DCIT, CHENNAI V. Laser Soft Infosystem Pvt. Ltd., CHENNAI

ITA 1346/CHNY/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 8481 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-05-2017
• Assessment Year: 2002-2003
• Appeal Filed On: 13-05-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A SUNDARARAJANIRS ADL CIT
• Keywords: Capital asset; Depreciation; Additional evidence; Revenue expenditure; Set aside
• Section: 143(3); 13; 147

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI , , BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ./I.T.A. NOS.1346, 1347, 1348/CHNY/2016 ! ' / ASSESSMENT YEARS : 2002-03, 2003-04 & 2006-07. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 4(1) CHENNAI. VS. M/S. LAZER SOFT INFOSYSTEM PVT. LTD, NO.100A, RADHA AVENUE, SRI LAKSHMI NAGAR, VALSARAVAKKAM, CHENNAI 600 087. [PAN AAACL 5896N] ( / APPELLANT) ( /RESPONDENT) # $ % / APPELLANT BY : SHRI. A. SUNDARARAJAN,IRS, ADL. CIT. &' # $ % /RESPONDENT BY : SHRI. S.P. CHIDAMBARAM, ADV. ( ) $ * /DATE OF HEARING : 02-01-2020 +,'! $ * /DATE OF PRONOUNCEMENT : 20-01-2020 / O R D E R PER INTURI RAMA RAO , ACCOUNTANT MEMBER: THESE ARE APPEALS FILED BY THE REVENUE DIRECTED AGAINST DIFFERENT ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS)-8, ITA NO.1346 TO 1348/16 :- 2 -: CHENNAI (CIT(A) FOR SHORT) DATED 29.01.2016 FOR T HE ASSESSMENT YEARS (AY) 2002-03, 2003-04 & 2006-07. 2. SINCE, THE IDENTICAL FACTS AND ISSUES ARE INVOLVED IN THESE APPEALS, WE PROCEED TO DISPOSE OF THE SAME VIDE THI S COMMON ORDER. 3. FIRST WE TAKE UP REVENUE APPEAL IN ITA NO.1346/CHNY /2016 FOR ASSESSMENT YEAR 2002-03 FOR ADJUDICATION. 4. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL: 1. THE ORDER OF THE CIT(A) IS CONTRARY TO THE LAW AND FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE ON THE CLAIM OF DEDUCTION U/S.1OA OF D2,25,36,715/- 2.1. THE CIT(A) ERRED IN NOT CONSIDERING THE FINDIN GS OF THE AO THAT THE NEW SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI) UNIT IS ONLY AN EXTENSION OF EXISTING BUSINESS WITH THE OLD MACHINERY AND ALSO WITH OLD EMPLOYEES AND HENCE DED UCTION UNDER SECTION 1OA IS NOT ALLOWABLE IN VIEW OF PROVI SIONS OF SUB-SECTION (2)(II) OF SECTION 10A. 2.2. HAVING REGARD TO THE DECISION OF HONBLE HIGH COURT OF KERALA IN THE CASE OF CHEMBRA PEAK ESTATES LTD. V.C IT [1972] 85 ITR 401, THE CIT(A) OUGHT TO HAVE UPHELD THE ACT ION OF THE AO IN DISALLOWING THE CLAIM ON DEDUCTION U/S.1O A AS THE ASSESSEE SETUP THE STPI UNIT BY SPLITTING UP AND RECONSTRUCTION OF THE EXISTING UNIT. 3. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.7,44,960/- MADE BY THE AD IN RESPECT OF TREATING THE EXPENDITURE ON PURCHASE OF SOFTWARE AS CAPITAL EXPE NDITURE. 3.1. THE CIT(A) ERRED IN NOT APPRECIATING THAT AS P ER OLD APPENDIX I AND NEW APPENDIX I OF IT RULES, COMPUTER SOFTWARE ALONG WITH COMPUTER HAS BEEN TREATED AS CA PITAL ITA NO.1346 TO 1348/16 :- 3 -: ASSET AND DEPRECIATION AT A HIGHER RATE OF 60 PER C ENT HAS BEEN ALLOWED CONSIDERING THE LIFE AND DURABILITY OF THE COMPUTER SOFTWARE. WHEN THE STATUTE SPECIFICALLY PR OVIDES FOR TREATING THE COMPUTER SOFTWARE AS A CAPITAL ASSET A ND ALLOWING DEPRECIATION THEREON, THE EXPENDITURE INCU RRED TOWARDS PURCHASE OF COMPUTER SOFTWARE CANNOT BE TRE ATED AS REVENUE EXPENDITURE. 4. THE CIT(A) ERRED IN ALLOWING 60% DEPRECIATION IN STEAD OF 25% DEPRECIATION ON THE DEVELOPMENT SOFTWARE AND TH EREBY IGNORING THE FACT THAT THE ASSESSEE AFTER DEVELOPIN G THE SOFTWARE IS SELLING THE SAME AS LICENSES AND THE LI CENSES ARE COVERED UNDER THE HEAD INTANGIBLE ASSETS. 