M/s. Nagarjuna Agrichem Ltd., Hyd, Hyderabad V. DCIT, Cir-16(1), Hyderabad

ITA 272/HYD/2011

• Counselvise Citation: 27222514 RSA 2011
• Duration Of Justice: 2 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 21-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R LAXMAN
• Assessee Lawyers: C P RAMASWAMY
• Keywords: Reopening of assessment; Capital asset; Depreciation; Business expenditure; Audit objection; Bad and doubtful debts; Difference of opinion; Deemed export; Change of opinion; Revenue expenditure; Reassessment proceedings; Capital expenditure
• Section: 143(3); 80HHC; 147; 148; 37; 12; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 272/HYD/2011 ASSESSMENT YEAR: 2004-05 NAGARJUNA AGRICHEM LTD., APPELLANT HYDERABAD (PAN AAACN6932H)) VS. DY. COMMISSIONER OF INCOME-TAX, RESPON DENT CIRCLE - 16(1), HYDERABAD. AND ITA NO. 285/HYD/2011 ASSESSMENT YEAR: 2004-05 DY. COMMISSIONER OF INCOME-TAX, APP ELLANT CIRCLE - 16(1), HYDERABAD. VS. NAGARJUNA AGRICHEM LTD., RESPONDENT HYDERABAD (PAN AAACN6932H)) ASSESSEE BY : SHRI C.P. RAMA SWAMY REVENUE BY : SHRI R. LAXMAN DATE OF HEARING : 08/10/2013 DATE OF PRONOUNCEMENT : 13/11/2013 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THESE ARE CROSS APPEALS DIRECTED AGAINST THE ORDER OF CIT(A)-V, HYDERABAD DATED 10-12-2010 FOR THE AY 2004-05. ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 2 ITA NO. 272/H/11 ASSESSES APPEAL 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSE SSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF PESTICID ES. FOR THE AY 2004- 05, THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 01-11-2004 ADMITTING TOTAL INCOME OF RS. 11,04,18,840/-. ASSES SMENT U/S 143(3) OF THE ACT WAS COMPLETED DETERMINING THE TOTAL INCOME AT RS. 11,56,87,950/-. SUBSEQUENTLY, CONSEQUENTIAL ORDER D ATED 23-02-2009 WAS PASSED GIVING RELIEF GRANTED BY THE CIT(A) AND THE TOTAL INCOME WAS DETERMINED AT RS. 11,15,76,122/-. THEREAFTER, THE A O REOPENED THE ASSESSMENT U/S 147 OF THE ACT AND COMPLETED IT U/S 143(3) R.W.S. 147 OF THE ACT DETERMINING THE TOTAL INCOME OF THE ASSESSE E COMPANY AT RS. 13,48,31,735/-. 3. AS REGARDS THE ISSUE OF LEGALITY OF REOPENING OF ASSESSMENT U/S 147 OF THE ACT, THE FACTS ARE THAT THE ASSESSEE COM PANY FILED ITS E-RETURN OF INCOME FOR THE A.Y. 2004-05 ON 01.11.2004 DISCLO SING INCOME OF RS. 11,04,18,840/-. THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF I.T ACT ON 27.10.2005. THEREAFTER, ASSESSMENT U/S 1 43(3) WAS COMPLETED ON AN INCOME OF RS. 11,56,87,950/-. CONSE QUENT TO THE ORDER DATED 23.02.2009 OF COMMISSIONER OF INCOME TA X(APPEALS), RELIEF OF RS. 41,11,828/- WAS GRANTED THEREBY DETER MINING THE INCOME AT RS. 11,15,76,122/-. THEREAFTER IT WAS FOUND THAT INCOME OF RS. 55,90,739/- HAD ESCAPED ASSESSMENT ON ACCOUNT OF TH E FACT THAT 100% OF THE CAPITAL EXPENDITURE AMOUNTING TO RS. 1, 39,76,847/- ON PURCHASE OF SOFTWARE WAS ALLOWED INSTEAD OF ALLOWANCE OF 60% AS PER THE PROVISIONS OF INCOME TAX ACT. IT WAS FURTHE R FOUND THAT THE ASSESSEE HAD CLAIMED HIGHER DEDUCTION U/S 80HHC TO THE TUNE OF RS. 12,20,129/- WHICH ESCAPED ASSESSMENT. IT WAS AL SO FOUND THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 35(2 AB) OF THE I.T. ACT ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 3 AND IS ELIGIBLE FOR DEDUCTION U/S 35(1) OF THE IT A CT. ON THE BASIS OF THE ABOVE, THE ASSESSMENT HAS BEEN REOPENED U/S 147 OF THE IT. ACT AND NOTICE U/S 148 WAS ISSUED TO THE ASSESSEE O N 30.03.2009 WHICH WAS SERVED ON 01.04.2009. 4. BEFORE THE CIT(A), THE ASSESSEE STATED THAT THE ACTION OF THE ASSESSING OFFICER IN ACQUIRING JURISDICTION UNDER S ECTION 147 OF THE ACT IS NOT CORRECT AS THE ORIGINAL ORDER OF ASSESSM ENT WAS PASSED U/S 143(3) OF THE ACT. THE FOLLOWING WRITTEN SUBMIS SIONS WERE MADE: 'THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 147 OF THE INCOME TAX ACT IS NULL AND VOID SINCE IT WAS ON FAC TS WHICH WERE AVAILABLE ON FILE AND FORMED PART OF ASSESSMEN T AND APPEAL PROCEEDINGS. IN THE ASSESSMENT ORDER U/S 143(3) DATED 29-12-2006 (COPY ENCLOSED IN ANNEXURE -1) ADDITION OF RS.52,01,203/- WAS MADE TOWARDS PRODUCT DEVELOPMENT EXPENSES. DURING THE CO URSE OF ASSESSMENT PROCEEDINGS THE AO HAD CALLED FOR DETAIL S OF EXPENDITURE INCURRED ON TESTING FEES, PURCHASE OF L AB CHEMICALS ETC. THE SAME WAS FURNISHED TO THE AO WHO HOWEVER FELT THAT SINCE THE EXPENDITURE WAS TOWARDS TESTING FEES, LAB CHEMICALS ETC, THE SAME WAS CAPITAL EXPENDITURE AND HENCE AN AMOUNT OF RS.52,01,203/- WAS DISALLOWED. AGGRIEVED AGAINST THE SAME AN APPEAL WAS FILED BEFO RE THE COMMISSIONER OF INCOME TAX (APPEAL) - V. WRITTEN SU BMISSIONS ALONG WITH DETAILS OF EXPENDITURE INCURRED TOWARDS TESTING FEES WAS SUBMITTED TO THE CIT(A) WHO IN TURN FORWARDED T HE INFORMATION TO AO AND CALLED FOR A REMAND REPORT. THE CIT (A) VIDE ORDER DATED 12-12-2008 IN ITA NO.3 80/DC- 16(1)/CIT(A)V/2006-07 (COPY ENCLOSED IN ANNEXURE -2 ) HELD THAT THE EXPENDITURE INCURRED ON TESTING FEES, LAB CHEMICALS WAS REVENUE IN NATURE AND ALLOWED A SUM OF RS. 41,1 1,828/- AS EXPENDITURE FOR THE YEAR, AND SINCE RS.10.89.375 /- WAS EXPENDITURE INCURRED IN THE EARLIER YEAR, THE CIT D IRECTED THAT THE SAME BE ALLOWED IN THE EARLIER YEAR. IN EFFECT THE ENTIRE EXPENDITURE WAS ALLOWED AS REVENUE EXPENDITURE OVER TWO YEARS. SIMILARLY SOFTWARE (SAP) EXPENDITURE OF RS.1.39.76. 