Mudaliar reported in 74 ITR 41, to - 294/Bang/2025 Page 42 of 53 submit that if there is any conflict between the Act and the Rules, the Act must prevail. 53.4 The learned AR further submitted that the mandate to quantify expenditure was introduced only by amendment to the Rules with effect from 01.07.2016, without any corresponding amendment to section 35(2AB) of the Act. Therefore, DSIR’s role of quantification cannot be treated as determinative of the assessee’s statutory entitlement under the Act. The assessee cannot be denied weighted deduction merely because DSIR has approved a lower amount in Form 3CL or has not quantified the entire expenditure. 53.5 Without prejudice, the learned AR submitted that even the expenditure not quantified by DSIR is otherwise allowable as scientific research expenditure under section 35(1)(i) of the Act, as it was incurred wholly and exclusively for the purposes of business. Alternatively, the same is allowable as revenue expenditure under section 37(1) of the Act. The nature of expenditure has never been disputed by the Assessing Officer. 53.6 The learned AR also highlighted the object and intent behind section 35(2AB) of the Act, which is to promote and encourage in-house research and development activities in India. A hyper-technical interpretation denying weighted deduction for genuine R&D expenditure would defeat the very purpose of the incentive provision. In view of the above submissions, the learned AR prayed that the weighted deduction under section 35(2AB) of the Act should be allowed on the entire eligible expenditure incurred by the assessee for both the assessment years. Alternatively, it was prayed that the expenditure not approved or quantified by DSIR be allowed under section 35(1)(i) or section 37(1) of the Act, and the disallowance made by the lower authorities be deleted.

Per contra, the learned DR supported the action of the Assessing Officer and the lower authorities in denying the weighted deduction under section 35(2AB) of the Act. He argued that furnishing of Form No. 3CL, duly issued by DSIR, is a mandatory requirement for claiming weighted deduction. Since the assessee did not submit Form 3CL during the assessment proceedings, the AO was justified in disallowing the claim. 54.1 The ld. DR contended that section 35(2AB) read with Rule 6(7A) clearly envisages a role for DSIR not only in approving the R&D facility but also in quantifying the eligible expenditure. According to him, the weighted deduction can be allowed only to the extent of expenditure approved and certified by DSIR in Form 3CL. If DSIR has approved or quantified a lower amount, the assessee cannot claim a higher deduction on its own. 54.2 The learned DR further submitted that Rule 6(7A) is not merely procedural but is an integral part of the statutory mechanism for granting weighted deduction. The purpose of involving DSIR is to ensure that only genuine and eligible R&D expenditure receives the benefit. Therefore, the Assessing Officer cannot ignore the quantification made by DSIR and independently allow deduction on the entire expenditure claimed by the assessee. 54.3 The ld. DR also argued that allowing Form 3CL to be filed at the appellate stage would dilute the statutory requirement and render the assessment proceedings meaningless. According to him, compliance with procedural requirements at the appropriate stage is necessary, especially for incentive provisions which have to be strictly construed. 54.4 Without prejudice, the learned DR submitted that even if Form 3CL is now available, the deduction under section 35(2AB) should be - 294/Bang/2025 Page 44 of 53 restricted strictly to the amount quantified by DSIR and not beyond that. Any expenditure not approved or quantified by DSIR cannot qualify for weighted deduction. 54.5 The learned DR further contended that the assessee cannot automatically seek allowance of the unapproved expenditure under section 35(1)(i) or section 37(1) of the Act. According to him, once a specific claim is made under section 35(2AB), the assessee must satisfy all the conditions of that provision, and failure to do so disentitles the assessee from alternative relief unless the claim is independently examined by the AO. 54.6 Accordingly, the learned DR prayed that the disallowance made by the Assessing Officer be upheld, or alternatively, that the weighted deduction be restricted only to the amount approved and quantified by DSIR in Form 3CL, and no further relief be granted.

