THE COMMISSIONER OF INCOME TAX TDS vs. M/S TTK HEALTH CARE TPA PVT LTD

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ITA No. 159 of 2021 C/W ITA No. 164 of 2021

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 10TH DAY OF APRIL, 2023 PRESENT THE HON'BLE MR JUSTICE P.S.DINESH KUMAR AND THE HON'BLE MR JUSTICE C.M. POONACHA INCOME TAX APPEAL NO. 159 OF 2021 C/W INCOME TAX APPEAL NO. 164 OF 2021 IN ITA No.159/2021

BETWEEN:

…APPELLANTS (BY SRI. DILIP M, STANDING COUNSEL FOR SRI ARAVIND K V., SENIOR STANDING COUNSEL)

AND:

Digitally signed by NIRMALADEVI Location: HIGH COURT OF KARNATAKA

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ITA No. 159 of 2021 C/W ITA No. 164 of 2021

BENGALURU - 560 095 PAN: AAACO 8283A …RESPONDENT (BY SRI. ARAVIND KAMATH, SENIOR ADVOCATE FOR SRI. NIKIT BALA, ADVOCATE)

THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO. 994/BANG/2019 DATED 21/08/2020 FOR ASSESSMENT YEAR 2015-2016 ANNEXURE-C AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1(1)(1), BENGALURU AND ETC.

IN ITA No.164/2021

BETWEEN:

…APPELLANTS (BY SRI. DILIP M, STANDING COUNSEL FOR SRI. ARAVIND K V., SENIOR STANDING COUNSEL)

AND:

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ITA No. 159 of 2021 C/W ITA No. 164 of 2021

5TH BLOCK BUILDING, 80 FEET ROAD, KOARAMANGALA, BENGALURU 560095. PAN.AAACO 8283A. …RESPONDENT (BY SRI. ARAVIND KAMATH, SENIOR ADVOCATE FOR SRI. NIKIT BALA., ADVOCATE)

THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO. 995/BANG/2019 DATED 21/08/2020 FOR ASSESSMENT YEAR 2016-2017 ANNEXURE-C AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1(1)(1), BENGALURU AND ETC.

THESE APPEALS COMING ON FOR HEARING, THIS DAY P.S. DINESH KUMAR J., DELIVERED THE FOLLOWING: COMMON JUDGMENT

These appeals are by the Revenue challenging the order dated 21.08.2020 in ITA Nos.994 & 995/Bang/2019 for the Assessment year 2015-2016 and 2016-17 passed by the ITAT, "B" Bench, Bangalore1 have been admitted to consider following questions of law: 1. Whether on the facts and circumstances of the case, the order passed by Tribunal is perverse in nature in holding that assessing authority was not right in making disallowance of expenditure claimed by

1 Income Tax Appellate Tribunal, "B" Bench, Bangalore

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assessee as salaries and marketing expenditure for development of new software platform without observing that the same is capital in nature and said expenditure was towards creating of an intangible asset for deriving enduring benefit? 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that expenditure claimed by assessee as salaries and marketing expenditure for development of new software platform is Revenue expenditure without observing that nature of expenditure is capital in nature and as payment made was towards creating capital asset which is a new product of assessee- company? 2. Heard Shri M.Dilip, learned Standing Counsel for the appellants-Revenue and Shri. Aravind Kamath, learned Senior Advocate for the respondent-Assessee. 3. The questions of law involved in both these appeals are one and the same. Hence, they are considered and disposed of by this common judgment. 4. Undisputed facts of the cases are that Assessee is a Company engaged in the business of rendering customized internet advertising services for advertisers which could be

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used on the Desktop. In order to develop its software, Assessee had incurred expenditure of `6,06,30,146/- during the year 2015-16 and `20,80,24,899/- during 2016-17. 5. Assessing Officer has recorded in his order that the Assessee was developing a software for advertisement. If the said software platform was developed, it would have given enduring benefit to Assessee. On this premise, he treated the expenditure as capital in nature. The CIT(A)2 has confirmed the order of the AO3. The ITAT has reversed the finding recorded by Assessing Officer and allowed the Appeals. 6. Shri. M. Dilip for the Revenue submitted that the CEO and the H.R. Manager had confirmed the fact that the Assessee was developing a new software. The said software would have given enduring benefit to the Assessee. Therefore, the Assessing Officer was right in holding that the expenditure was capital in nature. The ITAT has reversed the finding on the ground that the Assessee had abandoned the product. On the principle of

2 Commissioner of Income Tax (Appeals) 3 Assessing Officer

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law once the expenditure is made towards development of a software, the same must be construed as capital expenditure. 7. Shri. Aravind Kamath submitted that Assessee had indeed sought to develop a good software platform. However, the same was compatible only with the Desktop. In view of rapid change in the advertisement field Desktops have been substituted for mobile phones. The application had no future and the Assessee was forced to abandon the project. In the bargain, the Assessee has lost huge sums of money. Supporting the impugned order, he submitted that since the project was abandoned, the expenditure made in that behalf must be treated as revenue in nature. 8. We have carefully considered the submissions of learned counsels on both sides. 9. It is not disputed that the Assessee had invested money to develop a software platform for the Desktops. It is also not disputed that due to rapid change in the technology, the application sought to be developed by Assessee had become obsolete and the Assessee abandoned further development. In

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substance, Assessee has incurred expenditure in these two years to develop a software but due to change in technology, it had to abandoned the product. In effect, it had lost money spent on this product. The product having been abandoned, the Assessee shall not get any endure in benefit. The ITAT, in our considered opinion has correctly analised the facts in para No.10 of the impugned judgment and allowed the appeals. We do not find any ground to interfere with the findings recorded by the ITAT.

(i) Both appeals are dismissed;

(ii) The substantial questions of law are answered in favour of the Assessee and against the Revenue.

SD/- JUDGE

SD/- JUDGE BS List No.: 1 Sl No.: 25 (27/4)