4.1. IT IS SUBMITTED THAT THE CIT(A)S RELIED UPON DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR AY.2007-08 WHIC H HAS NOT BECOME FINAL AND AGAINST WHICH THE DEPARTMENTS APPEAL IS PENDING BEFORE THE HONBLE HIGH COURT OF MADRAS VIDE TCA NO.607 OF 2013. 5. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 5. THE BRIEF FACTS OF THE CASE ARE AS UNDER: THE RESPONDENT- ASSESSEE NAMELY M/S. LAZER SOFT IN FOSYSTEM PVT. LTD IS A COMPANY INCORPORATED UNDER THE PROVIS IONS OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINES S OF DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE. THE RETURN OF INC OME FOR THE AY 2002-03 WAS FILED ON 30.10.2002 DISCLOSING TOTAL IN COME OF D1,52,84,490/- AND THE SAME WAS REVISED WITH TOTA L INCOME OF D1,19,34,318/-. SUBSEQUENTLY, NOTICE U/S.148 OF THE ACT WAS ISSUED ON 18.03.2009. IN RESPONSE TO WHICH, THE RETURN O F INCOME WAS FILED ON 16.04.2009 DISCLOSING INCOME OF D1,19,34,318/-. AGAINST THE SAID ITA NO.1346 TO 1348/16 :- 4 -: RETURN OF INCOME, THE ASSESSMENT WAS COMPLETED BY T HE INCOME TAX OFFICER, COMPANY WARD II(1) CHENNAI (HEREINAFTER C ALLED AO) VIDE ORDER DATED 29.12.2009 PASSED U/S. 143(3) R/W S. 1 47 OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) AT TOTAL INCOME OF RS.5,03,05,487/-. WHILE DOING SO, THE AO DENIED EXEMPTIONS U/S.10A OF THE ACT ON THE GROUND THAT UNIT WAS FORMED BY RECONSTRUCTION OF ALREADY EXISTING UNIT AS OLD PLANT AND MACHINERY ALREADY USED IN THE BUSINESS IS 28% AND THE EMPLOYEES OLD UNIT WERE RE-DEPLOYED. THE ASSESSING OFFICER ALSO DISALLOWED THE CLAIM FOR PURCHASE OF SOFTWARE OF D18,62,398/- BY HOLDING IT TO BE CAPITAL AND ALLOWED DEPRECIATION @60% THEREON. THE ASSESSING OFFICER APPORTIONED THE COMMON EXPEN DITURE OF D2,00,00,000/- TOWARDS SOFTWARE DEVELOPMENT CAPITAL IZED IN THE BOOKS OF ACCOUNTS AND ALLOWED DEPRECIATION @25% THEREON, AS AGAINST CLAIM OF 60%. 6. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE LD. CIT(A), WHO VIDE IMPUGNED ORDER ALLOWED THE CLAIM FOR EXEM PTION OF PROFIT U/S.10A OF THE ACT BY HOLDING THAT THERE IS NO CO NTRAVENTION OF EXPLANATION 2 TO SUB SECTION 80I(2) OF THE ACT APPL ICABLE FOR THE PURPOSES OF EXPLANATION U/S.10A(2) OF THE ACT AS T HE VALUE OF OLD MACHINERY USED IS LESS THAN 20% OF THE TOTAL VALUE OF THE MACHINERY. AS REGARDS TO OTHER CONDITIONS ARE CONCERNED, THE L D. CIT(A) HELD THAT ITA NO.1346 TO 1348/16 :- 5 -: MERE TRANSFER OR RE-DEPLOYMENT OF MAN POWER OF EXI STING UNIT CANNOT BE CONSTRUED AS RECONSTRUCTION. AS REGARDS TO THE PURCHASE OF SOFTWARE, CONSIDERING THE DETAILS FILED BEFORE HIM , CAME TO CONCLUSION THAT EXPENDITURE WAS INCURRED IN THE FORM OF RENEW AL OF SUBSCRIPTION FOR LICENCE TO USE AND ACCORDINGLY HELD THAT IT IS REVENUE EXPENDITURE PLACING RELIANCE ON THE DECISION OF HONBLE JURISDI CTIONAL HIGH COURT IN THE CASES OF SOUTHERN ROADWAYS LTD, 304 ITR 84 AND KARUR VYSA BA NK (2015) 54 TAXMANN.COM 324 . AS REGARDS TO THE CAPITALIZATION OF COMMON EXPENDITURE OF D2,00,00,000/- TOWARDS SOFTW ARE DEVELOPMENT EXPENDITURE, THE LD. CIT(A) WHILE CONFI RMING THE ACTION OF THE ASSESSING OFFICER DIRECTED WITH TO ALLOW DEPREC IATION @60% INSTEAD OF 25 %. 7. BEING AGGRIEVED BY THE ABOVE DECISION OF THE CIT( A), THE REVENUE IS IN APPEAL BEFORE US CHALLENGING THE CO RRECTNESS OF THE ORDER OF THE CIT(A). THE GROUNDS OF APPEAL NO.1 & 5 ARE GENERAL IN NATURE THEREFORE, DOES NOT REQUIRE ANY ADJUDICATION . 8. GROUNDS OF APPEAL NO. 2 TO 2.2, CHALLENGES THE DEC ISION OF LD. CIT(A) IN ALLOWING CLAIM FOR DEDUCTION OF PROF IT U/S. 10A OF THE ACT. THE ASSESSING OFFICER DISALLOWED THE CLAIM PRIMARIL Y ON THE GROUND THAT USED MACHINERY EMPLOYED IN THE NEW BUSINESS IS 28 % AND TRANSFER OF EMPLOYEES OF THE EXISTING UNIT TO THE NEW UNIT HOLDING IT TO BE ITA NO.1346 TO 1348/16 :- 6 -: RECONSTRUCTION OF ALREADY EXISTING BUSINESS. ACCORD INGLY, HE DENIED EXEMPTION U/S.10A OF THE ACT. THE LD. CIT(A) CONSI DERING THE VALUE OF PLANT AND MACHINERY PURCHASED PRIOR TO THE SETTING UP OF NEW UNIT HAD CAME TO CONCLUSION THAT VALUE OF OLD MACHINERY IS LESS THAN 20% AND TRANSFER OF THE EMPLOYEES FROM THE EXISTING UNIT TO NEW UNIT CANNOT BE CONSTRUED AS RECONSTRUCTION OF EXISTING BUSINE SS. THIS FINDING OF THE LD. CIT(A) IS CONTRARY TO THE FINDING OF THE AS SESSING OFFICER THAT THE TOTAL VALUE OF OLD MACHINERY EMPLOYED BY THE AS SESSEE IS D60,48,386/- AND NEW MACHINERY IS ONLY D24,52,200/- . THIS VARIATION IN THE VALUE OF THE OLD MACHINERY AND NEW MACHINERY HAS BEARING ON THE ISSUE ON HAND. THE LD. CIT(A) HAD NOT ADDRESS ED THE REASON, GIVEN BY THE ASSESSING OFFICER NOR WAS IT THE CASE OF THE ASSESSEE COMPANY THAT THE TOTAL VALUE OF ASSET ADOPTED BY THE ASSESSING OFFICER IS INCORRECT. IN VIEW OF THE DISCREPANCIE S IN THE TOTAL VALUE OF FIXED ASSETS ADOPTED BY LD. CIT(A) AND ASSESSING OF FICER, WE ARE OF THE CONSIDERED OPINION THAT THE MATTER SHOULD BE REMI TTED BACK TO THE FILE OF LD. CIT(A) FOR FRESH ADJUDICATION ON THE MERITS OF THE APPEAL AFTER AFFORDING DUE OPPORTUNITY OF HEARING TO THE APPELLA NT IN ACCORDANCE WITH LAW. THUS, THE GROUNDS OF APPEAL NOS. 2 TO 2.2 FIL ED BY THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. GROUNDS OF APPEAL NO.3 & 3.1 CHALLENGES THE DECI SION OF LD. CIT(A) IN ALLOWING THE COST OF SOFTWARE AS REV ENUE EXPENDITURE ITA NO.1346 TO 1348/16 :- 7 -: CONSIDERING THE NATURE OF EXPENDITURE. FROM THE P ERUSAL OF THE ASSESSMENT ORDER, IT IS CLEAR THAT ASSESSEE COMPANY HAD FAILED TO FURNISH ANY DETAILS AS TO THE NATURE OF EXPENDITURE INCURRED BEFORE THE ASSESSING OFFICER. THE LD. CIT(A) CONSIDERING FRES H EVIDENCE FILED BEFORE HIM CAME TO CONCLUSION THAT EXPENDITURE WAS INCURRED WHOLLY TOWARDS RENEWAL OF SUBSCRIPTION FOR SOFTWARE. ACCOR DINGLY, ALLOWED THE SAME AS REVENUE EXPENDITURE PLACING RELIANCE ON TH E DECISIONS OF JURISDICTIONAL HIGH COURT IN THE CASES OF SOUTHERN ROADWAYS LTD (SUPRA) AND KARUR VYSA BANK (SUPRA). FROM THE PERUSAL OF PARA 4.3 OF THE ORDER OF LD. CIT(A), IT IS CLEAR THAT LD. CIT( A) HAD CONSIDERED ADDITIONAL EVIDENCE IN VIOLATION OF PROVISIONS OF R ULE 46A OF INCOME TAX ACT, 1962. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THIS ISSUE SHOULD BE REMITTED BACK TO THE FILE OF THE L D. CIT(A) FOR DE NOVO ASSESSMENT IN ACCORDANCE WITH LAW. ACCORDINGLY, TH E GROUNDS OF APPEAL NOS.3 & 3.1 OF THE REVENUE ARE PARTLY ALLO WED FOR STATISTICAL PURPOSE. 10. GROUNDS OF APPEAL NO.4 & 4.1, CHALLENGES THE DECIS ION OF THE LD. CIT(A) IN ALLOWING DEPRECIATION @60% AS A GAINST 25% ALLOWED BY THE ASSESSING OFFICER, AS THE ALLOCATED COMMON E XPENDITURE OF D2,00,00,000/-. THE ASSESSING OFFICER DISALLOWED A SUM OF D2,00,00,000/- BY ALLOCATING COMMON EXPENDITURE TOW ARDS ITA NO.1346 TO 1348/16 :- 8 -: DEVELOPMENT OF SOFTWARE. ADMITTEDLY, ASSESSEE DERI VES INCOME IN THE FORM OF LICENCE FEES FOR SOFTWARE SO DEVELOPED. BU T FROM THE MATERIAL ON RECORD, IT IS NOT CLEAR WHETHER IT IS APPLICATIO N SOFTWARE EMBEDDED RECORDED ON CD OR DISC, TAPE, PERFORATED MEDIA OR O THER INFORMATION STORAGE DEVICES OR IN THE NATURE OF AN INTANGIBLE A SSET. OTHER ISSUES ARE ALSO REMANDED BACK TO THE FILE OF THE LD. CIT(A ), WE REMIT THIS ISSUE ALSO BACK TO THE FILE OF THE LD. CIT(A) WITH A DIRECTION THAT ISSUE SHALL BE ADJUDICATED AFRESH KEEPING IN VIEW OF THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. COMPUTER AGE MANAGEMENT SERVICES P. LTD IN T.C.A NOS.409, 410 A ND 412 OF 2019 & CMP NOS. 13651 & 13674 OF 2019, DATED 08.07.2019 , WHEREIN IT WAS HELD AS FOLLOWS:- 8. THE QUESTION WOULD BE AS TO WHETHER THE SOFTWA RE APPLICATION, WHICH WAS ACQUIRED BY THE ASSESSEE WOU LD FALL UNDER ENTRY 5 OF PART A OF NEW APPENDIX I, WHICH STATES T HAT COMPUTERS INCLUDING COMPUTER SOFTWARE ARE ENTITLED TO DEPRECIATION AT 60%. NOTE 7 OF THE APPENDIX DEFINES THE EXPRESSION -COMPUTER SOFTWARE- TO MEAN ANY PROGRAMS RECORDED ON CD OR DISC, TAPE, PERFORATED M EDIA OR OTHER INFORMATION STORAGE DEVICES. 