We have carefully considered the rival submissions, perused the materials available on record, and examined the orders of the lower authorities. The issue before us is whether the assessee is entitled to weighted deduction under section 35(2AB) of the Act on the entire expenditure incurred on in-house research and development, including the portion of expenditure which was not quantified and approved by the DSIR in Form No. 3CL, for the assessment year under consideration 55.1 The facts are not in dispute. The assessee incurred revenue expenditure of ₹1,25,59,57,776 on in-house R&D activities. The R&D facility was duly approved by the DSIR. The assessee claimed weighted deduction at 150% under section 35(2AB) of the Act. The Assessing Officer restricted the deduction to 100% of the actual expenditure and disallowed the weighted portion solely on the ground that Form No. 3CL was not furnished during the assessment proceedings. Subsequently, - 294/Bang/2025 Page 45 of 53 during appellate proceedings, Form No. 3CL was produced, wherein the DSIR quantified and approved expenditure of ₹1,23,43,57,000, leaving a balance amount of ₹2,16,00,776 not quantified. 55.2 At the outset, we observe that the approval of the in-house R&D facility by the DSIR is an undisputed fact. The Assessing Officer has not questioned the genuineness of the expenditure, the nature of the expenditure, or the nexus of such expenditure with the assessee’s business. The sole reason for disallowance of the weighted deduction is the non-furnishing of Form No. 3CL during the assessment proceedings and the partial quantification of expenditure by DSIR. 55.3 We now examine the legal position. Section 35(2AB) of the Act grants weighted deduction on expenditure incurred on approved in- house research and development facilities. The section itself does not use the expression “expenditure certified by the prescribed authority.” It only mandates approval of the facility by the prescribed authority. The requirement of quantification of expenditure by DSIR has been introduced by way of amendment to Rule 6(7A) of the Income-tax Rules with effect from 01.07.2016. Thus, the quantification requirement flows from the Rules and not directly from the substantive provision of the Act. 55.4 It is a settled principle of law that Rules framed under the Act cannot override or curtail the scope of the substantive provisions of the Act. If there is any conflict between the Act and the Rules, the Act must prevail. In the present case, section 35(2AB) of the Act does not restrict the allowance of weighted deduction only to the amount quantified by DSIR. Unlike section 35(2B) of the Act, where the statute expressly limits the deduction to the amount “certified” by the prescribed authority, no such restrictive language is found in section 35(2AB) of the Act. Therefore, the Rule cannot be interpreted in a manner so as to read into - 294/Bang/2025 Page 46 of 53 the section a limitation which the legislature itself has consciously not provided. 55.5 We further note that the assessee has complied with all substantive conditions prescribed under section 35(2AB) of the Act, namely maintaining separate books of accounts for the R&D facility, getting such accounts audited, and furnishing the audit report to DSIR in Form No. 3CLA. The delay or partial quantification by DSIR is an event over which the assessee has no control. The assessee cannot be made to suffer for administrative or procedural lapses on the part of the prescribed authority. 55.6 Coming to the aspect of Form No. 3CL being furnished at the appellate stage, it is well-settled that appellate proceedings are a continuation of assessment proceedings. Once Form No. 3CL is brought on record, even at the appellate stage, the claim cannot be rejected merely on the ground that it was not furnished before the Assessing Officer. The Assessing Officer’s action may have been justified at the assessment stage due to non-availability of Form No. 3CL, but once the form is available on record, the claim has to be examined on merits in accordance with law. 55.7 As regards the portion of expenditure of ₹2,16,00,776 which was not quantified by DSIR, we are of the considered view that mere non- quantification by DSIR cannot automatically render such expenditure ineligible for weighted deduction under section 35(2AB) of the Act, when the facility itself is approved and the expenditure is otherwise found to be incurred on in-house R&D activities. There is nothing on record to show that this expenditure falls outside the scope of approved R&D activities or is of a nature specifically excluded under the Act.

The Ground No. 5 of the assessee’s appeal pertains to levy of interest under section 234D of the Act which is consequential in nature and does not require any separate adjudication. Hence, the same is dismissed as infructuous.

Coming to issue raised through additional ground of appeal

In the result, the appeal of the assessee is partly allowed for statistical purposes. pertaining to A.Y. 2019-20

The Ground Nos. 1 and 6 of the assessee’s appeal are general Grounds and the same do not require any separate adjudication. Hence, these grounds are dismissed as infructuous. 64.1 The Ground No. 2 of the assessee’s appeal pertains to the deductibility of software expenses as revenue expenses.

At the outset, we note that the issue raised by the assessee in its grounds of appeal

Therefore, the findings given in shall also be applicable for the assessment year 2019-20. The appeal of the assessee for the A.Y. 2018-19 has been decided by us vide paragraph No. 55 of this order favouring assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2018-19 shall also be applied for the assessment year 2019-20. Hence, the ground of appeal

At the outset, we note that the issues raised by the assessee in its grounds of appeal s for the AYs 2020-21 & 2021-22 are identical to the issue raised by the assessee in for the assessment year 2017-18. Therefore, the findings given in shall also be applicable for the assessment years 2020- 21 2021-22. The appeal of the assessee for the A.Y. 2017-18 has been decided by us vide paragraph No. 19 of this order favouring assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2017-18 shall also be applied for the assessment years 2020-21 and 2021-22. Hence, the grounds of appeals filed by the assessee for A.Ys. 2020-21 and 2021-22 are hereby allowed.

Coming to the issue raised through additional ground of appeal regarding allowances of foreign tax as business expenditure.

At the outset, we note that the issues raised by the assessee in its grounds of appeal for the AY 2020-21 and 2021-22 are identical to the issue raised by the assessee in for the assessment year 2017-18. Therefore, the findings given in shall also be applicable for the assessment years 2020- 21 and 2021-22. The appeal of the assessee for the A.Y. 2017-18 has been decided by us vide paragraph No. 41 of this order favouring assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2017-18 shall also be applied for the assessment years 2020-21 and 2021-22. Hence, the grounds of appeals filed by the assessee for the AYs 2020-21 and 2021-22 are hereby allowed for statistical purposes.

In the result, both the appeals of the assessee are partly allowed for statistical purposes.

In the combined result, all 5 appeals of the assessee are partly allowed for statistical purposes. Order pronounced in court on 30th day of January, 2026