INFOSYS LIMITED ,BANGALORE V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1) , BANGALORE

ITA 962/BANG/2024

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Infosys Limited appealed against the order of the National Faceless Appeal Centre (NFAC), which had disallowed certain deductions claimed under sections 32AC and 10AA of the Income Tax Act for the assessment year 2016-17. The main contention was whether the activities of software development could be classified under 'manufacturing' to qualify for deductions under section 32AC, and whether certain incomes should be included in the computation of profits for deduction under section 10AA. The Tribunal found that software development does not meet the criteria for 'manufacturing' as defined in the Act, and thus, the claim under section 32AC was rightly disallowed. However, the issue regarding the inclusion of certain incomes under section 10AA was remanded back to the CIT(A) for a detailed examination.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 474079 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 14-10-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 17-05-2024
• Other Referred Cases: CIT v. N.C. Budharaja & Co, CIT v. Madgul Udyog, CIT v Datacons (P.) Ltd, Texas Instruments India P Ltd v ACIT, CIT v. VTM Ltd., Mahindra Electric Mobility Ltd. vs. ACIT, Pr. CIT Vs. Oracle (OFSS) BPO Services Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A SREENIVASA RAO
• Assessee Lawyers: P.C KINCHA; C.A
• Keywords: Set aside; Opportunity of being heard; Revised return; Depreciation; Additional depreciation; Period of limitation; Time period of passing order; Benefit of exemption
• Section: 250; 32; 208; 22; 13; 139; 234B; 10B; 10AA; 32(1)(iia)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No. 962/Bang/2024 Assessment Year: 2016-17 Infosys Limited, Plot 44 & 97A, Konappana, Agrahara, Hosur Road, Electronics City, Bangalore – 560 100. PAN – AAACI 4798 L Vs. The Dy. Commissioner of Income Tax, Circle – 3(1)(1), Bengaluru. . APPELLANT RESPONDENT Assessee by : Shri P.C Kincha, C.A Revenue by : Shri A Sreenivasa Rao, CIT (DR) Date of hearing : 14.10.2024 Date of Pronouncement : 13.11.2024 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 27/03/2024 in DIN No. ITBA/NFAC/S/250/2023-24/1063442931(1) for the assessment year 2016-17. 2. The assessee has raised the following grounds of appeal: “1. General around: 1.1. The learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as CIT(A) for short) has erred in passing the order under section 250 in the manner passed by him. The order so passed to the extent prejudicial to the appellant is bad in law and liable to be quashed. 2. Disallowance of deduction under section 32AC:- ITA No.962/Bang/2024 Page 2 of 18 . 2.1. The learned CIT(A) has erred in not allowing the claim of deduction under section 32AC of the Act amounting to Rs. 172,31,17,307 for the reason that appellant is a service provider and not a manufacturer as stipulated under section 32AC. 2.2. The learned AO has erred in holding that the computation of the deduction under section 32AC is incorrect by placing reliance on the addition of assets under the head 'Plant & Machinery' as per annual report. 2.3. learned AO has erred in holding that new asset for claiming deduction under section 32AC excludes computers or computer software along with any office appliances, vehicles etc. The learned AO has erred in not appreciating the fact that the exclusion from new asset under section 32AC is for office appliances including computers or computer software, which would mean that computers or computer software used for office purposes only have to be excluded. 2.4. On facts and circumstances of the case, the appellant is engaged in the business of manufacture of an article or thing and therefore eligible for the claim of deduction under section 32AC Rs. 172,31,17,307. 3. Ground relating to disallowance of deduction under section 10AA: 3.1. The learned NFAC and the CIT(A) has erred in reducing the following incomes from profits of the business of SEZ units in computing deduction under section 1 OAA for the reason that the said incomes are not derived from the activity of software development and export. i) Interest on deposits with banks and other institutions amounting to Rs.2232,22,55,512 ii) Interest on loans to subsidiaries amounting to Rs. 3,44,53,301 iii) Interest on Govt Bonds amounting to Rs. 81,362 iv) Interest on debentures amounting to Rs. 60,49,51,027 v) Interest on tax refunds amounting to Rs. 46,22,39,222 vi) Incentive from airlines amounting to Rs. 1,74,127 3.2. On facts and circumstances of the case and law applicable, the appellant is entitled for the claim of deduction under section I OAA of the Act on the above incomes included in the profits of eligible SEZ units. 4. Levy of interest under section 234B: 4.1. The levy of interest under section 234B is bad in law and liable to be quashed. 5. Prayer: 5.1. Based on the above grounds and other grounds adduced at the time of hearing, the appellant prays that the order passed under section 250 to the extent prejudicial to the appellant be quashed or in alternative the above grounds and relief prayed thereof be allowed. The appellant prays accordingly.” 3. The issue raised by the assessee vide ground No. 1 of its appeal is general in nature and does not require any separate adjudication. Hence, the same is hereby dismissed. ITA No.962/Bang/2024 Page 3 of 18 . 