9. THE CASE OF THE REVENUE IS THAT SOFTWARE ARE LIC ENCES AND THAT THEY ARE INTANGIBLE ASSETS AND WOULD FALL UNDE R PART B OF NEW APPENDIX I, WHICH DEALS WITH KNOWHOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSES, FRANCISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. 10. WE FIND THAT PART B OF NEW APPENDIX I IS A GENE RAL ENTRY WHEREAS ENTRY 5 OF PART A OF NEW APPENDIX I IS A SP ECIFIC ENTRY READ WITH NOTE 7. IN THE INSTANT CASE, THE TRIBUNAL , IN OUR ITA NO.1346 TO 1348/16 :- 9 -: CONSIDERED VIEW, RIGHTLY HELD THAT THE ASSESSEE IS ELIGIBLE TO CLAIM DEPRECIATION AT 60%. 11. IN THE DECISION RENDERED BY A DIVISION BENCH O F THIS COURT IN THE CASE OF CIT VS. M/S.CACTUS IMAGING INDIA PRIVAT E LIMITED [REPORTED IN (2018) 406 ITR 406], TO WHICH, ONE OF US (TSSJ) WAS A PARTY, AN IDENTICAL QUESTION CAME UP FOR CONS IDERATION WHEREIN THE OBJECT WAS PRINTER (COMPUTER PRINTER). THIS COURT, AFTER TAKING INTO CONSIDERATION AS TO HOW THE ENTRI ES WOULD BE INTERPRETED, REFERRED TO THE DECISION IN THE CASE O F BIMETAL BEARINGS LTD. VS. STATE OF TAMIL NADU [REPORTED IN (1991) 80 STC 167] AND HELD AS HEREUNDER : 9 . THE HONBLE DIVISION BENCH TOOK NOTE OF THE DECISION OF THE HONBLE SUPREME COURT POINTING OUT THAT THE ENTRY TO BE INTERPRETED IS IN A TAXING STATUTE; FULL EFFECT SHOULD BE GIVEN TO ALL WORDS U SED THEREIN AND IF A PARTICULAR ARTICLE WOULD FALL WITH IN A DESCRIPTION, BY THE FORCE OF WORDS USED, IT IS IMPERMISSIBLE TO IGNORE THE DESCRIPTION, AND DENOTE THE ARTICLE UNDER ANOTHER ENTRY, BY A PROCESS OF REASONING. 10. IT WAS FURTHER POINTED OUT THAT THE RULE OF CONSTRUCTION BY REFERENCE TO CONTEMPORANEA EXPOSITIO IS A WELL~ESTABLISHED RULE FOR INTERPRETING A STATUTE BY REFERENCE TO THE EXPOSITI ON IT HAS RECEIVED FROM CONTEMPORARY AUTHORITY, THOUGH IT MUST GIVE WAY WHERE THE LANGUAGE OF THE STATUTE IS PLAIN AND UNAMBIGUOUS. 11. BY APPLYING THE RULE OF INTERPRETATION, WE FIND THAT THE RELEVANT ENTRY UNDER OLD APPENDIX I CLAUSE III (5) STATES COMPUTERS INCLUDING COMPUTER SOFTWARE AND THE NOTES UNDER THE APPENDIX DEFINES COMPUTER SOFTWARE IN CLAUSE 7 TO MEAN ANY COMPUTER PROGRAM RECORDED ON DISC, TAPE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVICE. NOTEWORTHY TO MENTION THAT THE NOTES CONTAINED IN THE APPENDIX, THE TERM -COMPUTER- HAS NOT BEEN DEFINED. THEREFORE, AS POINTED OUT BY THE DIVISION BENCH IN BIMETAL BEARINGS LTD. (SUPRA), IF A PARTICULAR ARTI CLE ITA NO.1346 TO 1348/16 :- 10 -: WOULD FALL WITHIN THE DESCRIPTION BY THE FORCE OF WORDS USED, IT IS IMPERMISSIBLE TO IGNORE THE WORD DESCRIPTION. THUS, GOING BY THE USAGE OF THE EQUIPMENT PURCHASED BY THE PETITIONER, WE HAVE TO TAKE A DECISION. 12. AS HELD IN THE ABOVE DECISION, IF A PARTICULAR ARTICLE WOULD FALL WITHIN THE DESCRIPTION BY THE FORCE OF THE WOR DS USED, IT IS IMPERMISSIBLE TO IGNORE THE WORD -DESCRIPTION&# 45; AND GOING BY THE USAGE OF THE EQUIPMENT PURCHASED B Y THE ASSESSEE, A DECISION HAS TO BE ARRIVED AT. WE FIND THAT THERE IS NO ERROR IN THE DECISION ARRIVED AT BY THE TRIBU NAL BY TAKING NOTE OF THE SPECIFIC ENTRY IN CONTRA DISTINCTION WI TH THE GENERAL ENTRY. THEREFORE, THE FIRST SUBSTANTIAL QUE STION OF LAW HAS TO BE NECESSARILY ANSWERED AGAINST THE REVENUE . THUS, THE GROUNDS OF APPEAL NOS.4 & 4.1 OF THE RE VENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.1346/CHNY/2016 FOR ASSESSMENT YEAR 2002-03 IS PA RTLY ALLOWED FOR STATISTICAL PURPOSE. 