DCIT, BANGALORE vs. SOBHA RENAISSANCE INFORMATION TECHNOLOGY PVT. LTD.,, BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the Revenue is directed against the order dt.10.10.2013 of

Commissioner of Income Tax (Appeals)-V, Bangalore for the Assessment Year

2005-06.

2 ITA No.301/Bang/2014

3 ITA No.301/Bang/2014 5. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 6. The appellant craves leave, to add, alter, amend and 1 or delete any of the grounds mentioned above.” 3. Ground No.1 is general in nature and does not require any specific

adjudication.

35(1)(iv) of the Income Tax Act, 1961 (in short 'the Act'). The assessee company

is engaged in the development of software and offer perpetual license of

software which provide software products covering digitized healthcare,

environmental health & safety solutions, end-to-end solutions that address

their business and technology need. During the course of assessment

proceedings, the Assessing Officer noted that the assessee during the year

completed the development of three software products and capitalised the

same in the books of accounts to the tune ofRs.7,31,81,240. Thus the Assessing

Officer found that the assessee has capitalised the expenditure in the books of

account but in the computation statement enclosed to the return the product

expenses to the tune of Rs.7,31,81,240 was claimed as revenue expenditure.

The Assessing Officer questioned the allowability of expenditure being capital

4 ITA No.301/Bang/2014 in nature and accordingly disallowed the claim of the assessee. The Assessing

Officer has also rejected the alternate plea of the assessee that even if this

expenditure is treated as capital in nature and the same is allowable under

Section 35(1)(iv) of the Act. However, the Assessing Officer observed that the

assessee can amortise its expenditure by way of depreciation under the I.T. Act

@ 60% to the extent of software product capitalized by the assessee and on

the balance amount which was shown as work-in-progress. The Assessing

Officer did not allow the depreciation. On appeal, the learned CIT (Appeals) has

confirmed the view of the Assessing Officer that the expenditure in question is

capital in nature. However, the learned CIT (Appeals) has allowed the alternate

claim of the assessee under Section 35(1)(iv) of the Act.

the learned CIT (Appeals) has allowed the claim of the assessee by accepting

the submissions of the assessee without giving the finding of fact that the

entire expenditure in question has been incurred in respect of R & D activity of

the assessee. The learned Departmental Representative has referred to the

finding of the learned CIT (Appeals) and submitted that the learned CIT

(Appeals) has presumed the fact as submitted by the assessee without proper

5 ITA No.301/Bang/2014 verification and examination or giving the finding on the nature of the activity

on which the expenditure has been incurred by the assessee. Thus the learned

Departmental Representative has submitted that the learned CIT (Appeals) has

committed an error in allowing the claim under Section 35(1)(iv) of the Act

without examination of the issue on the point where the said expenditure has

been incurred by the assessee on R & D activity so as to eligible for claim under

Section 35(1)(iv) of the Act.

that the learned CIT (Appeals) has followed the decision of this Tribunal on this

issue and further the issue is now covered by the judgement of the Hon'ble

High Court in the case of CIT Vs. Talisma Corporation Pvt. Ltd. 40 Taxman.com

400 (Kar) (2013). He has further submitted that the SLP filed by the

department against the decision of the Hon'ble High Court in the case of

Talisma Corporation Pvt. Ltd. (supra) has been dismissed by the Hon'ble

Supreme Court vide order dt.2.7.2014. Thus the learned Authorised

Representative has submitted that expenditure in question was incurred by the

assessee for development of software. Therefore even the said software is

treated as capital in nature and the assessee is eligible for deduction under

6 ITA No.301/Bang/2014 Section 35(1)(iv) of the Act as the said expenditure has been incurred for the

R&D activity of the assessee.