846/- WAS CLEARLY DISCLOSED IN THE ANNUAL REPORT AND BAD DEBT S WRITTEN OFF OF RS.12,27,845/- WERE EXPLAINED TO THE AO DURING T HE COURSE OF ASSESSMENT PROCEEDINGS. ALL THESE FACTS WERE AVAILABLE ON FILE AND THE RE-O PENING OF ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 4 ASSESSMENT BASED ON CHANGE OF OPINION AND PURSUANT TO AUDIT OBJECTIONS IS GROSSLY UNJUSTIFIED. DURING THE PENDENCY OF THE APPEAL BEFORE THE COMMIS SIONER OF INCOME TAX (APPEAL'S) - V, THE AO HAD CALLED FOR AD DITIONAL INFORMATION (BASED ON AUDIT OBJECTIONS) VIDE LETTER DATED 29- 04-2008 (COPY ENCLOSED IN ANNEXURE -3). THE INFORMA TION CALLED FOR WAS: - A) SOFTWARE EXPENDITURE OF RS. 139,76,847/- WHICH WAS CLAIMED BY THE C OMPANY AS REVENUE EXPENDITURE WHICH THE AO PROPOSED TO TREAT THE SAME AS CAPITAL EXPENDITURE AND ALLOW DEPRECIATION @60%. (B) PROVISION FOR BAD DEBTS RS.12,27,845/- WHICH THE AO PROPOSED TO ADD BACK. (C) MISTAKE IN CALCULATION OF DEDUCTION U/S 80HHC W HICH THE AO PROPOSED TO ADD BACK. (D) DISALLOWANCE OF EXPENDITURE U/S 35(2AB) AND SEC.35(1)(II). (E) EXCESSIVE CLAIM OF MAT CREDIT WHICH THE AO PROP OSED TO RESTRICT TO RS.9,55,830/- INSTEAD OF RS.27,4 7,561/- CLAIMED BY THE COMPANY. THE COMPANY HAD FILED A REPLY TO THE AO AND THE AO RECTIFIED THE ASSESSMENT U/S 154 ONLY ON THE ISSUE OF MAT CREDIT. AS THE SAID LETTER WAS BASED ON AUDIT OBJECTIONS, I T HAS BEEN HELD IN TRANSWORLD INTERNATIONAL INC. V. JCLT (2005) 273 ITR 242 (DELHI) THAT AN AUDIT OBJECTION BY ITSE LF CANNOT JUSTIFY NOTICE OF REASSESSMENT. SIMILARLY THE BOMBAY HIGH COURT IN THE CASE OF M.J. PHARMACEUTICALS LTD V. DCLT (2008) 297 ITR (BOM) HE LD THAT REASSESSMENT PROCEEDINGS BASED ON CHANGE OF OPINION IS NOT VALID. IN CIT V FEATHER FOAM ENTERPRISES PVT. LTD (2008) 2 96 ITR 342 (DEL.) IT WAS HELD THAT WHERE THE EXPLANATI ON OF ASSESSEE HAS BEEN ACCEPTED IN ORIGINAL ASSESSMENT SUBSEQUENT REJECTION OF EXPLANATION FOR THE PURPOSE OF REASSESSMENT AMOUNTS TO CHANGE OF OPINION. HENCE THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 147 OF THE INCOME TAX ACT IS NULL AND VOID SINCE IT WAS ON FACTS WHICH WERE AVAILABLE ON FILE AND FORMED PA RT OF ASSESSMENT AND APPEAL PROCEEDINGS.' 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) HELD AS FOLLOWS: ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 5 5.2 I HAVE CONSIDERED CAREFULLY THE FACTS AND EVIDE NCE AND.I FIND THAT THE NOTICE UNDER SECTION 148 WAS NOT ISSU ED ON THE BASIS OF CHANGE OF OPINION. THERE IS NO DOUBT THAT THERE WAS AN AUDIT OBJECTION. HOWEVER, THAT ITSELF DOES NOT PREC LUDE THE ASSESSING OFFICER FROM OBTAINING JURISDICTION OF SE CTION 148 OF THE ACT. THE CASES REFERRED TO BY THE APPELLANT DO NOT CONTAIN A RATIO THAT WHENEVER THERE IS AN AUDIT OBJECTION, SE CTION 148 IS INAPPLICABLE. THE IMPORT OF THE JUDGEMENTS IS THAT MERE AUDIT OBJECTION IS NOT ENOUGH TO REOPEN AN ASSESSMENT COM PLETED U/S 143(3). HOWEVER, IF THE FACTS JUSTIFY THE SAME, THE ASSESSMENT CAN BE REOPENED. IN THE PRESENT CASE, IT IS SEEN TH AT THE REOPENING WAS NOT ONLY ON THE BASIS OF INFORMATION ON RECORD. IN FACT VIDE LETTER DATED 24.9.2008, THE ASSESSING OFF ICER ASKED FOR DETAILED INFORMATION ON VARIOUS ISSUES FROM THE APP ELLANT. ONLY AFTER COLLECTION OF ADDITIONAL INFORMATION, WHICH W AS NOT ON RECORD EARLIER, THE ASSESSING OFFICER MADE UP HIS M IND THAT CERTAIN INCOME HAD ESCAPED ASSESSMENT. THEREAFTER, REASONS WERE RECORDED AND NOTICE U/S 148 WAS ISSUED. THE FA CT IS THAT THE REASONS RECORDED CATEGORICALLY STATE THAT THE T HREE ISSUES IN THE REASONS RECORDED WERE NOT CONSIDERED AT THE TIM E OF ORIGINAL ASSESSMENT PROCEEDINGS. 6. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US ON THE ISSUE OF LEGALITY OF REOPENING OF ASSESSMENT U/S 147 OF THE ACT. 7. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI CP RAM A SWAMY BROUGHT TO OUR NOTICE THAT NO FRESH MATERIAL WAS FO UND BY THE AO IN THE PROCESS OF REOPENING AND THE NOTICE WAS ISSUED U/S 148 ON THE BASIS OF CHANGE OF OPINION. FURTHER, THE LEARNED COUNSEL POI NTED OUT THAT BASED ON AUDIT OBJECTION, REOPENING U/S 148 IS NOT JUSTIF IED. FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF TRANSWORL D INTERNATIONAL INC. VS. JCIT, [2005] 273 ITR 242 (DEL.). THE LEARNED COUNSE L ALSO RELIED ON THE DECISION OF CIT VS. FEATHER FOAM ENTERPRISES (P) LT D., [2008] 296 ITR 0342 (DEL.) WHEREIN IT WAS HELD THAT WHERE THE EXPL ANATION OF THE ASSESSEE HAS BEEN ACCEPTED IN THE ORIGINAL ASSESSME NT, SUBSEQUENT REJECTION OF EXPLANATION FOR THE PURPOSE OF REASSES SMENT AMOUNTS TO CHANGE OF OPINION. ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 6 8. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED THA T CERTAIN ISSUES WERE NOT DISCUSSED IN THE ORIGINAL ORDER, HENCE, RE OPENING IS VALID. THE LEARNED DR RELIED ON THE FOLLOWING CASES: 1. ITO VS. PURUSHOTTAM DAS BANGUR & ANR., [1997] 22 4 ITR 362 (SC) 2. ESS KAY ENGG. CO. (P) LTD. VS. CIT [2001] 247 IT R 818 (SC) 9. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES, PERUSED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE REVE NUE AUTHORITIES. WE FIND FROM THE ASSESSMENT ORDER THAT THE AO HAS COMP LETED THE ASSESSMENT WITHOUT FORMING ANY OPINION. THE AO HAS POINTED OUT THAT THE ASSESSEES CLAIM CANNOT BE ALLOWED AS SUCH WITH OUT COMPLIANCE OF PROVISIONS OF THE ACT. IN THE CASE BEFORE US ONLY A FTER COLLECTION OF ADDITIONAL INFORMATION, WHICH WAS NOT ON RECORD EAR LIER, THE AO MADE UP HIS MIND THAT CERTAIN INCOME HAD ESCAPED ASSESSMENT AND, THEREAFTER, REASONS WERE RECORDED AND NOTICE U/S 148 WAS ISSUED . ACCORDING TO THE AO, THE FOLLOWING THREE ISSUES HAVE NOT BEEN CONSID ERED AT THE TIME OF ORIGINAL ASSESSMENT PROCEEDINGS: I) OUT OF THE AMOUNT DEBITED BY THE COMPANY TOWARDS SOFTWARE EXPENSES OF A SUM OF RS. 1,39,76,847/-. THE AO HELD THAT 60% OF EXPENDITURE TOWARDS SAP PACKAGE IS ELIGIBLE FOR DED UCTION AND BALANCE OF RS. 55,90,739/- HAS TO BE BROUGHT TO TAX . II) EXCESS ALLOWANCE OF RS. 12,20,129/- HAS BEEN AL LOWED U/S 80HHC. III) WEIGHTED DEDUCTION U/S 35(2AB) OF RS. 32,56,64 3/- IS TO BE DISALLOWED. WE FIND THAT THE AO HAS RIGHTLY REOPENED THE ASSESS MENT AND THE ACTION OF THE CIT(A) IN CONFIRMING THE SAME IS ALSO PROPER AND, THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ISSUE OF NOTICE U/S 1 48 OF THE ACT. THE DECISIONS RELIED ON BY THE DR IN THE CASE OF ESS KA Y ENGINEERING CO. (P) LTD. VS. CIT, 247 ITR 818(SC) AND ITO VS. PURUS HOTTAM DAS BANGUR ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 7 & ANR., 224 ITR 362 (SC) ARE APPROPRIATE ON THE ISS UE AND WE RELY ON THE SAME FOR UPHOLDING THE REOPENING INITIATED BY T HE AO. HENCE, GROUND NO. 2 RAISED BY THE ASSESSEE IS DISMISSED. 10. NOW WE PROCEED TO ADJUDICATE THE ISSUES ON THE MERITS OF THE CASE. 11. GROUND NO. 3 A) & B) WITH REFERENCE TO THE DIS ALLOWANCE OF EXPENDITURE INCURRED FOR LICENSE FEE FOR THE USE OF SAP IN THE COMPANY AND OTHER COMMUNICATION EXPENDITURE AMOUNTING TO RS . 55,90,739/-. 12. THE ASSESSEE CLAIMED SOFTWARE EXPENDITURE OF RS . 1,39,76,847/- IN THE P&L A/C. THE AO NOTICED THAT THE AMOUNT HAD BE EN PAID BY THE ASSESSEE FOR THE USE OF SAP PACKAGE IN THEIR COMPAN Y FOR 25 YEARS AND THE COMPANY HAD BEEN GRANTED LICENSE TO HAVE ACCESS TO SAPS ONLINE SOFTWARE FOR 25 YEARS. THE AO HELD THAT THE ACQUISI TION OF LICENSE WAS A CAPITAL EXPENDITURE AND HE CAPITALIZED THE SAME AND ALLOWED 60% DEPRECIATION ON THAT BY GIVING FOLLOWING REASONS: 3.3 IT IS OBSERVED FROM THE AGREEMENT ENTERED INTO BY THE COMPANY WITH M/S SAP INDIA THAT THE TERM OF THE AGR EEMENT IS FOR A PERIOD OF 25 YEARS AND THE ASSESSEE WILL BE GRANT ED WITH A LICENSE TO HAVE ACCESS TO SAPS ONLINE SOFTWARE SER VICES. THE TERMS AS MENTIONED IN PARA-5.1 OF THE R/3 SOFTWARE END USER VALUE LICENCE AGREEMENT IS REPRODUCED BELOW TERM: THIS AGREEMENT AND THE LICENCE GRANTED HEREUN DER SHALL BECOME EFFECTIVE UPON EXECUTION BY BOTH PARTIES AND SHALL CONTINUE IN EFFECT FOR A PERIOD OF 25 YEARS UNLESS TERMINATED UNDER SECT. 5.2. UNDER SECTION 19A OF THE COPYRIGHT (AMEN DMENT) ACT, 1994, SAP WAIVES LICENSEES STATUTORY REQUIREMENT T O USE THE SOFTWARE WITHIN A PERIOD OF ONE YEAR FROM THE DATE OF THIS AGREEMENT. 3.4 AS PER THE AGREEMENT, AS PER THE AGREEMENT, THE ASSESSEE WAS TO PAY RS.52,50,OOO//TOWARDS NET LICENCE FEE WI THIN THE MONTH OF NOVEMBER, 2002 AS PER THE AGREEMENT. THE S OFTWARE WILL BE INSTALLED AT THE DESIGNATED SITE. THE LEDGER EXT RACT OF SAP ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 8 EXPENSES FURNISHED BY THE COMPANY HAS BEEN EXAMINED . FROM THIS, IT CAN BE OBSERVED THAT RS.54,60,0001- IN ALL HAS BEEN PAID TO SAP IN THE FIN. YEAR 2002-03 AND HAS BEEN TRANSFERR ED TO THE PRESENT HEAD OF EXPENDITURE THROUGH A JOURNAL ENTRY PASSED ON 01.07.2003. THE REMAINING EXPENSES OF RS.82,16,957/ - REPRESENT EXPENSES INCURRED ON PURCHASE OF COMPUTER PARTS AND CHARGES FOR INITIAL UPLOADING OF SAP AND SYSTEMS INSTALLATION C HARGES, NETWORK INSTALLATION ACCESSORIES COST ETC. THEY ARE ALL OF THE NATURE OF EXPENSES TO ENABLE INITIAL SET UP OF THE SAP ENABLE D COMPUTER SOFTWARE PROGRAMMES. HENCE, ON FACTS OF THE CASE, I T CAN BE EASILY OBSERVED THAT THEY ARE ALL CAPITAL EXPENDITURE AND NOT EXPENSES OF REVENUE NATURE. 3.5. AS PER THE PROVISIONS OF CLAUSE(II) OF SUB-SEC TION(L) OF SEC.32, KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCE S, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMIL AR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE PT DAY O F APRIL, 1998, OWNED WHOLLY OR PARTLY BY THE ASSESSEE AND USED FOR THE PURPOSES OF BUSINESS OR PROFESSION ARE ELIGIBLE FOR DEPRECIA TION. 3.6. IN THE CASE OF THE ASSESSEE, THE LICENCE OBTAI NED FROM SAP AND THE RELATED EXPENSES ON INSTALLATION AND INITIA LIZATION OF SOFTWARE FALL UNDER THE PROVISIONS OF SEC.32 AND TH EREFORE, ELIGIBLE FOR DEPRECIATION @60% OF SUCH EXPENDITURE. THE ASSE SSEE, THEREFORE, CANNOT TREAT THE ENTIRE SUM OF RS.1,39,7 6,847/- AS REVENUE EXPENDITURE. THEREFORE, AFTER ALLOWING DEDU CTION OF 60% ON ACCOUNT OF DEPRECIATION, THE BALANCE OF RS.55,90 ,739/- IS ADDED BACK TO THE INCOME OF THE ASSESSEE.' 