Appeal details
Counselvise Citation
[2020] 110 COUNSELVISE.COM (IT) 6060 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
9 month(s) 17 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-09-2020
Appeal Filed By
Department
Order Result
Allowed
Bench Allotted
B
Next Hearing Date
14-09-2020
Assessment Year
2008-2009
Appeal Filed On
12-12-2019
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.2516/BANG/2019 ASSESSMENT YEAR : 2008 09 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(2), BENGALURU VS. M/S SOBHA RENAISSANCE INFORMATION TECHNOLOGY PVT. LTD., SRIT HOUSE, 113/1B, IPTL MAIN ROAD, KUNDALAHALLI BENGALURU-560 037. PAN AAECS 6273 N APPELLANT RESPONDENT APPELLANT BY : SHRI MUZAFFAR HUSSAIN, CIT (DR) RESPONDENT BY : SMT. ISHITA BHAUMIK, SMT. RAMYA S NAYAK, C.A DATE OF HEARING : 14-09-2020 DATE OF PRONOUNCEMENT : 29-09-2020 ORDER PRESENT APPEAL HAS BEEN FILED BY REVENUE AGAINST OR DER DATED 30/09/2019 PASSED BY LD.CIT(A)-6, BANGALORE F OR ASSESSMENT YEAR 2008-09 ON FOLLOWING GROUNDS OF APP EAL: PAGE 2 OF 8 IT(TP)A NO.2516/BANG/2019 1 THE ORDER OF THE CIT (APPEALS) IS OPPOSED TO LAW AN D THE FACTS AND CIRCUMSTANCES OF THE CASE. 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETH ER THE ID. CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE MADE BY THE AO OF THE EXPENDITURE INCURRED ON THE SOFTWARE DEVELOPMENT PROCESS CLAIME D U/S. 35(1)(IV) OF THE IT ACT? 3 FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGE D AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT(A), IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND TH AT OF THE ASSESSING OFFICER BE RESTORED. 4 THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, TO A MEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. ASSESSEE IS A PRIVATE LIMITED COMPANY HAVING UND ERTAKING REGISTERED UNDER SOFTWARE TECHNOLOGY PARKS IN INDIA . DURING THE YEAR UNDER CONSIDERATION, ASSESSEE WAS ENGAGED IN R ENDERING SOFTWARE DEVELOPMENT AND RELATED SERVICES. ASSESSEE FILED ITS RETURN OF INCOME ON 30/09/2008 DECLARING TOTAL LOSS OF RS.3,57,81,807/-. ASSESSEES CASE WAS SELECTED FOR SCRUTINY AND NOTICES UNDER SECTION 143(2) OF THE ACT AND 143(1) OF THE ACT WAS ISSUED IN RESPONSE TO WHICH REPRESENTATIVE OF ASSES SEE APPEARED BEFORE LD.AO AND FILED REQUISITE DETAILS. 3. LD. AO NOTED THAT ASSESSEE INCURRED EXPENSES OF RS.26,79,33,501/- RELATING TO PRODUCT DEVELOPMENT W HICH WAS CAPITALISED ALONG WITH OPENING WORK IN PROGRESS AMO UNTING TO RS.99,523/-, TOTALLING TO RS.27,78,52,249/-. LD.AO ALSO NOTED PAGE 3 OF 8 IT(TP)A NO.2516/BANG/2019 THAT, EVEN THOUGH SAID DEVELOPMENT EXPENDITURE WAS CAPITALISED IN BOOKS, THE SAME WAS CLAIMED AS ADMISSIBLE DEDUC TION WHILE COMPUTATION OF INCOME. LD. AO NOTED THAT, SAID EXP ENDITURE INSTEAD OF BEING CLAIMED AS REVENUE EXPENDITURE IN PROFIT AND LOSS ACCOUNT, TO DETERMINED NET PROFIT, ASSESSEE CL AIMED IT AS DEDUCTION TO ARRIVE AT TOTAL INCOME FOR PURPOSES O F TAX PAYABLE. BEFORE LD.AO, ASSESSEE CONTENDED THAT IT INCURS PRO DUCT DEVELOPMENT EXPENDITURE BASED ON SPECIFIC REQUIREME NT OF CLIENT AND EXPENDITURE SO INCURRED HAS NEXES WITH THE REVE NUE ON ACCOUNT OF SALE OF PRODUCT. IT WAS SUBMITTED BY ASS ESSEE THAT, EXPENDITURE ON PRODUCT DEVELOPMENT IS REVENUE EXPEN DITURE. ALTERNATIVELY, ASSESSEE ALSO CONTENDED THAT, EVEN I F THE EXPENDITURE IS OTHERWISE TREATED AS CAPITAL IN NATU RE, ASSESSEE IS