12. NOW, WE TAKE UP APPEAL OF THE REVENUE IN ITA NO.1347/CHNY/2016 FOR ASSESSMENT YEAR 2003-2004 FO R ADJUDICATION. 13. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL: 1. THE ORDER OF THE CIT(A) IS CONTRARY TO THE LAW AND FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.1346 TO 1348/16 :- 11 -: 2. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE ON THE CLAIM OF DEDUCTION U/S.1OA OF RS.1,95,41,396/-. 2.1. THE CIT(A) ERRED IN NOT CONSIDERING THE FINDIN GS OF THE AO THAT THE NEW SOFTWARE TECHNOLOGY PARKS OF INDIA (ST PI) UNIT IS ONLY AN EXTENSION OF EXISTING BUSINESS WITH THE OLD MACHINERY AND ALSO WITH OLD EMPLOYEES AND HENCE DEDUCTION UND ER SECTION 1OA IS NOT ALLOWABLE IN VIEW OF PROVISIONS OF SUB- SECTION (2)(II) OF SECTION 10A. 2.2. HAVING REGARD TO THE DECISION OF HONBLE HIGH COURT OF KERALA IN THE CASE OF CHEMBRA PEAK ESTATES LTD. V.C IT [1972] 85 ITR 401, THE CIT(A) OUGHT TO HAVE UPHELD THE ACT ION OF THE AO IN DISALLOWING THE CLAIM ON DEDUCTION U/S.1OA AS THE ASSESSEE SETUP THE STPI UNIT BY SPLITTING UP AND RE CONSTRUCTION OF THE EXISTING UNIT. 3. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.3,90,421/- MADE BY THE AO IN RESPECT OF TREATING THE EXPENDITURE ON PURCHASE OF SOFTWARE AS CAPITAL EXPE NDITURE. 3.1. THE CIT(A) ERRED IN NOT APPRECIATING THAT AS P ER OLD APPENDIX I AND NEW APPENDIX I OF IT RULES, COMPUTER SOFTWARE ALONG WITH COMPUTER HAS BEEN TREATED AS CA PITAL ASSET AND DEPRECIATION AT A HIGHER RATE OF 60 PER C ENT HAS BEEN ALLOWED CONSIDERING THE LIFE AND DURABILITY OF THE COMPUTER SOFTWARE. WHEN THE STATUTE SPECIFICALLY PR OVIDES FOR TREATING THE COMPUTER SOFTWARE AS A CAPITAL ASSET A ND ALLOWING DEPRECIATION THEREON, THE EXPENDITURE INCURRED TOWA RDS PURCHASE OF COMPUTER SOFTWARE CANNOT BE TREATED AS REVENUE EXPENDITURE. 4. THE CIT(A) ERRED IN ALLOWING 60% DEPRECIATION IN STEAD OF 25% ON THE DEVELOPMENT SOFTWARE AND THEREBY IGNORIN G THE FACT THAT THE ASSESSEE AFTER DEVELOPING THE SOFTWAR E IS SELLING THE SAME AS LICENSES AND THE LICENSES ARE COVERED U NDER THE HEAD INTANGIBLE ASSETS. 4.1. IT IS SUBMITTED THAT THE CIT(A)S RELIED UPON DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR AY.2007-08 WHIC H HAS NOT BECOME FINAL AND AGAINST WHICH THE DEPARTMENTS APP EAL IS PENDING BEFORE THE HONBLE HIGH COURT OF MADRAS VID E TCA NO.607 OF 2013. 5. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE ON PROVISION FOR TRAVEL EXPENSES OF RS.31,00,492/-. ITA NO.1346 TO 1348/16 :- 12 -: 5.1. THE CIT(A) ERRED IN NOT APPRECIATING THAT EXPE NDITURE WHICH IS DEDUCTIBLE FOR INCOME-TAX PURPOSES IS TOWA RDS A LIABILITY ACTUALLY EXISTING AT THE TIME BUT SETTING APART MONEY WHICH MIGHT BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE AND HENCE PROVISION FOR TR AVEL EXPENSES IS NOT ALLOWABLE AS REVENUE EXPENDITURE. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER REST ORED. 14. THE BRIEF FACTS OF THE CASE ARE AS UNDER:- THE RETURN OF INCOME FOR THE AY 2003-04 WAS FILED ON 01.12.2003 DISCLOSING TOTAL INCOME OF D2,43,78,38 0/-. AGAINST THE SAID RETURN OF INCOME, THE ASSESSMENT WAS COMPLETED BY THE ASSESSING OFFICER VIDE ORDER DATED 30.03.2006 PAS SED U/S. 143(3) OF THE ACT) AT TOTAL INCOME OF RS.4,51,46,920/-. THE ASSESSMENT WAS RECTIFIED ON 09.08.2006 AT TOTAL INCOME OF D3,22,53 ,810/-. SUBSEQUENTLY, THE ASSESSMENT WAS REOPENED BY ISSUE OF NOTICE U/S.148 OF THE ACT ON 25.03.2008 FOR THE PURPOSE OF WITHDRA WING EXCESS DEDUCTION ALLOWED U/S.10A OF THE ACT AND ASSESSMENT WAS COMPLETED VIDE ORDER DATED 03.12.2010 PASSED U/S.143(3) R.W.S 147 OF THE ACT AT TOTAL INCOME OF D7,06,91,340/-. 15. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE LD . CIT(A), WHO VIDE IMPUGNED ORDER ALLOWED THE CLAIM OF THE A SSESSEE FOR ITA NO.1346 TO 1348/16 :- 13 -: DEDUCTION U/S.10A OF THE ACT FOLLOWING HIS ORDER FO R ASSESSMENT YEAR 2002-2003. AS REGARDS TO THE CAPITALIZATION OF ALL OWABILITY OF SOFTWARE EXPENSES AS REVENUE EXPENDITURE, THE LD. CIT(A) FOL LOWING HIS EARLIER ORDER ALLOWED DEPRECIATION @60% AND SIMILARLY CAPI TALIZATION OF COMMON EXPENDITURE ALLOWED DEPRECIATION @60%. AS REGARDS TO THE DISALLOWANCE OF TRAVEL EXPENSES, THE LD. CIT(A) SUS TAINED THE ADDITION TO THE EXTENT OF D3,99,508/-. 16. BEING AGGRIEVED BY THE ABOVE DECISION OF THE CIT( A), THE REVENUE IS IN APPEAL BEFORE US CHALLENGING THE C ORRECTNESS OF THE ORDER OF THE CIT(A). 17. THE GROUNDS OF APPEAL NO.1 & 6 ARE GENERAL IN NATU RE THEREFORE, DOES NOT REQUIRE ANY ADJUDICATION. 18. GROUNDS OF APPEAL NO.2 TO 2.2, CHALLENGES THE DEC ISION OF LD. CIT(A) IN ALLOWING CLAIM FOR DEDUCTION OF PROF IT U/S. 10A OF THE ACT. 19. IDENTICAL ISSUE WAS RAISED BY THE REVENUE FOR THE ASSESSMENT YEAR 2002-2003 IN ITA NO.1346/CHNY/2016, WHEREIN, WE REMITTED THE ISSUE BACK TO THE FILE OF THE LD. CIT( A) FOR DE NOVO ADJUDICATION FOR THE REASONS STATED THEREIN. ON PA RITY OF REASONING, THE ISSUE IN PRESENT GROUNDS OF APPEAL ARE ALSO REM ITTED BACK TO THE FILE OF THE CIT(A) FOR FRESH ADJUDICATION. THUS, THE GROUNDS OF APPEAL ITA NO.1346 TO 1348/16 :- 14 -: NO.2 TO 2.2 OF THE REVENUE FOR ASSESSMENT YEAR 2003 -2004 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. 20. GROUNDS OF APPEAL NO.3 & 3.1, CHALLENGES THE DECISI ON OF LD. CIT(A) IN ALLOWING THE COST OF SOFTWARE AS REVENUE EXPENDITURE CONSIDERING THE NATURE OF EXPENDITURE. 21. IDENTICAL ISSUE WAS RAISED BY THE REVENUE FOR THE ASSESSMENT YEAR 2002-2003 IN ITA NO.1346/CHNY/2016, WHEREIN, WE REMITTED THE ISSUE BACK TO THE FILE OF THE LD. CIT( A) FOR DE NOVO ADJUDICATION FOR THE REASONS STATED THEREIN. ON PA RITY OF REASONING, THE ISSUE IN PRESENT GROUNDS OF APPEAL ARE ALSO REM ITTED BACK TO THE FILE OF THE CIT(A) FOR FRESH ADJUDICATION. THUS, THE GROUNDS OF APPEAL NO.3 & 3.1 OF THE REVENUE FOR ASSESSMENT YEAR 2003 -2004 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. 22. GROUNDS OF APPEAL NO.4 & 4.1, CHALLENGES THE DECIS ION OF THE LD. CIT(A) IN ALLOWING DEPRECIATION @60% AS A GAINST 25% ALLOWED BY THE ASSESSING OFFICER. 23. IDENTICAL ISSUE WAS RAISED BY THE REVENUE FOR THE ASSESSMENT YEAR 2002-2003 IN ITA NO.1346/CHNY/2016, WHEREIN, WE REMITTED THE ISSUE BACK TO THE FILE OF THE LD. CIT( A) FOR DE NOVO ADJUDICATION FOR THE REASONS STATED THEREIN. ON PA RITY OF REASONING, ITA NO.1346 TO 1348/16 :- 15 -: THE ISSUE IN PRESENT GROUNDS OF APPEAL ARE ALSO REM ITTED BACK TO THE FILE OF THE CIT(A) FOR FRESH ADJUDICATION. THUS, THE GROUNDS OF APPEAL NO.4 & 4.1 OF THE REVENUE FOR ASSESSMENT YEAR 2003- 2004 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. 24. GROUNDS OF APPEAL NO.5 & 5.1, CHALLENGES THE DECISI ON OF LD. CIT(A) IN ALLOWING PROVISION FOR TRAVEL EXPENSES. 25. THE ASSESSING OFFICER DISALLOWED PROVISION FOR TRA VEL EXPENSES ON THE GROUND THAT IT IS MERE PROVISION. EVEN BEFORE THE LD. CIT(A) NO DETAILS WERE FILED ESTABLISHING THAT EXP ENDITURE WAS ACTUALLY INCURRED AND PAYMENT WAS NOT MADE. FROM THE PERUSA L OF THE ORDER OF THE LD. CIT(A), IT IS CLEAR THAT LD. CIT(A) ALLO WED THE CLAIM PARTLY IN MERE FACT THAT THIS PROVISION WAS REVERSED IN THE S UBSEQUENT YEAR. IN OUR CONSIDERED OPINION THIS PROVISIONAL DEDUCTION CANNOT BE ALLOWED AS DEDUCTION. THE PROVISIONAL DEDUCTION CAN BE ALL OWED AS DEDUCTION PROVIDED LIABILITY IS CRYSTALLIZED. THUS, THE RE ASONING OF THE LD. CIT(A) IS NOT ACCEPTABLE. ACCORDINGLY, THIS ISSUE IS REM ITTED BACK TO THE FILE OF THE LD. CIT(A) FOR DE NOVO ADJUDICATION. THUS, THE GROUNDS OF APPEAL NOS. 5 & 5.1 FILED BY THE REVENUE ARE PARTLY ALL OWED FOR STATISTICAL PURPOSES. ITA NO.1346 TO 1348/16 :- 16 -: 26. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.1347/CHNY/2016 FOR ASSESSMENT YEAR 2003-04 IS PA RTLY ALLOWED FOR STATISTICAL PURPOSE. 27. NOW, WE TAKE UP APPEAL OF THE REVENUE IN ITA NO.1348/CHNY/2016 FOR ASSESSMENT YEAR 2006-2007 FO R ADJUDICATION. 28. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF AP PEAL: 1. THE ORDER OF THE CIT(A) IS CONTRARY TO THE LAW AND FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.6,15,252/- MADE BY THE AO IN RESPECT OF TREATING THE EXPENDITURE ON PURCHASE OF SOFTWARE AS CAPITAL EXPE NDITURE. 2.1. THE CIT(A) ERRED IN NOT APPRECIATING THAT AS P ER OLD APPENDIX I AND NEW APPENDIX I OF IT RULES, COMPUTER SOFTWARE ALONG WITH COMPUTER HAS BEEN TREATED AS CA PITAL ASSET AND DEPRECIATION AT A HIGHER RATE OF 60 PER C ENT HAS BEEN ALLOWED CONSIDERING THE LIFE AND DURABILITY OF THE COMPUTER SOFTWARE. WHEN THE STATUTE SPECIFICALLY PR OVIDES FOR TREATING THE COMPUTER SOFTWARE AS A CAPITAL ASSET A ND ALLOWING DEPRECIATION THEREON, THE EXPENDITURE INCURRED TOWA RDS PURCHASE OF COMPUTER SOFTWARE CANNOT BE TREATED AS REVENUE EXPENDITURE. 3. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE ON THE CLAIM OF DEDUCTION U/S.35 OF RS.4,29,84,248/-. 3.1. THE CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT DEDUCTION UNDER SECTION 35 IS NOT INTENDED FOR AN A SSESSEE, WHO DOES NOT DEVELOP THE IN-HOUSE SCIENTIFIC RESEAR CH ACTIVITIES. 3.2 THE CIT(A) ERRED IN NOT APPRECIATING THE FACT T HAT DURING SURVEY, THERE WAS NO EVIDENCE FOUND SUPPORTING THE CLAIM OF STATED SCIENTIFIC RESEARCH ACTIVITIES. DURING THE S CRUTINY PROCEEDINGS ALSO THE ASSESSEE COMPANY HAS NOT GIVEN ANY ITA NO.1346 TO 1348/16 :- 17 -: DETAILS AND HENCE THE IMPUGNED EXPENDITURE HAD NOTH ING TO DO WITH SCIENTIFIC RESEARCH. THUS PROVISIONS OF SEC TION 35(1)(I) HAS NO APPLICATION TO THE PRESENT ASSESSEES CASE. 3.3. THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE COMPANY HAS UNDERTAKEN RESEARCH ACTIVITIES MERELY BASED ON DSIR APPROVAL DATED 23.03.2003 AND IN THE ABSENCE OF ANY SUPPORTING DOCUMENTS. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER REST ORED. 29. THE BRIEF FACTS OF THE CASE ARE AS UNDER:- THE RETURN OF INCOME FOR THE AY 2006-07 WAS FILED ON 28.11.2006 DISCLOSING TOTAL INCOME OF D1,38,13,06 0/-. AGAINST THE SAID RETURN OF INCOME, THE ASSESSMENT WAS COMPLETED BY THE ASSESSING OFFICER VIDE ORDER DATED 30.12.2008 PAS SED U/S. 143(3) OF THE ACT) AT TOTAL INCOME OF RS.2,97,86,641/-. WHIL E DOING SO, THE ASSESSING OFFICER DISALLOWED DEDUCTION U/S.35 OF TH E ACT AT D4,29,84,248/- ON THE GROUND THAT THERE WAS NO EVID ENCE THAT ASSESSEE HAD UNDERTAKEN RESEARCH ACTIVITIES. 30. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE LD . CIT(A), WHO VIDE IMPUGNED ORDER ALLOWED THE CLAIM OF THE A SSESSEE BY OBSERVING AS UNDER:- 4.11 I HAVE CONSIDERED THE OBSERVATIONS OF THE AS SESSING OFFICER AND THE SUBMISSIONS MADE BY THE APPELLANT. AS THE A PPELLANT RIGHTLY POINTED OUT THE ASSESSMENT WAS COMPLETED ON THE DAY ON WHICH THE MANAGING DIRECTOR SOUGHT TIME TO FILE THE DETAILS CALLED ITA NO.1346 TO 1348/16 :- 18 -: FOR BY THE ASSESSING OFFICER. ADMITTEDLY, THE ASSES SMENT WAS COMPLETED ON THE SAME DAY AS IT WAS GETTING BARRED BY LIMITATION THE VERY NEXT DAY I.E.,31. 