on record. The limited question raised by the revenue in this appeal is

regarding the allowability of of the claim under Section 35(1)(iv) of the Act on

the expenditure incurred by the assessee for development of software

products. The learned CIT (Appeals) while giving the finding in paras 9.7 & 9.8

of the impugned order has allowed the claim of the assessee by following the

decision of the co-ordinate bench of this Tribunal in the case of DCIT Vs. TCIL

Bellsouth Ltd. 89 TTJ 851 as under :-

“ 9.7 The alternate claim of the assessee to allow the expenditure incurred on software development under Section 35(1)(vi) of the IT Act, has been examined. The clause (iv) of Section 35(10 has to be read with sub-section (2) and (3) of section 35 of the Income Tax Act. Sub-section (3) suggests that the asset on which expenditure is claimed to have been incurred should be capital asset, which was or being used for scientific research. Assessing Officer’s contention is that it is the asset used for scientific research, and not every expenditure on process which result in a capital asset, which is the subject matter of deduction under Section 35. Hon'ble ITAT, Bangalore in case of Tally Solutions P. Ltd. (2010) 130 TTJ (Bang) 234, has held that where assessee in the business of software incurred certain capital expenditure on hardware like computer peripherals, computers and computer networking, deduction under Section 35(10(iv) on such capital expenditure incurred for scientific research is allowable.

7 ITA No.301/Bang/2014 9.72 Learned Authorised Representative has relied on the Hon'ble Delhi ITAT decision in case of TCIL Bellsouth Ltd., since reported in (2004) 89 TTJ 851, to contend that even revenue expenditure incurred for development of software package amounts to expenditure on scientific research, eligible for deduction under Section 35(1)(iv). Detailed discussion has been made in paras 13, 16-18 and 21 of the Tribunal’s order to come to the conclusion. Facts of that case are similar to that of the appellant, both being engaged in the development and export of software product / package. Respectfully following the decision of the Hon'ble ITAT, it is held that the expenditure claimed on software product development would be eligible for deduction under Section 35(1)(iv), irrespective of whether it actually resulted in the software product coming into existence as an asset, during the year or not.

9.8 To conclude, the expenditure incurred by the assessee for the software product development is held to be capital expenditure to be allowed as deduction under Section 35(1)(iv) of the Income Tax Act. Ground No.1 of the assessee is allowed.”

It is clear from the finding of the learned CIT (Appeals) that it has not gone into

the factual issue whether this expenditure pertains to the R & D activity of the

assessee as per the provisions of section 35(1)(iv) r.w.s. 43(4)(ii)(a) of the Act

wherein the definition of scientific research has been provided. Since the

proper record and other details are not available before us in respect of the

actual nature of the expenditure in question therefore we cannot give a

conclusive finding regarding the real nature of the expenditure incurred by the

assessee whether it is incurred on R&D activity of the assessee or not.

Therefore in the facts and circumstances of the case, as well as in the interest

8 ITA No.301/Bang/2014 of justice, we set aside this issue to the record of CIT (Appeals) for limited

purpose of verifying the real nature of the expenditure incurred by the assessee

whether it is for the R & D activity of the assessee. The CIT (Appeals) has to

decide this issue after verification and examination of the relevant record and

in the light of the decision of Hon'ble jurisdictional High Court in the case of

Talisma Corporation Pvt. Ltd. (Supra). Needless to say the assessee shall be

afforded an opportunity of hearing.

software application being revenue in nature.

Rs.1,27,93,369 in the profit and loss account for software expenses. The

Assessing Officer asked the assessee to show cause as to why this expenditure

should not be allowed as capital in nature. In response the assessee has

submitted that the expenditure has been incurred in acquiring application

software to enable it to carrying on its business more efficiently, therefore the

same is allowable as business expenditure. Thus the aim of the assessee is to

carry out its business operations efficiently and smoothly. It was also

contended that such software itself does not work on stand along basis but the

9 ITA No.301/Bang/2014 same has to be fitted to a computer system to work. Therefore it is an aid in

manufacturing process rather than the tool itself. The Assessing Officer did not

accept the contention of the assessee. The Assessing Officer further noted that

out of the software expenses to the extent of Rs.42,50,136 was sold to the

customer during the year. Accordingly, the Assessing Officer restricted the

disallowance to the balance amount of Rs.85,43,232.