13. ON APPEAL, BEFORE THE CIT(A) THE ASSESSEE STATE D THAT IT WAS MERELY THE LICENSE HOLDER AND NOT THE OWNER OF THE SOFTWARE. RELYING ON DECISIONS OF THE VARIOUS BENCHES OF THE ITAT (NOT T HE JURISDICTIONAL BENCH), THE ASSESSEE ARGUED THAT THE EXPENDITURE ON SAP WAS NOT A CAPITAL EXPENDITURE. AFTER CONSIDERING THE SUBMISS IONS OF THE ASSESSEE, THE CIT(A) HELD THAT THE EXPENDITURE ON SAP SOFTWAR E IS NOT A CAPITAL EXPENDITURE BY OBSERVING AS UNDER: 6.3.1 HAVING SAID THAT, IT IS FURTHER TO BE SEEN T HAT THE SOFTWARE WILL BE USED FOR PRODUCING THE VARIOUS PRODUCTS FOR A PERIOD OF 25 YEARS. THERE IS AN ANNUAL MAINTENANCE AND UP-GRADAT ION CHARGE TO THE SOFTWARE. THE ASSESSING OFFICER WAS RIGHTLY HEL D THAT SUCH ANNUAL MAINTENANCE CHARGE IS REVENUE EXPENDITURE. H OWEVER, WITH ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 9 RESPECT TO THE AMOUNT IN QUESTION THE EXACT NATURE OR THE EXACT ACCOUNTING TREATMENT TO BE GIVEN TO THIS EXPENDITUR E WILL BE CLEAR AFTER CONSIDERING THE JUDGEMENT OF RAJASTHAN HIGH C OURT IN THE CASE BAJAJ SEVASHARAM LTD. VS DY.C1T (2006) 280 ITR 480 (RAJ). IN THIS CASE, THE QUESTION BEFORE THE HON'BLE RAJAS THAN HIGH COURT WAS WHETHER WHILE CONSIDERING ALLOWANCE OF REVENUE EXPENDITURE INCURRED FOR ADVERTISEMENT DURING ANY ASSESSMENT Y, EAR, THE SAME CAN BE SPREAD OVER BY AN ASSESSEE ON THE PRINCIPLE OF DEFERRED REVENUE EXPENSES ON THE GROUND THAT THE BENEFIT OF SUCH EXPENSE WOULD FLOW FOR SUBSEQUENT YEARS ALSO? THE FACTS ARE THAT THE. ASSESSEE INCURRED CERTAIN EXPENDITURE ON ADVERTISEM ENT THROUGH AUDIO VISUAL MEDIA. SUCH EXPENDITURE CREATED CERTAI N RIGHTS IN AUDIO-VISUAL CLIPPINGS WHICH WERE PUBLISHED AND ADV ERTISED THROUGH THE MEDIUM OF AUDIO-VISUAL FILMS WHETHER BY TELECASTING OR THROUGH THE CLIPPINGS SHOWN ON THE SCREEN IN THE CI NEMA HALLS. SINCE THE ASSESSEE WAS DERIVING THE BENEFIT OF EXPE NDITURE OF ADVERTISEMENT THROUGH VIDEO CLIPPINGS SPREAD OVER C ERTAIN PERIOD, IT HAD ADOPTED A POLICY OF SPREADING OVER THE EXPEN SES FOR A NUMBER OF YEARS DEPENDING UPON THE PERIOD DURING WH ICH THE CLIPPINGS WERE LIKELY TO BE USED INSTEAD OF CLAIMIN G THE ENTIRE EXPENSES FOR ONE YEAR IN WHICH THE AMOUNT HAS BEEN PAID TO THE PRODUCER OF THE CLIPPINGS. THE AO WAS OF THE OPINIO N THAT THERE WAS NO CATEGORIZATION OF DEFERRED REVENUE EXPENDITU RE. THE TRIBUNAL ALLOWED ASSESSEE TO SPREAD EXPENSES INCURR ED IN A PARTICULAR YEAR OVER A NUMBER OF YEARS. THE TRIBUNA L HELD THAT THE ASSESSEE WAS ENTITLED TO SPREAD THE CLAIM PROPORTIO NATELY OVER A PERIOD OF ENSUING YEARS. ACCORDING TO THE TRIBUNAL ENTIRE EXPENSES INCURRED AND SPREAD OVER FOR FOUR YEARS HAD TO BE A LLOWED AS A WHOLE UP TO THE ASSESSMENT YEAR 1993-94. 6.3.1 RESPECTFULLY FOLLOWING THE ABOVE JUDGEMENT, I TOO HOLD THAT THE EXPENDITURE ON PURCHASE OF LICENSE OF SAP SOFTW ARE FOR 25 YEARS HAS TO BE SPREAD OVER AS A DEFERRED REVENUE E XPENDITURE FOR 25 YEARS. IN THIS WAY, THE PRINCIPLE OF MATCHING OF REVENUE AND EXPENSES WILL BE ADHERED TO AND THIS IS THE CORRECT WAY OF BOOKING THE EXPENDITURE. ACCORDINGLY, I HOLD THAT 1/25TH OF THE EXPENDITURE IS TO E ALLOWED IN THE CURRENT YEAR AND THE BALANCE IN THE OTHER 24 YEARS. 14. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE IS IN APPEAL BEFORE US ON THIS ISSUE. ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 10 15. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SAP EXPENDITURE IS A ONE TIME EXPENDITURE AND IN SUPPOR T OF HIS CONTENTION HE INVITED OUR ATTENTION TO PAGES 1, 2 & 3 OF THE P APER BOOK CONTAINING DETAILS OF SOFTWARE EXPENSES. THE LEARNED COUNSEL HAD ENCLOSED THE END-USER VALUE LICENCE AGREEMENT DULY SIGNED BY THE SAP SIGNATORIES AT PAGES 2 TO 24 OF THE PAPER BOOK. HE DREW OUR ATTENT ION TO PARA 2.1 WITH REFERENCE TO GRANT OF LICENCE AT PAGE 6. HE ALSO PO INTED OUT TO PAGE 18 OF PAPER BOOK WHERE AT CLAUSE (3), IT HAD MENTIONED THAT THERE ARE USE RESTRICTIONS TO BE OBSERVED BY LICENSEE AND IT IS A FFILIATED FOR THE LICENSED SOFTWARE. THE SOFTWARE LICENSED UNDER THIS AGREEME NT IS LICENSED SUBJECT TO RECEIPT OF PAYMENT WITHIN THE STIPULATED TERMS. THE LEARNED COUNSEL RELIED ON THE DECISION IN THE CASE OF CIT VS. VARINDER AGRO CHEMICALS LTD., 309 ITR 272 (P&H). HE SUBMITTED THA T THE TOTAL AMOUNT INCURRED WAS OF RS. 139,76,847/- COMPRISING AS UNDE R: I) RS. 54,60,000/- TOWARDS SOFTWARE EXPENSES INCLUD ING LICENSE FEES. II) INSTALLATION CHARGES (INCLUDING INTERNET CHARGE S FOR RUNNING THE SAP) RS. 78,61,136/-. III) SAP ENABLED COMPUTER ACCESSORIES RS. 6,55,711/ -. IT IS SUBMITTED THAT THE COMPANY WAS MERELY LICENCE HOLDER AND NOT THE OWNER OF THE SOFTWARE AND THE AMOUNT SPENT FOR PURC HASE OF SAP ENABLED COMPUTER ACCESSORIES WAS INSIGNIFICANT WHEN COMPARED TO THE TOTAL EXPENDITURE OF RS.139.76.847/-. IN THIS CONN ECTION, HE REFERRED TO THE DECISION OF ADDL. CIT VS. ASAHI INDIA SAFETY GL ASS, 6 SOT 656 (DELHI), WHEREIN IT WAS HELD AS UNDER: THAT BY ACQUIRING LICENSE TO USE ORACLE SOFTWARE, THE ASSESSEE DID NOT CREATE ANY TANGIBLE ASSET MUCH LESS ANY ASS ET WHICH PROVIDES ANY NEW SOURCE OF INCOME OR AUGMENTS THE P RESENT SOURCE OF INCOME AND ACCORDINGLY THE EXPENDITURE WA S REVENUE IN NATURE. IN