4. The issue raised by the assessee vide No. 2 of its appeal is that the learned CIT(A) has erred in confirming the disallowance of deduction claimed under section 32AC of the Act. 5. The facts in brief are that the assessee in the present case, a public company, is engaged in the business of development and export of computer software. In the return of income filed for the year under consideration, the assessee claimed investment allowance under the provisions of section 32AC of the Act for Rs. 172,31,17,307/- only. The assessee during the assessment proceeding submitted that the activity of software development encompasses the word manufacture or production. Therefore, the condition precedent to investment allowances under section 32AC of the Act i.e. in the business of manufacturing or production of article or thing is satisfied. 6. However, the AO held that activity of the assessee company, i.e. software development, is not manufacturing activity as defined under section 2(29BA) of the Act. It is because, in the activity of software development, there is no transformation of non-living physical entity into a new and distinct object or article, neither bringing new and distinct object/article/thing with different chemical composition or integral structure. Therefore, the assessee company is not eligible for investment allowance as per the provisions of section 32AC of the Act which was brought under the statute to boost the manufacturing industry. The AO further found that the assessee itself in its Form 56F filed for claiming deduction u/s 10AA of the Act has mentioned nature of business as “service sector-software development agency”. Thus, the AO in view of ITA No.962/Bang/2024 Page 4 of 18 . the above disallowed the claim of the assessee for Rs. 172,31,17,307/- made under section 32AC of the Act. 7. The aggrieved assessee preferred an appeal before the learned CIT(A) who after following the order of the Tribunal in the own case of the assessee for A.Y. 2014-15 & 2015-16 bearing ITA Nos. 125 & 126/Bang/2019, confirmed the disallowance made by the AO. 8. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us. 9. The learned AR before us fairly submitted that the issue is covered against the assessee by the order of the Tribunal in its own case for A.Ys. 2014-15 & 2015-16 in ITA Nos. 125-126/Bang/2019 which has been contested by the assessee at higher forum. 10. On the other hand, the leaner DR before us vehemently supported the order of the authorities below. 11. We have heard the rival contentions of both the parities and perused the materials available on record. At the outset, we note that the issue on hand is covered against the assessee in its own case cited above. The relevant extract is reproduced as under: 2. For the aforesaid reasoning and judicial pronouncements on the facts and circumstances of the case and law application, we hold that settlement amount paid to US authorities amounting to Rs. 208,93,00,000 should be allowed as deduction for the relevant assessment year. It is ordered accordingly. Disallowance u/s 32AC (Ground No.11) ITA No.962/Bang/2024 Page 5 of 18 . 3. For the relevant assessment year, the assessee had claimed deduction u/s 32AC of the I.T.Act amounting to Rs.132,13,18,483 on account of investment in new plant and machinery. Working of the aforesaid deduction claimed was submitted to the A.O. vide letter dated 28.09.2017. A brief submission giving the reasons for the allowability of deduction claimed was submitted vide letter dated 08.12.2017. The A.O. however disallowed the claim u/s 32AC of the I.T.Act for the reason that the activity of software development falls within the purview of service sector, whereas section 32AC of the I.T.Act has been inserted by the Legislature to give impetus to the manufacturing sector only. Further, the A.O. had held that the total of the addition to the plant and machinery block during the year amounted to only Rs.413.11 crore. Consequently, the A.O. was of the view that if at all deduction is to be granted u/s 32AC of the I.T.Act, only a sum of Rs.61.97 crore ought to be granted, instead of Rs.132 crore as claimed by the assessee. 4. The CIT(A) upheld the disallowance made by the A.O. The CIT(A) held that the software development activity cannot be considered as “manufacture” as defined in section 2(29BA) of the I.T.Act. As regards the issue of quantum of deduction, the CIT(A) held that the same is academic in nature and did not require any adjudication. 5. Aggrieved, the assessee has raised this issue before the Tribunal. The ld. AR has contended that the software development activities are to be considered in the nature of manufacture or production of article or thing. The ld. AR has relied on various decisions to support his contentions. 6. The ld. DR has filed a brief written submissions. The essence of the submissions of the ld. DR is that deduction u/s. 32AC of the I.T. Act is given as an impetus to the manufacturing sector only and assessee being predominantly in the service sector would not be entitled to the deduction. 