the Assessing Officer by holding that the purchase of software are not for use in

the assessee's business but it was merely a stock-in-trade.

the learned CIT (Appeals) has given a finding which is contrary to the stand

taken by the assessee before the Assessing Officer that the software was

purchased for the business use of the assessee which had enabled the assessee

to carry on its business more efficiently and smoothly whereas the learned CIT

(Appeals) has held that it is not used in the business of the assessee but it is

stock-in-trade.

that the assessee produced relevant record before the learned CIT (Appeals) in

10 ITA No.301/Bang/2014 support of the claim that it was a stock in trade. He has supported the order of

the learned CIT (Appeals).

material on record. There is no dispute that the assessee claimed the said

expenditure was incurred for acquiring the application software to enable

carrying on its business more efficiently and smoothly. The relevant part of the

assessee's submission before the Assessing Officer has been reproduced by the

Assessing Officer in para 2 as under : i. The expenses incurred by the assessee in acquiring application software to enable it carry on its business more efficiently were allowable as business expenditure even if some enduring benefits resulted by use of software. ii. The application software enables the assessee to carry out its business operations efficiently and smoothly. iii. Such software itself does not work on stand alone basis but the same has to be fitted to a computer system to work. iv. Such software enhances the efficiency of the operation and it is an aid in manufacturing process rather than the tool itself. The above submissions of the assessee before the Assessing Officer manifest

that assessee's claim that the expenditure is incurred in acquiring the

11 ITA No.301/Bang/2014 application software which has been used in the business operations of the

assessee. However, the Assessing Officer found that the application software

was sold to the customers therefore to that extent the Assessing Officer

allowed the claim of the assessee of Rs.42,50,136. The learned CIT (Appeals)

has allowed the entire claim in para 10.3 as under :

“10.3 The Assessing Officer, in his assessment order, appears to be of a belief that the aforesaid expenditure on “Oracle software package” was for the computer systems of the assessee, which would add and enhance the efficiency of assessee's business operations. In the remand report, the Assessing Officer has restated that the stand and has not commented on the facts stated in the rectification application and the enclosed evidence. As seen from the evidences, the purchase of software was not for the use in assessee's business, which could even be considered to be capital expenditure. It was merely a stock in trade, and was actually exported to assessee's client in Jordan with user license. In view of the irrefutable facts, expenditure on software purchase is held to be fully allowable as revenue expenditure.”

The finding of the learned CIT (Appeals) is contrary to the claim of the assessee

and further the learned CIT (Appeals) has not referred any specific evidence or

record on the basis on which he has come to the conclusion that the application

software in question is a stock in trade and was actually exported to the clients.

In view of the above facts and circumstances, we set aside this issue to the

record of the learned CIT (Appeals) for proper verification of the record and

12 ITA No.301/Bang/2014 giving a specific finding on this issue. Needless to say the assessee be afforded

an opportunity of hearing.

Act. The assessee filed the return declaring loss and therefore did not claim

deduction under Section 10A by filing a declaration under Section 10A(8) of the

Act. In the course of assessment proceeding, the Assessing Officer proposed to

make certain additions as well as to compute book profit for MAT. The

assessee contended before the Assessing Officer that the assessee withdraws

the declaration under Section 10A and claimed the deduction under Section

10A of the Act. The Assessing Officer disallowed the claim of the assessee on

the ground that there is a limitation of filing the declaration under Section

10A(8) being due date of filing of return under Section 139 of the Act.