IBM INDIA LTD VS CLT 105 ITD (BANGALORE) IT WAS HELD THAT APPLICATION OF SOFTWARE ENHANCES THE EFFICIENCY OF THE OPERATION. IT IS AN AID IN THE MANUFACTURING PROCESS RATHER THAN THE TOOL ITSELF ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 11 THUS THE PAYMENT FOR SUCH APPLICATION SOFTWARE THOU GH ENDURING IN NATURE, IT DOES NOT RESULT INTO ACQUISITION OF A NY CAPITAL ASSET. THE SAME ENHANCES THE PRODUCTIVITY OR EFFICIENCY AN D HENCE TO BE TREATED AS REVENUE EXPENDITURE. ' 'IN SONATA INFORMATION TECHNOLOGY LTD VS ADD/. CLT 103 ITD 324, IT WAS HELD THAT SOFTWARE ACQUIRED UNDER A LICENSE ON TERMS AND CONDITIONS WHEREIN THE OWNERSHIP IS RETAINED BY THE LICENSOR AND WHERE SUCH SOFTWARE ONLY ADDS TO THE EFFICIENT RUNN ING OF DAY TO DAY OPERATION OF BUSINESS, CANNOT BE HELD TO BE EXP ENDITURE OF CAPITAL NATURE AS THEY ARE ONLY COPYRIGHTED ARTICLE S. 16. THE LEARNED DR ON THE OTHER HAND POINTED OUT TH AT FROM AY 2003- 04 AS PER RULE-5 OF IT RULES READ WITH OLD APPENDIX -1 INDICATES THAT THE ITEMS FALLING UNDER THE CATEGORY OF COMPUTERS INCLU DING COMPUTER SOFTWARE ARE ELIGIBLE FOR DEPRECIATION OF 60% AND H ENCE THE AO HAS RIGHTLY TREATED IT AS CAPITAL EXPENDITURE AND ALLOW ED DEPRECIATION AT 60%. 17. AFTER HEARING THE PARTIES AND PERUSING THE RECO RD, WE ARE OF THE OPINION THAT AS IT IS ONE TIME EXPENDITURE AND GRAN T OF LICENCE IS TIED UP TO THE PAYMENT MADE BY THE USER, THE SAME SHALL BE ALLOWED AS REVENUE EXPENDITURE. LD CIT(A) HAS RIGHTLY CAME TO A CONCLU SION THAT EXPENDITURE IS REVENUE IN NATURE BUT THAT OF DEFERRED REVENUE. WE DO NOT AGREE WITH THE LATER CONCLUSION. THE EXPENDITURE IS REVENUE IN NATURE AND AO HAS RIGHTLY CONSIDERED AS SUCH AT THE TIME OF ORIGINAL ASSESSMENT ACCORDINGLY, WE MODIFY THE ORDER OF THE CIT(A) AND ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE. AO IS DIRECTED TO ALLOW ENT IRE EXPENDITURE AS CLAIMED. 18. GROUND NO. 4 IS AS FOLLOWS: A) THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF THE CLAIM MADE IN TERMS OF SECTION 35(2AB) FOR A SUM OF RS. 31,34,928/-. B) THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE APPELLANT OBTAINED APPROVAL FROM THE PRESCRIBED AUTHORITY, PR ESCRIBED IN ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 12 TERMS OF SECTION 35(2AB) AND CONSEQUENTLY ERRED IN CONFIRMING THE DISALLOWANCE. C) THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE APPROVAL OBTAINED BY THE APPELLANT FROM SECRETARY, DSIR WAS THE SAME, IN EFFECT, AS PRESCRIBED IN FORM NO. 3CM AND APPLYING THE PROVISIONS OF SECTION 292B, THE DEDUCTION CLAIMED BY THE APPEL LANT CANNOT BE DENIED. 19. THE ASSESSEE CLAIMED A DEDUCTION OF RS. 1,92,9 6,426/- TOWARDS R&D EXPENDITURE CONSISTING OF IN HOUSE R&D OF 62,69 ,856/- AND OUTSIDE R&D OF RS. 1,30,26,571/-. FURTHER, THE ASSESSEE CL AIMED WEIGHTED DEDUCTION U/S 35(2AB) OF AN AMOUNT OF RS. 31,34,92 8/- BEING 50% OF THE IN HOUSE R&D EXPENSES. THE ASSESSEE ALSO CLAIME D 25% OF THE OUT- SIDE R&D EXPENDITURE. THE ASSESSING OFFICER HELD TH AT THE WEIGHTED DEDUCTION WITH RESPECT TO IN HOUSE R&D WAS NOT ALLO WABLE TO THE ASSESSEE BY GIVING THE FOLLOWING REASONS, THE ADDI TION OF RS. 31,34,928/- WAS MADE: '5.2. IN RESPECT OF 'IN-HOUSE R&D EXPENDITURE' OF R S.62,69,855/-, THE ASSESSEE HAS FURNISHED AETAILS OF EXPENDITURE A S UNDER: I) R&D STAFF SALARIES RS. 27,67,602/- II) R&D TECHNICAL CONSULTANCY RS. 12,97,920/- III) EXPENSES ON IN-HOUSE R&D LAB. RS. 2 2,04,334/- TOTAL RS. 62,69,856/- ============ IT HAS BEEN EXPLAINED THAT THE COMPANY'S R&D FACILI TY IS APPROVED BY THE MINISTRY OF SCIENCE AND TECHNOLOGY, DEPT. OF SCIENCE AND INDUSTRIAL RESEARCH, GOVT. OF INDIA FOR THE FIRST T IME IN 1999 AND HAS BEEN RENEWED EVERY 3 YEARS AFTER DUE DILIGENCE AND INSPECTION OF RECORDS AND FACILITIES. RENEWAL HAS T AKEN PLACE IN 2001, 2004 AND 2007. AS PER CLAUSE(I) OF SUB-SEC.(L ) OF SEC.35, IF A COMPANY INCURS ANY EXPENDITURE ON SCIENTIFIC RESE ARCH RELATED TO ITS BUSINESS THEN THE SAME CAN BE ALLOWED AS DEDUCT ION. THEREFORE, THE ASSESSEE IS ELIGIBLE FOR 100% DEDUCT ION OF EXPENDITURE SINCE THE NATURE OF EXPENDITURE LAID OU T BY THE ASSESSEE IS NOT CAPITAL. HOWEVER, THE ASSESSEE ALSO HAS CLAIMED WEIGHTED DEDUCTION UNDER SUB-SEC(2AB) FOR 50% OF TH E ABOVE EXPENDITURE AMOUNTING TO RS.31,34,928/-. THE RELEVA NT APPROVALS FOR CLAIM OF WEIGHTED DEDUCTION AS PRESCRIBED HAVE NOT BEEN ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 13 PRODUCED BY THE ASSESSEE. NEITHER FORM 3CL NOR FORM 3CM HAVE BEEN FURNISHED BY THE ASSESSEE TO BE ELIGIBLE FOR T HE WEIGHTED DEDUCTION. THEREFORE, THE ASSESSEE-COMPANY IS NOT E LIGIBLE FOR TH SAME AND THE CLAIM FOR DEDUCTION OF RS.31,34,928/- IS DISALLOWED.' 