7. We have heard the rival submissions and perused the material on record. The assessee is engaged in the business of software development activity. In the written submissions of the assessee it is stated that in the software business, parties may enter into a contract for the creation or modification of software by a software house or computer programmer. This is frequently the way in which customized software is developed and acquired by the user/purchaser. The level of activities/services rendered will vary with each contract. At one end of the spectrum, the customers needs may require that a programme be created virtually from scratch. At the other end of spectrum, a minor modification to an existing or standard program may be sufficient to meet the customers requirements. In the current economic and business scenarios, the creation of computer programs to assist the various business functions is a complex process. The software to be ultimately created is broken into different drivers or modules. These different modules or even sub-segments thereof are normally developed by different persons because the expertise and wherewithal to develop the software may not be available with a single person. For each module, specifications are developed. The performance level to be achieved including the stress levels, security levels and recovery levels are defined. ITA No.962/Bang/2024 Page 6 of 18 . 8. Therefore, the software development activity performed by the assessee involves various activities like developing a software from the scratch, modification of existing software, maintenance of existing software or software testing. 9. Before proceeding further, there is necessity to examine the background under which section 32 of the I.T. Act was introduced. It is generally felt in the academic arena that the structure of Indian economy is skewed towards or dominated by service sector and the base of manufacturing sector is inadequate. India transitioned from agriculture dominated country to service sector dominated country. This is an unusual path of development whereas most of the world countries treaded the path of agriculture dominated economy to manufacturing dominated economy then came to be dominated by the service sector. This unusual development path of India led to a question whether India can sustain its economic development. This is evident from OECD (2007) (Economic Survey of India, Paris, www.oecd.org/eco/surveys/india), Dougherty, S. and R. Herd and T. Chalaux (2009) (“What is Holding Back Productivity Growth in India? Recent Microevidence” OECD Journal: Economic Studies Volume 2009, ISSN 1995-2848) and Kochhar et al. (2006) (“India’s Pattern of Development: What Happened, What Follows?’ Journal of Monetary Economics, Vol. 53 No.5, pp. 981-1019). Few expressed skeptical view (OECD 2007) as an answer to this question. The relevant paras are extracted below: From Dougherty, S. and R. Herd and T. Chalaux (2009) The slow take-off of India's manufacturing sector compared with many of its Asian neighbours is the source of a considerable amount of consternation and mystery. Manufacturing's share of value added has barely risen over the past three decades, and India's goods exports have remained below 1% of corresponding world trade. At the same time, services trade has expanded rapidly and the decline in the share of agriculture in the economy has found its counterpart in services rather than manufacturing (OECD, 2007). In apparent contradiction, the literature on economic development has long argued that production shifts first from agriculture into manufacturing and — only at a later stage of development — from manufacturing into services. This so- called Three-Sector (or Fisher-Clark-Kuznets) Hypothesis appears consistent with much cross-country evidence, and has been associated with demand shifts and productivity differentials: the resource shift out of low-productivity agriculture into higher-productivity manufacturing boosts overall productivity in converging economies. Two recent studies have attempted to answer the question of whether India can bypass a manufacturing stage. Kochhar et al. (2006) look across India's states and at industry-level evidence, and argue that the distortions in skill-intensity and scale that have emerged are persistent and may allow it to bypass the more traditional development path that other countries have followed. OECD (2007) takes a more skeptical view, noting that few countries have not relied heavily on manufacturing at some stage for their development. (Ref page 438 of DRPB) ITA No.962/Bang/2024 Page 7 of 18 . Scale, capital intensity and productivity Extremely small scale Perhaps the most dominant characteristic of India's manufacturing sector is the extraordinarily small scale of establishments relative to any OECD or major emerging country when measured in terms of employment and output (Figure 3). About 87% of manufacturing employment is in micro-enterprises of less than 10 employees, a smallness of scale that is unmatched, with the closest comparator being Korea, where less than half of employment is in micro-enterprises. While there is a fairly high share of very large companies — making for a bimodal distribution — there are few enterprises of intermediate size. ………… ………… Given the relatively small size of many manufacturing firms, India is reaping far smaller gains from scale economies than many other countries. Larger establishments often use newer technologies and thus achieve higher productivity, while smaller establishments are much less productive. Accordingly, although small firms' share in manufacturing employment is almost 90%, they produce only about a third of manufacturing output. An estimate of scale effects for plants, based on individual establishments in the Annual Survey of Industries, shows them to be very large and persistent. Even after controlling for technology, industry, region and firms' age, total factor productivity (TFP) is about twice as high in firms with more than 250 employees than in those with only up to 10 employees (Figure 4). (refer p 443-444 of DRPB) From Kochhar et al. (2006) Abstract India has followed an idiosyncratic pattern of development, certainly compared with