Accordingly, the Assessing Officer rejected the claim of the assessee.

assessee by following the decision of Hon'ble jurisdictional High Court in the

case of CIT Vs. Infosys Technologies Ltd. reported in 349 ITR 598.

when the assessee did not claim the deduction under Section 10A in the return

13 ITA No.301/Bang/2014 of income then, after expiry of the limitation for making such declaration under

Section 10A(8), the assessee is not eligible to claim the deduction under Section

10A of the Act. Therefore, the learned Departmental Representative has

submitted that the learned CIT (Appeals) has committed an error in allowing

the claim of the assessee when originally the assessee did not claim deduction

under Section 10A in the return of income.

that there are precedents on this issue wherein it has been held that the time

limit for declaration under Section 10A(8) of the Act is only directory.

Therefore merely because the assessee did not claim in the return of income

due to negative return income, the claim of the assessee cannot be denied on

the positive income computed by Assessing Officer by making certain additions

and the assessee subsequently withdrawn the declaration made under Section

10A(8) of the Act. Thus the learned Authorised Representative has submitted

that there is no bar in making the claim of deduction under Section 10A of the

Act during the assessment proceedings when the Assessing Officer has

proposed to assess the income by making certain additions. He has relied upon

14 ITA No.301/Bang/2014 the judgment of Hon'ble jurisdictional High Court in the case of Infosys

Technologies Ltd. (supra).

on record. There is no dispute that initially the assessee did not claim the

deduction under Section 10A as it has filed return of income by declaring loss.

Subsequently when the Assessing Officer proposed to make certain addition,

the assessee withdrew the declaration under Section 10A(8) and the claim of

deduction under Section 10A on the positive income assessed by the Assessing

Officer. The revenue is taking a technical objection that after the expiry of the

time period provided under Section 10A(8) the assessee cannot withdraw the

earlier declaration and make a claim of deduction under Section 10A of the Act.

We find that there are precedents on this issue and the Delhi Bench of the

Tribunal in the case of Moser Baer India Ltd. (2007) 110 TTJ (Del) 807 held that

the time limit provided under Section 10A(8) is only directory if the claim made

during the assessment proceedings is legally admissible then the same cannot

be denied merely because it was not made in the return of income. The

learned CIT (Appeals) has allowed the claim of the assessee in para 11.2 as

under :

15 ITA No.301/Bang/2014 “ 11.2 It is a settled law that deductions and exemptions allowable to an assessee cannot be denied on superficial, technical and venial breach. Hon'ble High Court of Karnataka in case of Infosys Technologies Ltd. (2012) 349 ITR 598 (Karn) have held tht the fact that the assessee did not claim exemption under Section 10A while filling the return cannot come in the way of holding that assessee is entitled to benefit of s. 10A since it was alternatively argued both before the Assessing Officer and the appellate authority that if the income is treated as trading receipt, exemption under Section10A may be granted. In the instant case, the assessee's software export unit is registered with the STP, Bangalore. It is not the case of the Assessing Officer that such unit of the assessee is not eligible for deduction under Section 10A(8) would not come in the way of allowing the deduction, if other conditions are fulfilled. It is therefore held that deduction under Section 10A is allowable to the assessee, subject to profits computed in respect tof the STP unit. Ground No.3, 4 and 5 are allowed.”

Thus it is clear that the learned CIT (Appeals) has relied upon the judgments of

Hon'ble jurisdictional High Court in the case of Infosys Technology Ltd. (supra)

wherein the Hon'ble jurisdictional High Court has concurred with the view that

the assessee is entitled to deduction under Section 10A when the Assessing

Officer treated the capital gain as business income of the assessee. The

eligibility of the assessee in the case on hand to claim exemption under Section

10A of the Act is not denied otherwise being a software export unit registered

with STPI. Therefore, we do not find any error or illegality in the order of the

learned CIT (Appeals), the same is upheld.

16 ITA No.301/Bang/2014 18. In the result, the appeal of Revenue is partly allowed for statistical

purpose. Order pronounced in the open court on 17th day of June, 2016.

Sd/- Sd/- (A.K. GARODIA) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp

Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File.

By Order

Asst. Registrar, ITAT, Bangalore