20. ON APPEAL, BEFORE THE CIT(A) THE ASSESSEE STATE D THAT THE COMPANY'S R&D FACILITY WAS APPROVED BY MINISTRY OF SCIENCE & TECHNOLOGY, GOVERNMENT OF INDIA. IT WAS FURTHER STA TED THAT ONCE THE APPROVED IS GRANTED, THE REMAINING PART OF CCO & CC M IS PURELY STATISTICAL IN NATURE. AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE THE CIT(A) DISCUSSED THE ISSUE ELABORATELY AT PARAS 8.2 TO 8.4 OF THE IMPUGNED ORDER AND ANALYZING SECTION 35(2AB), CONF IRMED THE ORDER OF THE AO. 21. THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEE IS ELIGIBLE FOR WEIGHTED DEDUCTION THOUGH THE ASSESSEE HAS NOT COMP LIED WITH THE STATUTORY FORMALITIES. FOR THIS PROPOSITION, HE REL IED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SAN DAN VIKAS INDIA LTD., 335 ITR 117 (DELHI) WHEREIN THE HONBLE DELHI HIGH COURT FOLLOWING DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. CLARIS LIFE SCIENCES LTD., [2010] 326 ITR 251 (GUJ.) HELD THAT THE TRIBUNAL WAS JUSTIFIED IN ALLOWING BENEFIT OF WEIGHTED DEDUCTION U/S 35(2AB) FOR AY 2005-06, THOUGH THE RECOGNITION AND APPROVAL BY THE PRESCRIBED AUTHORITY WAS GIVEN IN FEB/SEPT.2006. 22. THE LEARNED DR, ON THE OTHER HAND, RELIED ON TH E ORDERS OF THE REVENUE AUTHORITIES. 23. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES , PERUSED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE REVE NUE AUTHORITIES. IT IS OBSERVED THAT THE STATUTORY FORMALITIES FOR GETTING APPROVAL U/S 35(2AB) ARE THAT APPLICATION IN FORM NO. 3CK AND 3CL ARE TO BE SUBMITTED AND AN ORDER OF APPROVAL HAS TO BE OBTAINED IN FORM NO . 3CM FROM THE ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 14 PRESCRIBED AUTHORITY. WE FIND THAT THE ASSESSEE HAS NOT FURNISHED FORM NO. 3CM EITHER BEFORE THE REVENUE AUTHORITIES OR BE FORE US FOR CLAIMING WEIGHTED DEDUCTION U/S 35(2AB). THE AO HAS ALLOWED THIS CLAIM EARLIER WITHOUT EXAMINING THE ALLOWABILITY IN THE ABSENCE O F CERTIFICATES. CONSEQUENTLY THERE IS JUSTIFICATION FOR REOPENING O F ASSESSMENT. IN THESE CIRCUMSTANCES, WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO ALL OW WEIGHTED DEDUCTION U/S 35(2AB) AS AND WHEN THE ASSESSEE RECEIVES THE A PPROVAL UNDER FORM NO. 3CM FROM THE PRESCRIBED AUTHORITY. GROUND NO. 4 IS ALLOWED FOR STATISTICAL PURPOSES. 24. GROUND NO. 5 IS AS FOLLOWS: THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOW ANCE OF THE CLAIM MADE FOR WEIGHTED DEDUCTION U/S 35(1)(II). HE FAILED TO APPRECIATE THAT THE CONDITIONS LAID DOWN FOR ALLOWI NG WEIGHTED DEDUCTION FOR SCIENTIFIC EXPENDITURE INCURRED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, HAVING BEEN ESTABLISHE D BY THE APPELLANT, HE OUGHT TO HAVE ALLOWED THE WEIGHTED DE DUCTION INSTEAD OF ALLOWING THE EXPENDITURE ONLY U/S 37(1). 25. IT IS OBSERVED THAT WITH RESPECT TO OUTSIDE R&D EXPENDITURE OF RS. 1,30,26,571/-, THE AO ALLOWED SOME CLAIM ON ACCOUNT OF WEIGHTED DEDUCTION U/S 35(1)(II). WITH RESPECT TO BALANCE PA YMENT OF RS. 79,78,975/-, THE AO FOUND THAT THE PAYMENTS WERE MA DE TO VARIOUS UNIVERSITIES AND RESEARCH INSTITUTES AND EXPORT REL ATED TESTING FEES, AS BELOW: NAME OF THE VENDOR AMOUNT IN (RS.) ACHARYA NG RANGA AGRICULTURAL UNIVERSITY 136,000.00 CENTRAL LEATHER RESEARCH INSTITUTE 243,000.00 CENTRAL RICE RESEARCH INSTITUTE, CUTTACK 30,000.00 COTTON RESEARCH STATION 7,000.00 DIRECTORATE OF RICE RESEARCH 75,000.00 DIRECTORATE OF WHEAT RESEARCH 120,000.00 INTERNATIONAL INSTITUTE OF BIO-TECHNOLOGY AND ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 15 TOXICOLOGY (IIBAT) TAMILNADU 1,418,575.00 INVERESK RESEARCH INTERNATIONAL LTD., UK 3,434,558. 00 MANDYA RESEARCH STATION 5,000.00 OTHER INSTITUTES 1,922,181.00 PLANT PROTECTION CONSULTANTS 338,404.00 UNIVERSITY OF AGRICULTURAL SCIENCES 105,000.00 SUB TOTAL A 7,834,718.00 R&D EXPORT RELATED EXPENSES: CLEARING AND OTHER INCIDENTAL CHARGES 144,257.00 SUB TOTAL B 7,834,718.00 TOTAL (A+B) 7,978,975.00 26. GIVING THE FOLLOWING REASONS, THE AO DISALLOWED THE ENTIRE AMOUNT: '5.5. THE DETAILS FURNISHED HAVE BEEN VERIFIED. EXC EPT FDR CLEARING AND OTHER INCIDENTAL CHARGES OF RS.1,44,257/-, ALL OTHER EXPENSES ARE PAYMENTS MADE TO DIFFERENT UNIVERSITIES TOTALIN G TO RS.78,34,718/-. ACCORDING TO THE PROVISIONS OF CLAU SE(II) : [AN AMOUNT EQUAL TO ONE AND ONE-FOURTH TIMES OF] AN Y SUM PAID TO A SCIENTIFIC RESEARCH ASSOCIATION WHICH HAS AS ITS OBJECT THE UNDERTAKING OF SCIENTIFIC RESEARCH OR TO A UNIVERSITY, COLLEGE OR OTHER INSTITUTION TO BE USED FOR SCIENTIFIC RESEARCH: [PROVIDED THAT SUCH ASSOCIATION, UNIVERSITY, COLLEG E OR OTHER INSTITUTION FOR THE PURPOSES OF THIS CLAUSE- (A) IS FOR THE TIME BEING APPROVED, IN ACCORDANCE W ITH THE GUIDELINES, IN THE MANNER AND SUBJECT TO SUCH CONDI TIONS AS MAY BE PRESCRIBED' AND (B) SUCH ASSOCIATION, UNIVERSITY, COLLEGE OR OTHER INSTITUTION IS SPECIFIED AS SUCH, BY NOTIFICATION IN THE OFFICI AL GAZETTE, BY THE CENTRAL GOVERNMENT]' ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 16 5.6. ON PERUSAL OF THE INFORMATION FURNISHED BY THE ASSESSEE, IT IS OBSERVED THAT THE PROOF OF PAYMENTS MADE TO THE UNI VERSITIES AND OTHER INSTITUTES AS CLAIMED BY THE ASSESSEE HAVE NO T BEEN FURNISHED. FURTHER, IT IS NOT KNOWN WHETHER THE RES EARCH INSTITUTES, UNIVERSITIES TO WHICH THE PAYMENTS HAVE BEEN MADE, ARE APPROVED IN ACCORDANCE WITH THE GUIDELINES PRESCRIBED IN RUL ES 5C AND 50 AND / OR NOTIFIED BY THE CENTRAL GOVT. AS REQUIRED UNDER THE PROVISIO TO CLAUSE(II). IN THE ABSENCE OF THE ABOVE DETAILS, THE ASSESSEE CANNOT BE ALLOWED THE WEIGHTED DEDUCTION. IN REGARD TO THE EXPENDITURE ITSELF, THE ASSESSEE HAS NOT FURNIS HED PROOF. HENCE, IT IS NOT KNOWN WHETHER THE EXPENDITURE IS L AID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ITS BUSINESS. T HEREFORE, EVEN THE EXPENDITURE PER SE OF RS. 79,78,975.00/- CANNOT BE A/LOWED AS DEDUCTION EITHER UNDER SEC.37 OR V/S 35(L)(II) OF T HE I. T. ACT. IN VIEW OF THIS, RS.79,78,975/- + RS.32,56,643/- (25% WEIGHTED DEDUCTION) = RS.1,12,35,618/- IS DISALLOWED AND ADD ED BACK TO INCOME RETURNED.' 