other fast growing Asian economies. (refer p 457 of DRPB) While China, the world's manufacturing powerhouse, appears to be absorbing surplus labor from agriculture into manufacturing, there is growing concern that India has failed to match its neighbor in this process. To many India's emergence as a world-class services hub offers shows them to be very large and persistent. Even after controlling for technology, industry scant comfort because of the relatively limited prospects of such skill-based development for employment growth. In addition, worries are mounting about the uneven distribution of opportunities across states (the fast—growing peninsula versus the slow-moving hinterland), sectors (services versus manufacturing or agriculture), and skill and education levels. Will India foster growth in labor-intensive manufacturing? If yes, how? If not, how can jobs be provided for India's vast, growing, pool of low- skilled labor? (refer p 458 of DRPB) 3.2. Manufacturing versus services in the cross-section The traditional perspective of Kuznets or Chenery would predict a rapid increase in the share of manufacturing, a decline in agriculture and an uncertain or modest effect on services. However, between 1980 and 2002, India's share of services in value added exploded from 37 percent to 49 percent. Its share of manufacturing in value added remained broadly unchanged at 16 percent, while ITA No.962/Bang/2024 Page 8 of 18 . the decline in agriculture mirrored the performance of services. The corresponding numbers for employment were 19 percent to 22 percent and 14 percent to 18 percent (Table 1). ………. ………. Furthermore, in the regressions using the change in the share of manufacturing value-added to overall growth (column 1, Panel B), the India indicator is negative. Thus, the data suggest a relative slowing in manufacturing growth. What is indisputable is the performance of services over this period. India has been unusual in this regard. India’s share in service is a significant 3.8 percent higher than in other countries in 2000 (Table 5, panel A, column 4). This is broadly confirmed in the change regressions (panel B), where India records an increase in the size of the services sector that is 10 percentage points of GDP greater than that of the average country. Finally, note in Table 5 (column 8, panel A), that India is again a negative outlier in terms of the employment share in services, falling below other countries by a huge 17 percentage points in 2000. Gordon and Gupta (2004) have also observed that, unlike other countries, Indian labor's share in services employment has been flat rather than growing with income. The huge increase in value added in services without a commensurate increase in employment, must have come from tremendous gains in labor productivity in services. (refer p 472-473 of DRPB) 10. Hence, it was felt that the unusual path may lead to vulnerability of Indian Economy to ups and downs of global economy. The reason being service industries are foot loose industries where as manufacturing industries are not. In addition, employment growth is inadequate and is not matching with the output of service sector. It means service sector led to jobless growth. To ward off this problem, the necessity to increase the manufacturing base with large scale manufacturing firms was felt and there is an urge among the policy makers of India to increase the manufacturing base. Under this context only Sec.32AC was also introduced. To quote Hon'ble Finance Minister of India in this context, attention is invited to para 136 and 59 of Budget speech of Budget 2013-14. The relevant paras are reproduced below: \"136. No large economy can become truly developed without a robust manufacturing sector. Hence, as stated in part A of my speech, I propose to provide an investment allowance at the rate of 15 percent to a manufacturing company that invests more than '100 crore in plant and machinery during the period 1.4.2013 to 31.3.2015.\" \"59. To attract new investment and to quicken the implementation of projects, I propose to introduce an investment allowance for new high value investments. A company investing '100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 percent of the investment. This will be in addition to the current rates of depreciation. There will be enormous spill-over benefits to small and medium enterprises.\" ITA No.962/Bang/2024 Page 9 of 18 . 11. So, the intention is very much clear that Sec. 32AC was introduced to boost the manufacturing sector vis-à-vis service sector. Particularly the intention was to boost large manufacturing firms that is why initial investment allowance is given to those manufacturing firms belonging to manufacturing sector investing more than 100 Crore. It is without dispute known that Infosys Ltd, the appellant in the present case is a giant and one of the leaders in the service sector. A detailed reading of Annual Report clearly shows that the assessee is into service sector. Viewed from the above factual background of introduction of section 32AC of I.T. Act, let us analyse the section and the contention of both the parties. 