STILL ELIGIBLE TO CLAIM IN TERMS OF SECTION 35 (1) (IV) OF THE ACT BECAUSE, THESE EXPENDITURES ARE INCURRED BY ASSESSE E ON SCIENTIFIC RESEARCH AND RELATED TO BUSINESS, WITHIN THE MEANING OF SECTION 43 (4) OF THE ACT. 4. LD.AO REJECTED SUBMISSIONS ADVANCED BY ASSESSEE. LD. AO WAS OF THE OPINION THAT, ASSESSEE COULD NOT EXPLAIN WHETHER, SUCH EXPENDITURE IS BASED ON SPECIFIC REQUIREMENT OF CLI ENT AND HAD NEXUS WITH REVENUE IF ANY ON ACCOUNT OF SALE OF PR ODUCT. LD. AO HELD THAT ASSESSEES ACTIVITY OF PRODUCT DEVELOPMEN T DID NOT FALL WITHIN THE MEANING OF SCIENTIFIC RESEARCH AS GIVEN UNDER SECTION 43 (4) OF THE ACT. LD.AO ACCORDINGLY, DISALLOWED TH E CLAIM OF ASSESSEE. PAGE 4 OF 8 IT(TP)A NO.2516/BANG/2019 5. AGGRIEVED BY ORDER OF LD.AO ASSESSEE PREFERRED A PPEAL BEFORE LD.CIT(A). LD.CIT(A) DECIDED THE ISSUE IN FA VOUR OF ASSESSEE BY OBSERVING AS UNDER: FINDINGS IN THE CASE OF CIT VS. TALISMA CORPORATION THE ASSE SSEE WAS ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PROJECTS INCURR ED CERTAIN PRODUCT DEVELOPMENT COST WHICH MAINLY INCLUDED SALARY AND O THER GENERAL ADMINISTRATIVE EXPENSES. THE HONBLE KARNATAKA HIGH COURT HAS HELD THAT IN VIEW OF FACT THAT SAID EXPENDITURE WAS IN RESPEC T OF SCIENTIFIC RESEARCH AND WAS INCURRED IN RELATION TO BUSINESS CARRIED ON BY THE ASSESSEE, IT WAS TO BE ALLOWED AS DEDUCTION UNDER SECTION 35(1)( IV) EVEN IF EXPENDITURE WAS CAPITAL IN NATURE. THE SLP FILED BY THE REVENUE AGAINST THE ABOVE DECISION HAS BEEN DISMISSED BY THE SUPREME COURT [S PECIAL LEAVE TO APPEAL (C) . .CC NO.(S) 8116/2014[ IN THE CASE OF T EJSA NETWORKS LTD. VS. ACIT, THE KARNATAKA HIGH COURT HAS HELD THAT IN CAS E PRODUCT DEVELOPMENT EXPENDITURE IS TREATED AS CAPITAL IN N ATURE, THE SAME SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 35( I)(IV) OF THE ACT. IN THE CASE OF DCIT VS. TCIL BELL SOUTH LTD., THE DELHI ITAT HELD THAT THE SOFTWARE DEVELOPMENT PROCESS CONSISTED OF A WHOLE SERIES OF PROCESSES WHEREIN SYSTEMS ANALYSIS AND DESIGN CONSTITUTED THE RESEARC H ACTIVITY AND THE PROGRAMMING QUALITY, CONTROL, DEBUGGING AND TESTING , ETC. CONSTITUTED THE DEVELOPMENT ACTIVITY. THE ITAT HELD THAT THE SOFTW ARE DEVELOPMENT PROCESS CONSTITUTED SCIENTIFIC RESEARCH ACTIVITY A ND THE EXPENDITURE INCURRED WAS ADMISSIBLE UNDER SECTION 35(1 )(IV) OF THE ACT. THE FACTS OF THE APPELLANTS CASE ARE SIMILAR TO THOSE OF TALISMA COR PORATION AND TEJAS NETWORKS. FOLLOWING THE DECISIONS OF THE JURISDICTI ONAL HIGH COURT AS WELL THAT OF THE ITAT, DELHI IN THE ABOVE CITED CASES, T HE APPELLANTS CLAIM FOR DEDUCTION U/ S 35 IS ALLOWED. THIS GROUND OF APPEAL IS ALLOWED. 6. AGGRIEVED BY ORDER OF LD.CIT(A) REVENUE IS IN AP PEAL BEFORE US NOW. 7. LD.CIT DR AT THE OUTSET SUBMITTED THAT, AUTHORIT IES BELOW HAS NOT DISCHARGED REQUIREMENTS SPECIFIED UNDER SEC TION 43(4)(II) REGARDING OWNERSHIP OF PRODUCT DEVELOPMENT. HE SUBM ITTED THAT, IN THE EVENT, PRODUCTS DEVELOPED BY ASSESSEE IS OWN ED BY ASSESSEE, BENEFIT AVAILABLE UNDER SECTION 35(1)(IV) WILL NOT BE AVAILABLE TO ASSESSEE. PAGE 5 OF 8 IT(TP)A NO.2516/BANG/2019 8. AT THIS JUNCTURE, LD.AR SUBMITTED THAT, IDENTICA L ISSUE IN EARLIER ASSESSMENT YEAR HAS BEEN REMANDED BY THIS TRIBUNAL. HE PLACED RELIANCE ON PAGES 59-94 OF PAPER BOOK, WHERE IN RELEVANT ORDERS FOR ASSESSMENT YEAR 2005-06 AND 2009-10 ARE PLACED. 9. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SID ES IN LIGHT OF RECORDS PLACED BEFORE US. 10. WE NOTE THAT, ASSESSEE HAS BEEN INCURRING EXPEN SES IN ASSESSMENT YEAR 2005-06 IN ITA NO.301/BANG/2014, AGAINST WHICH, DEDUCTION WAS CLAIMED IN COMPUTATION OF INC OME. LD.AO, IDENTICALLY DISALLOWED CLAIM, BY HOLDING IT TO BE C APITAL IN NATURE. ASSESSEE ALSO MADE SIMILAR ALTERNATE CLAIM BEFORE A UTHORITIES BELOW FOR ASSESSMENT YEAR 2005-06, THAT IT SHOULD B E GIVEN DEDUCTION UNDER SECTION 35 (1) (IV) OF THE ACT, IN RESPECT OF EXPENDITURE ON SCIENTIFIC RESEARCH RELATED TO BUSIN ESS CARRIED ON BY ASSESSEE. WE NOTE THAT, THIS TRIBUNAL , WHILE CONSIDERING THE CLAIM REMANDED THE ISSUE TO LD.CIT(A) BY OBSERVING AS UNDER. IT IS CLEAR FROM THE FINDING OF THE LEARNED CIT (A PPEALS) THAT IT HAS NOT GONE INTO THE FACTUAL ISSUE WHETHER THIS EXPENDITUR E 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 DEFINITI ON OF SCIENTIFIC RESEARCH HAS BEEN PROVIDED. SINCE THE PROPER RECORD AND OTHE R DETAILS ARE NOT AVAILABLE BEFORE US IN RESPECT OF THE ACTUAL NATURE OF THE EXPENDITURE IN QUESTION THEREFORE WE CANNOT GIVE A CONCLUSIVE F INDING 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 OF JUSTICE, WE SET ASIDE THIS ISSUE TO THE RECORD OF C IT (APPEALS) FOR LIMITED PURPOSE OF VERIFYING THE REAL NATURE OF THE EXPENDITURE INCURRED BY THE ASSESSEE WHETHER IT IS FOR THE R & D ACTIVIT Y OF THE ASSESSEE. THE CIT (APPEALS) HAS TO DECIDE THIS ISSUE AFTER VE RIFICATION AND EXAMINATION OF THE RELEVANT RECORD AND IN THE LIGHT OF THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF TA LISMA CORPORATION PVT. LTD. (SUPRA). NEEDLESS TO SAY THE ASSESSEE SHA LL BE AFFORDED AN OPPORTUNITY OF HEARING. PAGE 6 OF 8 IT(TP)A NO.2516/BANG/2019 11. WE NOTE THAT, IN APPEAL BEFORE US, THE LD.AR RE LIED ON DECISION OF HONBLE KARNATAKA HIGH COURT IN CASE OF TALISMA CORPORATION PVT.LTD., REPORTED IN (2013) 40 TAXMANN.COM 400. WE NOTE THAT FACTS AND ISSUE CONSIDERED BY THIS TRIBUNAL IN ASSESSMENT YEAR 2005-06 ARE SAME WITH THE YEAR UNDE R CONSIDERATION. THEREFORE, RESPECTFULLY FOLLOWING TH E VIEW TAKEN BY THIS TRIBUNAL IN ASSESSMENT YEAR 2005-06 IN ASSESSEES OWN CASE, WE REMAND THIS ISSUE TO LD.CIT(A). LD.CIT(A) IS DIR ECTED VERIFY WHETHER, ASSESSEE ACQUIRES ANY COPYRIGHT/OWNERSHIP IN RESPECT OF PRODUCTS SOLD DEVELOPED. LD.CIT(A) IS DIRECTED T O DECIDE THE ISSUE BASED ON DOCUMENTS/EVIDENCES FILED BY ASSESSE E IN LIGHT OF DECISION BY HONBLE KARNATAKA HIGH COURT IN CASE OF TALISMA CORPORATION PVT.LTD., (SUPRA). ACCORDINGLY, GROUNDS RAISED BY REVENUE STANDS ALLOW ED FOR STATISTICAL PURPOSES. IN THE RESULT APPEAL FILED BY REVENUE STANDS ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH SEPT, 2020 SD/- SD/- (B. R. BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 29 TH SEPT, 2020. /VMS/ PAGE 7 OF 8 IT(TP)A NO.2516/BANG/2019 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE PAGE 8 OF 8 IT(TP)A NO.2516/BANG/2019 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -09-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -09-2020 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -09-2020 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -09-2020 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -09-2020 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -09-2020 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -09-2020 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS
