COMMISSIONER OF INCOME TAX vs. ASPENTECH INDIA P. LTD.

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ITA - 640 / 2009HC Delhi11 September 20095 pages
For Petitioner: PREM LATA BANSAL
AI SummaryDismissed

What did the High Court hold?

The tribunal held that activities undertaken to secure orders in a software development business are considered business activities and not merely for setting up the business. Therefore, the expenditure incurred was allowable as business expenses.

What were the facts?

The assessee claimed an expenditure of Rs. 2.53 crores against a meagre income. The Assessing Officer disallowed this expenditure, arguing the business had not yet commenced. The CIT(A) disagreed, finding that business activities had started.

What were the issues?

Whether expenses incurred to secure orders in a software development business are allowable as business expenses, and if Section 35D applies to such expenses.

Which sections of the Income-tax Act were involved?

Section 35D

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Cases cited in this judgment(2)Show list

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IN THE HIGH COURT OF DELHI AT NEW DELHI

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ITA No. 640 of 2009

% <u>Decided on : September 11, 2009</u>

Commissioner of Income Tax

. . . Appellant

through:

Ms. Prem Lata Bansal, Advocate

VERSUS

Aspentech India Pvt. Ltd.

... Respondent

through:

NEMO

CORAM:-

THE HON'BLE MR. JUSTICE A.K. SIKRI THE HON'BLE MR. JUSTICE VALMIKI J. MEHTA

- 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? - 2. To be referred to the Reporter or not? - 3. Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J. (ORAL)

- 1. For the relevant assessment year, i.e. assessment year 2003-04, the respondent/assessee had filed the return declaring a loss of Rs.2.48 crores. The Assessing Officer (AO) found that the assessee had claimed expenditure of Rs.2.53 crores against a meagre income of Rs.4,93,343/-. He, thus, raised certain queries to the assessee but was not satisfied with the explanation and, therefore, disallowed the aforesaid expenditure of Rs.2.53 crores. - 2. We may note at the outset that this expenditure included salary paid

2009:DHC:13354-DB

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personnel. According to the CIT (A), the only objection of the that since the assessee company had not obtained any orders to start revenue generation activities, its business could not have been said to have been set up.

5.

This was clearly a wrong approach, as rightly observed by the CIT(A), who opined that in an industry like software development business activities start with pursuing of the companies to get orders and all activities carried out to get such orders, being incidental to the business activities, would be regarded as for the purpose of business and not for setting up of the business. The CIT (A) also recorded the reasons, on the basis of which it arrived at the finding that the business had, in fact, started. As to when the activity is deemed to be undertaken as part of business activity and the expenses incurred are to be allowed as business expenses, the CIT (A) referred to and relied upon the judgment of the Gujarat High Court in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 and that of the Calcutta High Court in Tetron Commercial Ltd. v. CIT, 261 ITR 422. Referring to Saurashtra Cement & Chemical Industries Ltd. (supra), the CIT(A) stated that following tests were laid down by the Gujarat High Court in that case to determine the commencement of business activities. It reads

as under :-

"A business activity consists of three stages: the first stage relates to the activity necessary for the nurnose of acquiring the

2009:DHC:13354-DB

expenses have been incurred after setting up of the busin Assessee has already filed the return for the earlier y wherein losses declared by it has been accepted. This is not the first year of the business. It is irrelevant to say that assessee should show income if it wants to claim expenses as business expenses. In view of the above, we do not find any merit in this appeal it is dismissed."

- 7. Learned counsel for the Revenue submits that when the expenses were huge, such expenses need to have been amortized under the provisions of Section 35D of the Income Tax Act, 1961. However, this is clearly a misconceived and erroneous argument inasmuch as it predicates on the premise that the expenditure in question is incurred before the commencement of the business. When a finding of fact is recorded in the instant case that in the relevant assessment year business had already commenced, the provisions of Section 35D would not get attracted at all. - 8. We, therefore, find that no question of law arises and dismiss the appeal.

(A.K. SIKRI)

JUDGE

(VALMIKI J. MEHTA)

JUDGE

September 11, 2009 nsk

T<sub>2</sub>

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