12. Section 32AC of the I.T. Act provides for deduction for investment allowance where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new asset after the 31st day of March, 2013 but before the 1st day of April, 2015 and the aggregate amount of actual cost of such new assets exceeds one hundred crore rupees. Thus, the main question to be considered is whether the software development activity of the assessee qualifies as \"business of manufacture or production of any article or thing\". The word manufacture is defined in section 2(29BA) to mean \"manufacture\", with its grammatical variations, means a change in a non-living physical object or article or thing,— (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or 13. (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure; 14. To qualify as 'manufacture', as per above definition, the change should be in a non-living physical object or article or thing. Software is intangible and not physical object or article or thing. So, at the threshold, software development activity cannot qualify as 'manufacture'. Further, it cannot be said that, creating or maintenance of software programs, results in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. 15. The words production, article or thing are not defined in the IT Act. The Hon’ble Supreme Court in the case of CIT v. N.C. Budharaja & Co [1993] 70 Taxman 312 (SC) has dealt with the meaning of these words. The Hon’ble Supreme Court observed that the word production' has a wider connotation than the word 'manufacture' while every manufacture can be characterised as production, every production need not amount to manufacture. The word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. It was further held that the word 'article' is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it ITA No.962/Bang/2024 Page 10 of 18 . is understood in commercial world. It was further observed that the expressions 'manufacture' and 'produce' are normally associated with movables - articles and goods, big and small - but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. 16. As can be seen from the above decision, the expressions 'manufacture' and 'produce' are normally associated with movables - articles and goods, big and small. Whereas in the instant case the activity is software development, which is intangible. Further, in the case of CIT v. Madgul Udyog [1994] 208 ITR 541 (CAL.) it was observed as follows: Learned counsel for the assessee sought to make much capital of the fact that the dictionary meaning of the word \"article\" (vide the Shorter Oxford English Dictionary) includes the word, \"property\". The expression \"property\" is a highly abstract concept. It is of no aid unless it is specifically indicated that the property referred to also includes immovable property. There are various classes of properties. In the present day world of technology even the expertise and technical know-how, data, designs, patents and copyrights are accepted as intellectual property but on that score, such property could not be an \"article\". 17. Thus, it was held that intellectual property could not be an 'article'. The AR has relied on the decision of the Karnataka High Court in the case of CIT v Datacons (P.) Ltd (1985) 155 ITR 66 wherein it was held as follows \"It will be clear from these activities that the assessee receives vouchers and statement of accounts from the customer and they are converted into the required balance sheet, stock account, sales analysis, etc. They are got printed as per the requirements of the customer. In all these activities, the assessee has to play an active role by co-ordinating the activities and collating the information. Such activities, in our opinion, could fairly fall within the concept of processing of goods, if not manufacture of goods.\" 18. The Karnataka High Court has held that the activity of receiving vouchers, etc. and converting into balance sheet, stock statement, etc. can be treated as processing of goods. Thus, such activity can be treated as processing activity but not manufacture or production activity. 19. The learned AR has relied on the decision in the case of Texas Instruments India P Ltd v ACIT (2020) 115 taxmann.com 154 (Bangalore Trib) where in the Tribunal allowed additional depreciation under section 32(1)(iia) to the assessee being engaged in the business of software development. The relevant findings of the tribunal in the context of section 32(1)(iia) is as below: 19. A bare reading of the aforesaid provisions shows that the new machinery or plant should be used by an assessee engaged in the business of manufacture or production of any article or thing and the new machinery or plant need not be used in manufacture or production of any article or thing. The learned counsel has before us relied on the decision of the Hon'ble Madras High Court High Court in the case of CIT v. VTM Ltd. [2010] 187 Taxman 319/12009] 319 ITR 336 (Mad.) wherein the assessee-company was engaged in the business of ITA No.962/Bang/2024 Page 11 of 18 . manufacture of textile goods. During the relevant assessment year, it had set up a wind mill for generation of power and claimed additional depreciation thereon under section 32(1)(iia). The Assessing Officer disallowed the claim on the ground that the assessee was engaged only in the manufacture of textile goods and the setting up of a wind mill had absolutely no connection with the manufacture of textile goods. However, the Commissioner (Appeals) as well as the Tribunal allowed the assessee's claim of additional depreciation. On appeal to the High Court, the Hon'ble High Court held that for application of section 32( I)(iia ) what is required to be satisfied in order to claim the additional depreciation is that a new machinery or plant, which has been set up, should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed after 31-3-2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a windmill had nothing to do with the manufacture of textile goods was totally not germane to the specific provision contained in section 32(1)(iia ). In the light of the aforesaid decision, we are of the view that one of the basis on which the revenue authorities disallowed the claim of the Assessee for disallowance of additional depreciation cannot be sustained. 