27. BEFORE THE CIT(A), THE ASSESSEE STATED THAT THE DISALLOWANCE CANNOT BE MADE COMPLETELY AND EVEN IF THE WEIGHTED DEDUCTION IS NOT ALLOWED, THE EXPENDITURE FOR BUSINESS PURPOSE AND IS TO BE ALLOWED UNDER SECTION 37(1). AFTER CONSIDERING THE SUBMISSI ONS OF THE ASSESSEE, THE CIT(A) HELD THAT THE ASSESSEE HAS NOT DEMONSTRA TED THAT IT IS ELIGIBLE FOR WEIGHTED DEDUCTION AS CLAIMED AND THE AO HAS HI MSELF GIVEN A LIST OF UNIVERSITIES AND TESTING INSTITUTES TO WHOM THESE A MOUNTS HAVE BEEN PAID, AS IT IS NOT THE CASE OF THE AO THAT THE PAYM ENTS ARE BOGUS OR THAT THEY ARE NOT MADE FOR BUSINESS PURPOSE. HE FURTHER HELD THAT A MERE LOOK AT THE RELEVANT EXPENDITURE WOULD REVEAL THAT THE SAME IS MADE FOR CERTAIN TESTING AND EXPORT RELATED SERVICES PERTAIN ING DIRECTLY TO THE ASSESSEES BUSINESS. HE FINALLY CONCLUDED AS UNDER: I DO NOT SEE ANY REASON FOR DISALLOWING THE ENTIRE EXPENDITURE. GIVEN THE FACTS AND CIRCUMSTANCES, I AGREE WITH THE WEIGHTED DEDUCTION IS NOT TO BE ALLOWED ON THIS AMOUNT, BUT EXPENDITURE IS DEFINITELY ALLOWABLE AS BUSINESS EXPENDITURE U/S 37 (1) OF THE ACT. THE APPELLANT GETS RELIEF ACCORDINGLY. 28. BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT T HE COMPANY MADE PAYMENTS OF RS. 1,30,26,571/- TO VARIOUS UNIVERSITI ES AND RESEARCH INSTITUTIONS FOR THE PURPOSE OF TESTING. IT IS FURT HER SUBMITTED THAT THE ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 17 ENTIRE LIST OF PARTIES TO WHOM THE ABOVE PAYMENTS W ERE MADE WERE FURNISHED TO THE AO IN THE RE-ASSESSMENT PROCEEDING S ONCE AGAIN AND OUT OF THIS THE AO HAS SIMPLY REDUCED RS. 50,47,593 /- AND FOR THE REMAINING BALANCE THE AO HAS MERELY PICKED UP SOME ITEMS IN THE LIST AND DISALLOWED THE SAME ON THE REASONING THAT IT W AS NOT KNOWN WHETHER THE RESEARCH INSTITUTES/UNIVERSITIES ARE AP PROVED OR NOT. THE LEARNED COUNSEL CONTENDED THAT THIS IS CONTRARY TO FACTS SINCE FROM A PERUSAL OF THE LIST OF PARTIES TO WHOM PAYMENTS ARE MADE IT WILL BE VERY CLEAR THAT THEY ARE EITHER CENTRAL GOVERNMENT RESEA RCH INSTITUTIONS OR OTHER RESEARCH INSTITUTIONS / UNIVERSITIES WHICH AR E APPROVED INSTITUTIONS AND THE EXPENDITURE IS ALLOWABLE U)S 35(1)(II). 29. THE LEARNED DR, HOWEVER, RELIED ON THE ORDER OF THE CIT(A). 30. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE AT PAGE 33 OF THE PAPER BOOK FILED LIST OF PAYMENTS I.E. PAYEES LIST CONSISTING OF VARIOUS UNIVERSITIES AND INSTITU TIONS FOR PURPOSE OF TESTING AND AT PAGE 36 OF THE PAPER BOOK, SAMPLE NOTE FOR APPROVAL FROM CENTRAL RICE RESEARCH INSTITUTE, CUTTACK HAS B EEN PRODUCED. HOWEVER, THE LEARNED DR SUBMITTED THAT DIRECTIONS S HOULD BE GIVEN TO VERIFY WHETHER APPROVAL HAS BEEN IN ACCORDANCE WIT H THE GUIDELINES PRESCRIBED IN RULES 5C AND 5D OR NOTIFIED BY THE CE NTRAL GOVERNMENT ON PROVISO TO CLAUSE (2). IN THESE CIRCUMSTANCES, WE A RE INCLINED TO SET ASIDE THE ISSUE TO THE FILE OF THE AO TO GRANT WEIG HTED DEDUCTION AFTER VERIFYING WHETHER THE APPROVAL HAS BEEN OBTAINED BY THE UNIVERSITIES/INSTITUTIONS TO WHOM PAYMENTS HAVE BEE N MADE. 31. GROUND NO. 6 IS WITH REFERENCE TO THE DISALLOW ANCE UNDER 80HHC AMOUNTING TO RS. 20,66,392/-. ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 18 32. THE ASSESSEE CLAIMED DEDUCTION U/S 80 HHC OF RS . 48,23,632/- BY ARRIVING AT ELIGIBLE PROFITS OF RS. 1,60,78,773/- AND WHILE ARRIVING AT THIS ELIGIBLE PROFITS CONSIDERING THE FOLLOWING: PROFITS OF THE BUSINESS RS. 15,40,03,795 ADJUSTED EXPORT TURNOVER RS. 22,62,41,093 ADJUSTED TOTAL TURNOVER RS.206,97,17,782 THE AO RECOMPUTED THE EXPORT TURNOVER AND DISALLO WED THE CLAIM U/S 80HHC AMOUNTING TO RS. 20,66,392/-. 33. ON APPEAL, BEFORE THE CIT(A) THE ASSESSEE STATE D THAT THE CALCULATIONS MADE BY THE AO WERE CORRECT AND DEEMED EXPORT SALES WERE TO BE ADDED TO THE TOTAL EXPORT SALES. THE AR OF THE ASSESSEE SUBMITTED THAT THE DETAILS OF DEEMED EXPORTS WERE NEVER ASKED FOR DURING ASSESSMENT PROCEEDINGS, HOWEVER, THE SAME WE RE PRODUCED DURING THE APPEAL PROCEEDINGS BEFORE THE CIT(A). AF TER CONSIDERING THE SUBMISSIONS, THE CIT(A) HELD THAT DEEMED EXPORTS AR E DULY CERTIFIED BY THE CONCERNED AGENCIES AND ARE FULLY DOCUMENTED AND THE AO DID NOT TAKE A LOOK AT THESE DOCUMENTS. HE, THEREFORE, HELD THAT THE DEEMED EXPORTS ARE TO BE TREATED AS PART OF THE EXPORT TUR NOVER AND THE REST OF THE CALCULATIONS HAVE BEEN MADE CORRECTLY MADE BY T HE AO. 34. AFTER HEARING THE PARTIES AND PERUSING THE RECO RD, IT IS OBSERVED THAT THE CIT(A) HAS GIVEN A FINDING THAT DEEMED EXP ORT SALES ARE DULY CERTIFIED BY THE CONCERNED AGENCIES AND FULLY DOCUM ENTED AND, THEREFORE, THE SAME ARE TO BE TREATED AS PART OF TH E EXPORT TURNOVER. WE FIND NO INFIRMITY IN THE ORDER OF CIT(A) AND UPHOLD THE SAME. FURTHER, WE DIRECT THE AO TO MODIFY THE CALCULATION U/S 80 HHC AFTER INCLUDING THE DEEMED EXPORT SALES AS PART OF EXPORT TURNOVER. HEN CE, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO. ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 19 35. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 285/HYD/2011 BY THE REVENUE 36. GROUND NO. 1 RAISED BY THE REVENUE IS AS FOLLOW S: THE LEARNED CIT(A) OUGHT TO HAVE HELD THE SOFTWARE EXPENDITURE OF RS. 1,39,76,847/- IS CAPITAL EXPENDITURE IN NATU RE AND OUGHT NOT TO HAVE HELD THAT IT IS OF THE NATURE OF DEFERRED R EVENUE EXPENDITURE SPREAD OVER A PERIOD OF 25 YEARS. 37. THIS GROUND HAS ALREADY BEEN DECIDED IN GROUND NO.3 OF THE ASESSSEES APPEAL VIDE PARAS 11 TO 17, WHEREIN WE H AVE ALLOWED THE FULL CLAIM OF THE ASSESSEE. THEREFORE, THIS GROUND OF AP PEAL OF THE REVENUE IS DISMISSED. 38. GROUND NO. 2 IS DIRECTED AGAINST THE ACTION OF THE CIT(A) IN ALLOWING THE BAD DEBTS CLAIM OF RS. 12,27,854/-. 39. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE ORDERS OF THE REVENUE AUTHORITIES, WE CONFIRM THE ORDER OF TH E CIT(A) TAKING INTO CONSIDERATION THE WRITTEN SUBMISSIONS FILED BEFORE THE CIT(A) BY THE ASSESSEE: 'THE AO MERELY DISALLOWED ON THE GROUNDS THAT 'THER E SHOULD BE SOME INDICATION THAT THE DEBT HAS BECOME A NON PERF ORMING ASSET TO BE WRITTEN OFF IN THE BOOKS'. IT IS PERTINENT TO NOTE THAT LEDGER ACCOUNT OF BOTH THE ABOVE PARTIES FOR THE PAST SEVERAL YEARS WERE SUBMITTED TO THE AO AND THE SAID ACCOUNTS CLEARLY SHOWED THAT NO AMOUNTS WERE RECOVE RED FROM THE PARTIES FOR THE LAST SEVERAL YEARS. 'IN CLT VS AHMEDABED ELECTRICITY CO. LTD (2003) 262 1TR 97 (GUJ) IT WAS HELD THAT THE TAX PAYERS OPINION THAT A DEBT S IS A BAD DEBT SHOULD SUFFICE, WHEN THERE ARE CIRCUMSTANCES OR MAT ERIAL TO INDICATE THE REASONABLENESS OF THE DECISION TO TREA T THE DEBT AS BAD'. ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 20 'IN NEWDEAL FINANCE & INVEST. LTD VS DCLT (2000) 74 1TD 469(CHENNAI} IT WAS HELD THAT WHERE THE ASSESSEE HA D ACTED BONA FIDE AND REASONABLY, THE AO CANNOT SUBSTITUTE HIS O WN SUBJECTIVE JUDGMENT AND MUST ACCEPT THE ASSESSEE'S DECISION. S IMILAR VIEW WAS EXPRESSE1J, IN THE CASE OF JAYANTI COMMERCE LTD VS ACLT(L997) 61 ITD 183 (CAL)'. 40. WE FIND THAT THE MANAGEMENT HAS TAKEN CONSCIOUS DECISION FOR WRITING OFF BAD DEBTS DUE TO NON-RECOVERY OF THE SA ME. THE ASSESSEE HAS ALSO DEMONSTRATED THAT THE DEBT HAD BECOME NON- PERFORMING. THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. V. CI T, [2010] 323 ITR 397 (SC) HELD AS UNDER:- AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE IN COME-TAX ACT, 1961, WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR T HE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECO VERABLE, IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE. 41. RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY T HE HONBLE SUPREME COURT IN THE SAID CASE, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAISED BY THE REVENUE. 42. GROUND NO. 3 IS AS FOLLOWS: THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE ENTI RE OUTSIDE R&D EXPENDITURE OF RS. 79,78,975/- IS NOT AN ALLOWA BLE EXPENDITURE U/S 35(I)(II) SINCE THE ASSESSEE HAS NO T FURNISHED PROOF OF APPROVALS OF THE INSTITUTIONS U/S 35 IN AC CORDANCE WITH RULES5C AND 5D OR NOTIFIED BY THE CENTRAL GOVT. 43. THIS GROUND IS SIMILAR TO THE GROUND THAT HAS B EEN DECIDED BY US IN GROUND NO. 5 OF ASSESSEES APPEAL VIDE PARAS 24 TO 30 WHEREIN WE HAVE SET ASIDE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO ALLOW THE CLAIM AFTER FURNISHING THE PROOF OF APPROVALS OF TH E INSTITUTIONS U/S 35 IN ACCORDANCE WITH RULES 5C AND 5D OR NOTIFIED BY THE CENTRAL GOVT. THEREFORE, THIS GROUND OF THE REVENUE IS ALLOWED FO R STATISTICAL PURPOSES. ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 21 44. GROUND NO. 4 IS AS FOLLOWS: THE LEARNED CIT(A) OUGHT NOT TO HAVE HELD THAT THE DEEMED EXPORT SALES OF TECHNICALS OF RS. 56,08,050/- AND DEEMED E XPORT SALES OF FORMULATIONS OF RS. 1,37,64,135/- FORMS PART OF EXP ORT TURNOVER FOR CALCULATING ELIGIBLE DEDUCTION U/S 80HHC. 45. THIS ISSUE HAS ALSO BEEN DECIDED IN GROUND NO. 6 OF ASSESSEES APPEAL VIDE PARAS 31 TO 34 WHEREIN WE HAVE UPHELD THE ORDER OF THE CIT(A) AND SET ASIDE THE ISSUE TO THE FILE OF THE A O TO MODIFY THE CALCULATION U/S 80HHC AFTER INCLUDING THE DEEMED EX PORT SALES AS PART OF EXPORT TURNOVER. THEREFORE, THIS GROUND OF APPEAL O F THE REVENUE IS DISMISSED. 46. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 47. TO SUM UP APPEAL OF THE ASSESSEE BEING ITA NO. 272/HYD/2011 AND THE APPEAL OF THE REVENUE BEING ITA NO. 285/HYD /2011 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 13 TH DAY OF NOVEMBER, 2013. SD/- SD/- (B. RAMAKOTAIAH) (ASHA VI JAYARAGHAVAN) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 13 TH NOVEMBER, 2013 KV ITA NOS. 272 & 285 /HYD/11 NAGARJUNA AGRICHEM LTD. 22 COPY TO:- 1) M/S NAGARJUNA AGRICHEM LTD., C/O. DR. CP RAMASWA MI, ADVOCATE, FLAT NO. 303, GITANJALI APTS., PLOT NO. 1 08, SRINAGAR COLONY, HYDERABAD 500 072. 2) DCIT, CIRCLE - 16(1), HYDERABAD 3) THE CIT (A)-V, HYDERABAD 4) THE CIT-IV, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.