12.2008. THE APPELLANT F URNISHED COPY OF THE DSIR APPROVAL DATED 23.03.2003 WHEREIN THE I N-HOUSE R&D UNIT OF THE APPELLANT HAS BEEN RECOGNIZED FOR THE P ERIOD UP TO 31.03.2006. IT IS ALSO SEEN THAT THERE IS FORCE IN THE CONTENTION OF THE APPELLANT THAT THE EXPENSES WERE INCURRED TOWAR DS RESEARCH ACTIVITIES AND WERE IN THE NATURE OF SALARY, STAFF WELFARE EXPENSES AND OTHER OVERHEAD EXPENSES OF THE RESPECTIVE PROJE CTS. THE APPELLANT ALSO FURNISHED THE BREAKUP OF PRODUCT DEV ELOPMENT COST AMOUNTING TO RS. 4,29,84,249/- WHICH SHOWS THAT THE COST WAS ESSENTIALLY INCURRED TOWARDS SALARY AND OTHER OVERH EADS. FURTHER THE APPELLANT RELIED ON THE CASE OF TALISMA CORPORA TION PVT.LTD (2013 ) 40 TAXMANN.COM 400 (KARNATAKA), IN SUPPORT OF ITS CONTENTIONS, WHEREIN IT WAS OBSERVED AS FOLLOWS THE EXPENDITURE IN RESPECT OF THE SCIENTIFIC RESEAR CH, EVEN F IT IS CAPITAL IN NATURE AS IT WAS INCURRED I N RELATION TO THE BUSINESS CARRIED ON BY THE ASSESSEE UNDER SE CTION 35(1) (IV) OF THE ACT, THE SAID EXPENDITURE IS TO B E DEDUCTED. IN VIEW OF THE ABOVE I HAVE NO HESITATION IN HOLDIN G THAT THE APPELLANT IS ELIGIBLE FOR THE DEDUCTION U/S. 35 OF THE INCOME TAX ACT. THE APPELLANT SUCCEEDS ON THIS GROUND. 31. BEING AGGRIEVED BY THE ABOVE DECISION OF THE CIT( A), THE REVENUE IS IN APPEAL BEFORE US CHALLENGING THE C ORRECTNESS OF THE ORDER OF THE CIT(A). 32. T HE GROUNDS OF APPEAL NO.1 & 4 ARE GENERAL IN NATURE THEREFORE, DOES NOT REQUIRE ANY ADJUDICATION. 33. GROUNDS OF APPEAL NO.2 & 2.1, CHALLENGES THE DECISI ON OF LD. CIT(A) IN ALLOWING THE COST OF SOFTWARE AS REVENUE EXPENDITURE CONSIDERING THE NATURE OF EXPENDITURE. ITA NO.1346 TO 1348/16 :- 19 -: 34. IDENTICAL ISSUE WAS RAISED BY THE REVENUE FOR THE ASSESSMENT YEAR 2002-2003 IN ITA NO.1346/CHNY/2016, WHEREIN, WE REMITTED THE ISSUE BACK TO THE FILE OF THE LD. CIT( A) FOR DE NOVO ADJUDICATION FOR THE REASONS STATED THEREIN. ON PA RITY OF REASONING, THE ISSUE IN PRESENT GROUNDS OF APPEAL ARE ALSO REM ITTED BACK TO THE FILE OF THE CIT(A) FOR FRESH ADJUDICATION. THUS, THE GROUNDS OF APPEAL NO.2 & 2.1 OF THE REVENUE FOR ASSESSMENT YEAR 2006- 2007 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. 35. GROUNDS OF APPEAL NO.3 TO 3.3, CHALLENGES THE DECIS ION OF LD. CIT(A) IN ALLOWING THE CLAIM OF DEDUCTION U/S.35 OF THE ACT. 36. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD. FROM THE PERUSAL OF THE ORDER OF THE LD. C IT(A), IT IS CLEAR THAT LD. CIT(A) ALLOWED THE CLAIM CONSIDERING THE APPROV AL GRANTED BY DSIR. HOWEVER, LD. CIT(A) HAD NOT ADDRESSED REASO NS OF THE ASSESSING OFFICER THAT NO RESEARCH ACTIVITIES WAS C ARRIED ON. FURTHER VERY FACT THAT EXPENDITURE WAS INCURRED IN THE FORM OF SALARY AND OVERHEADS ONLY GOES TO SUGGEST THAT THERE IS NO RES EARCH ACTIVITIES CARRIED OUT. IN THE ABSENCE OF ANY CAPITAL ASSETS EMPLOYED FOR THE PURPOSE OF RESEARCH ACTIVITIES, THIS ISSUE REQUIRES TO BE ADJUDICATED WITH REFERENCE TO THE EVIDENCE OF RESEARCH ACTIVITI ES IF ANY CARRIED ON BY THE ASSESSEE. THUS, IN OUR CONSIDERED OPINION, THE LD. CIT(A) HAS ITA NO.1346 TO 1348/16 :- 20 -: CLEARLY FELL IN ERROR IN ALLOWING THE CLAIM OF THE ASSESSEE. THUS, THE GROUNDS OF APPEAL NOS. 3 TO 3.3 FILED BY THE REVE NUE STANDS ALLOWED. 37. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.1348/CHNY/2016 FOR ASSESSMENT YEAR 2006-07 IS PA RTLY ALLOWED FOR STATISTICAL PURPOSE. 38. TO SUMMARIZE THE RESULTS, THE APPEALS FILED BY THE REVENUE IN ITA NOS.1346, 1347 & 1348/CHNY/2016 FOR ASSESSME NT YEARS 2002-03, 2003-04 AND 2006-2007 ARE PARTLY ALLOWED F OR STATISTICAL PURPOSE. ORDER PRONOUNCED ON 20TH DAY OF JANUARY, 2020, A T CHENNAI. SD/- SD/- ( ) (GEORGE MATHAN) /JUDICIAL MEMBER ( ) (INTURI RAMA RAO) /ACCOUNTANT MEMBER -) / CHENNAI . / DATED: 20TH JANUARY, 2020. KV /0 $0& *12032'* / COPY TO: 0 1 . # / APPELLANT 3. 0 ( 4*056 / CIT(A) 5. 278 0& * 9 / DR 2. &' # / RESPONDENT 4. 0 ( 4* / CIT 6. 8:0;) / GF