20. As far as the question whether the assets on which the Assessee claimed additional depreciation should be regarded as \"Plant\" or \"Office Equipment\", we do not find sufficient material before the revenue authorities to come to a conclusion one way or the other. The learned counsel for the Assessee submitted in the course of his arguments that the assets on which additional depreciation is claimed were used for testing process while designing semi-conductors which was also a business which the Assessee was carrying on. These details have not been brought on record by the Assessee before the lower authorities nor before us. He also placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT v. I.B.M. World Trade Corpn. [1981] 130 ITR 739 (Born.) wherein the Hon'ble Bombay High Court held the expression \"office equipment\" used in Sec. 33 should be construed in context of appliances which are generally used in office as an aid for proper function of office and that EA machines, data processing machines installation and operation of which is on scientific basis, and which has their roles to play cannot be equated with office appliances and therefore such machines are \"Plant\" and not \"Office appliances\". As we have already observed there is complete lack of details to decide whether the assets in question are \"Plant\" or \"Office equipment\" in the absence of the role these assets perform and purpose for which these assets are used by the Assessee. We therefore set aside the order of CIT(A) on this limited issue of determining whether the assets on which additional depreciation is claimed by the Assessee can be regarded as Plant. The Assessee is directed to furnish the details and description to the AO in this regard, who shall decide the issue afresh in accordance with law, after affording Assessee opportunity of being heard. In the event of the AO coming to the conclusion that the assets in question are in the nature of plant, the claim for additional depreciation should be allowed. With these observations we allow the relevant grounds of appeal for statistical purpose. ITA No.962/Bang/2024 Page 12 of 18 . 20. As is clear from the above extract, the Tribunal was dealing with the question whether the new machinery or plant should be used by an assessee engaged in the business of manufacture or production of any article or thing and the new machinery or plant need not be used in manufacture or production of any article or thing. The aspect of whether the software development activity is in the nature of manufacture or production of article or thing was not discussed in that decision. Even otherwise, the decision relates to AY 2008-09, when the definition of term 'manufacture' is applicable from AY 2009-10. Similarly, reliance on the decision of Gujarat High Court in the case of CIT v. Professional Information Systems & Management [2005] 146 Taxman 673 (GUJ.) for AY 1983-84 cannot be applicable in light of definition of term 'manufacture'. 21. The learned AR has contended that 4% of total revenue of the assessee during the year is derived from sale of software products and thus its claim u/s 32AC should be allowed. In our opinion, 4% of total revenue is miniscule and cannot change the character of the assessee of being engaged in the business of software development. The predominant activity of the assessee is software development. Accepting the contentions of the learned AR will lead to absurd result, wherein even a small revenue of 0.1% from the activity of manufacturing or production of article or thing, will lead to a conclusion that the entire investment in plant and machinery from a non-eligible business will be eligible for investment allowance under section 32AC of I.T.Act. 22. Further, the learned AR had submitted that the prescribed authority i.e., DSIR had granted approval for deduction u/s. 35(2AB) of the I.T. Act. Section 35(2AB) of the I.T. Act deals with weighted deduction in respect of expenditure incurred on scientific research on in-house research and development facility. The said emphasis is on expenditure incurred on scientific research. Moreover, the approval given by DSIR is section specific i.e., section 35 of the I.T. Act. However, looking at the background of introduction of section 32AC, the definition of the term “manufacture” u/s. 2(29BA) of I.T. Act, we are of the firm view that benefit deduction is available to only manufacturing sector and not the service sector. For the aforesaid reasoning and judicial pronouncements cited supra, we hold that the assessee is not eligible for deduction u/s. 32AC. It is ordered accordingly. Deduction u/s. 35(2AB) – Ground No.12 23. During the AY 2014-15, the assessee has claimed an amount of Rs.521,11,36,156/- being 200% weighted deduction u/s. 35(2AB) of the Act. The assessee filed the relevant forms and submissions before the AO in this regard. The assessing officer noticed that as per form 3CL dated 19/05/2017 as issued by DSIR, the eligible expenditure for the purpose of deduction u/s. 35(2AB) was Rs. 245.8 Crores. The AO also noticed that the assessee had claimed the 200% deduction on an amount of 260.56 crores, therefore the assessing officer held that the differential amount of Rs. 14.71 crores is not eligible for weighted deduction at 200% and accordingly disallowed Rs. 29.44 crores. Before the CIT(A), the assessee argued that the expenditure as reported by DSIR in form 3CL could not alter the quantum of deduction available to the ITA No.962/Bang/2024 Page 13 of 18 . assessee u/s. 35(2AB) and the expenditure noted to be allowed but the basis of actual expenditure incurred. The assessee in this regard relied on the following decisions. 24. The CIT(A) did not accept the submissions of the assessee confirming the disallowance made by the AO by relying on the decision of Hon’ble Karnataka High Court in case of Tejas Networks Ltd. vs. DCIT (2015) 60 taxmann.com 309 (Karn.) The CIT(A) also did not accept the alternate submission of the assessee that differential amount of Rs. 14.71 crores should be allowed as regular scientific research expenditure u/s. 35(1)(i). 25. Aggrieved the assessee is in appeal before the Tribunal. 26. Before us, the Ld.AR reiterated the submissions made before the lower authorities. It is submitted by the Ld.AR that prior to 01.07.2016, form 3CL has no sanctity and only with effect from 01.07.2016 with the amendment to Rule 6(7A)(b) of the Income Tax Rules with the quantification of weighted deduction u/s. 35(2AB) has significance. In this regard, the Ld.AR relied on the decision of Coordinate Bench of the Tribunal in case of Mahindra Electric Mobility Ltd. vs. ACIT in ITA No. 641/Bang/2017 dated 14.09.2018. The Ld.DR relied on the order of the lower authorities.” 12. The facts of the case on hand are identical to the facts of the case discussed above. At the time of hearing, the ld. AR has not brought anything on record contrary to the finding of the ld. CIT-A. Similarly, nothing has been brought on record, suggesting that the finding given by the ITAT in the own case of the assessee discussed above has either been overruled or stayed by higher judicial forum. Likewise, no distinguishing feature has been pointed out in the case on hand vis-à-vis in the own case of the assessee cited above. Therefore, respectfully following the same, we do not find any reason to interfere in the finding of the authorities below. Hence, the ground of appeal of the assessee is hereby dismissed. 13. The next issue raised by the assessee vide ground No. 3 is that the learned CIT(A) erred in confirming the exclusion of certain incomes from the computation of deduction under section 10AA of the Act. ITA No.962/Bang/2024 Page 14 of 18 . 14. The assessee while computing the deduction/exemption under section 10AA of the Act included certain incomes declared under the head income from other sources as income eligible for deduction/exemption which are detailed as under: 1. Interest on GLES deposit with LIC Rs. 94,44,82,481/- 2. Interest from employee loan Rs. 4,72,67,524/- 3. Sale of scrap Rs. 7,88,96,214/- 4. Incentive from Airlines Rs. 1,74,127/- 5. Interest on tax refunds Rs. 46,22,39,222/- 6. Interest on loan to subsidiary Rs. 3,44,53,301/- 7. Interest on deposits with bank, EB and others Rs. 2232,22,55,512/- 8. Interest on Government Bond Rs. 81,362/- 9. Interest on Debenture Rs. 60,49,51,027/- 14.1 The above items of income under the head of other sources were excluded by the AO from the computation of eligible profit for deduction under section 10AA of the Act, on the reasoning that these incomes are not derived from software development export. 15. On appeal by the assessee, the learned CITA(A) allowed the deduction under section 10AA of the Act on interest on GLES deposit, interest from employee and sale of scrap by following the order of this Tribunal in the own case of the assessee for A.Y. 2014-15 and 2015-16 cited above. Likewise, the learned CIT(A) disallowed the benefit of exemption/ deduction claimed under section 10AA of the Act on the income being Incentive from Airline by following order of the Tribunal as ITA No.962/Bang/2024 Page 15 of 18 . stated above. The deduction on the remaining 5 types of interest income appearing at S. No. 5 to 9 in the above list were also disallowed by the learned CIT(A) by holding that the assessee has not claimed deduction under section 10AA of the Act on these items in the return of income. Therefore in pursuance to the provision section 80A(5) of the Act, no deduction under section 10AA of the Act, be allowed in absence of claim made in the return of income. Thus, the learned CIT(A) partly allowed the appeal of the assessee. 16. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. 17. The ld. AR before us filed a written submission having 18 pages and submitted that the assessee is eligible for exemption under section 10AA of the Act as the provision requires that the profit of the business of the undertaking should be considered for the purpose of calculating the exemption. As per the ld. AR, the similar exemption was allowed by the Revenue in the earlier year in the own case of the assessee. 18. On the other hand, the ld. DR vehemently supported the order of the lower authorities. 19. We have heard the rival contentions of both the parties and perused the materials available on record. In the present cases, the assessee has claimed exemption u/s 10AA of the Act with respect to certain interest income and incentive from the Airlines but the same was denied by the AO holding that the impugned incomes are not derived from the activity of export of software development. However, the ld. ITA No.962/Bang/2024 Page 16 of 18 . CIT(A) without getting into the dispute whether the impugned incomes were derived from the export of software development or not has held that the assessee has not claimed the exemption of all the items in dispute in the return of income as mandated under the provisions of sec. 80A(5) of the Act. Accordingly, the ld. CIT(A) denied the claim of the assessee. 19.1 Now the controversy arises whether the assessee has contravened the provisions of sec. 80A(5) of the Act in the given facts and circumstances. Admittedly, the exemption u/s 10AA of the Act was claimed by the assessee in the return of income which was also accepted by the AO during the assessment proceedings except with respect to few items of income discussed above. As such, the assessee has claimed exemption u/s 10AA of the Act in the return of income which was also allowed during the assessment proceedings by the AO barring certain items of income for which the exemption was not claimed in the income tax return filed. Therefore, the ld. CIT-A denied the benefit of exemption u/s 10AA of the Act for the reasons discussed above. Thus, in our considered opinion, it is not the case that the assessee has not claimed any exemption u/s 10AA of the Act in the return of income but omitted to claim exemption with respect to certain income elaborated above. For this reason, the assessee made a fresh claim for the limited items of income discussed above during the assessment proceedings. In this regard we find that the Hon’ble Delhi High Court in the identical facts and circumstances has decided the issue in favour of the assessee in the case of Pr. CIT V s. Oracle (OFSS) BPO Services Ltd., reported in 102 Taxmann.com 396, wherein it was held as under: ITA No.962/Bang/2024 Page 17 of 18 . 21. Sub-section 5 to Section 80A states that if assessee has failed to make its claim on return under 10AA or 10B or any other provisions of Chapter VIA, no deduction shall be allowed to him thereunder. This bars and prohibits the assessee from claiming the deduction under Sections 10A and 10B and Chapter VIA if no such claim was made in the return of income. It is also mandatory that the return of income for claiming such deduction should be filed within the time stipulated under Section 139 (1) of the Act, as was held in the case of Nath Bros. Exim International Ltd. (supra). In the said case the assessee in the return for the assessment year 2007-08 had not claimed any exemption under Section 10B of the Act. This deduction was claimed for the first time in the revised return. On being denied this claim, constitutional vires of Sub- section 5 to Section 80A, as inserted by Finance Act, 2009 and 4th proviso of Section 10B (1) of the Act, were challenged. The challenge was rejected by the Division Bench of this Court holding that the amendment made cannot be faulted and quashed on the ground that it was discriminatory, arbitrary, unreasonable and violative of Article 14, observing that it was within the legislative domain to prescribe the limitation period and also stipulate that the assessee to claim deduction must file returns during the limitation period, so as to enable the Department to take up these cases for scrutiny assessment. Plea of arbitrariness was rejected. The decision and ratio is distinguishable as the respondent-assessee had claimed deduction under Section 10A of the Act in the return of income filed within the limitation period. It was, therefore, not a new claim. Question of revision of deduction was not the issue and question raised and answered in Nath Brothers Exim International Ltd.'s case (supra). 22. Our attention was, however, drawn to the observations of the Division Bench that the objective behind the amendment was to defeat multiple claims of deduction and ensure better compliance. Certainly, the amended provisions ensure better compliance of the statutory provisions. Reference to the expression 'multiple claims of deduction' would be with reference to the stipulation that deduction should be claimed under a particular provision and it cannot be shifted and treated as deduction claimed under the other provision. Language of Sub-section 5 to Section 80 A does not state that the deduction once claimed under a particular section cannot be corrected and modified before the Assessing Officer. Indeed, the Assessing Officer can examine the claim for deduction and can make adjustment/disallowance. We would not read in the amended provision, a stipulation barring and restricting the assessee from revising the computation/claim for deduction made in accordance with Section 80A (5) of the Act. 19.2 In view of the above, we hold that the assessee cannot be denied the benefit of exemption for the revised claim made during the assessment proceedings by invoking the provisions u/s 80A(5) of the Act. ITA No.962/Bang/2024 Page 18 of 18 . 19.3 It is also pertinent to note that the similar claims were also made by the assessee in the assessment years 2017-18 and 2018-19, which were allowed by the ld. CIT(A) vide order dated 28-02-2023 and 13-03- 2023 and the Revenue has not challenged the same. Nevertheless, the ld. CIT(A) has not verified the claim made by the assessee u/s 10AA of the Act for the items of income discussed above on merit. Therefore, we are inclined to set aside the issue to the file of the ld. CIT(A) for fresh adjudication as per the provisions of law and in that light of the discussions stated above. Hence, the ground of appeal of the assessee is hereby partly allowed for statistical purposes. 20. In the result, the appeal of the assessee is hereby partly allowed for statistical purposes. Order pronounced in court on 13th day of November, 2024 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 13th November, 2024 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore "