Joint Commisioner of Income Tax (LTU) , Bangalore V. M/s Texas Instruments India Pvt Ltd , Bangalore

ITA 831/BANG/2017

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2064 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 11-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained expenditure; Capital asset; Depreciation; Transfer pricing; Double taxation relief; Opportunity of being heard; International transaction; Additional evidence; Permanent establishment; Initiation of penalty proceedings; Wholly owned subsidiary; Revenue expenditure; Capital expenditure; TDS; Set aside
• Section: 32; 37; 271(1)(c); 69C; 143(3); 142(1); 234B; 40(a)(ia); 194C; 144C; 143(2); 43; 48; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND MS. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A Nos. and Assessment Year Appellant Respondent 852/Bang/2017 2009-10 M/s. Texas Instruments (India) Pvt. Ltd., Bagmane Tech Park, No.66/3, Adjacent to LRDE, Byrasandra, C. V. Raman Nagar, Bengaluru-560 093. PAN : AAACT 5445 M The Additional Commissioner of Income-Tax-LTU, Bengaluru. 831/Bang/2017 2009-10 The Joint Commissioner of Income Tax (LTU), Bengaluru. M/s. Texas Instruments (India) Pvt. Ltd., Bengaluru-560 093. PAN : AAACT 5445 M Assessee by : Shri. Percy Pardiwala, Sr. Counsel Revenue by : Shri. Sanjay Kumar S. K, CIT(DR)(ITAT), Bengaluru. Date of hearing : 15.06.2022 Date of Pronouncement : 29.06.2022 O R D E R Per Bench These are cross appeals against the order of the CIT(Appeals), LTU, Bangalore dated 31.01.2017 for the assessment year 2009-10. 2. The brief facts of the case are that the assessee is a private limited company incorporated in 1985 under the Companies Act, 1956 as a wholly owned subsidiary of Texas Instruments Incorporated, USA ["TI Inc"]. The assessee has an undertaking registered under the Software Technology Parks of India ["STPI']) and is primarily engaged in software development for TI Inc. for the purpose of creating semiconductor devices. ITA Nos. 852 & 831/Bang/2017 Page 2 of 59 3. The assessee e-filed its return of income for the AY 2009-10 on 30.9. 2009 declaring a total income of Rs 829,619,519. In computing the above income, it claimed a deduction of Rs 77,851,741 from its gross total income as per the provisions of section 80JJAA of the Income Tax Act, 1961 ["the Act"]. 4. Notices under section 143(2) and section 142(1) of the Act calling for certain information/details was served on the assessee, which were provided by the assessee. During the course of assessment proceedings, the international transactions entered into by the assessee were referred to the Transfer Pricing Officer ["TPO"] for determination of Arm's Length Price ["ALP"] u/s. 92CA of the Act. The TPO passed an order dated 21.1. 2013 u/s. 92CA of the Act making a TP adjustment of Rs 1,209,858,772. Accordingly, the AO passed draft assessment order u/s. 143(3) r.w.s. 144C of the Act dated 19.3.2013 after making certain disallowances on corporate tax listed below and computed the total income at Rs 2,843,922,040:-  Disallowance of deduction u/s. 80JJA – Rs.77,851,741.  Disallowance of expenses on discontinued capital project – Rs.74,19,000.  Disallowance of write off of capital work in progress – Rs.12,46,021.  Disallowance of expenditure under the head plant & machinery – Rs.92,33,401.  Disallowance of lease rentals paid on equipment – Rs.2,55,00,765.  Disallowance of lease rentals paid on car – Rs.7,75,20,788.  Disallowance of profit on foreclosure of leased assets – Rs.55,70,701.  Disallowance of software development expenditure – Rs.214,825,509.  Disallowance of amount claimed u/s. 40(a)(i) – Rs.57,761,289. ITA Nos. 852 & 831/Bang/2017 Page 3 of 59  Disallowance of data automation expenses – Rs.279,837,005.  Disallowance of Employee Stock Option Plan expenses – Rs.1,419,397.  Disallowance of Information Technology Support Service expenses – Rs.8,517,018.  Disallowance of miscellaneous expenses – Rs.37,740,114.  Addition of Rs.1,209,859,772 to taxable income on account of re- computation of the ALP by the TPO. Thereafter, the assessee intimated the AO opting to file an appeal with CIT(Appeals), pursuant to which the AO passed the final assessment order dated 22.4.2013 determining the total income of the assessee at Rs 2,843,922,040. 5. During the course of the appeal proceedings before the CIT(Appeals), the assessee withdrew the grounds relating to TP adjustment since the assessee accepted the final resolution in the MAP proceedings entered by its parent company with the US Competent Authority under Article 22 of India-US DTAA. On the corporate grounds, the CIT(Appeals) allowed the Data Automation Expenses of Rs.279,837,005 as well as the claim u/s. 40(a)(i) of Rs.57,761,289 subject to verification by AO; and upheld the rest of the disallowances made by the AO. Aggrieved, both the parties are in appeal before the Tribunal. While the revenue’s appeal is only with regard to the deletion of disallowance of Data Automation Expenses, the assessee in its appeal has challenged the disallowances upheld by the CIT(Appeals). 6. We first take up the revenue’s appeal with regard to deletion of Data Automation Expenses by the CIT(A). The brief facts on this ITA Nos. 852 & 831/Bang/2017 Page 4 of 59 issue are that the assessee debited a sum of Rs.151,27,43,459 as data automation expenses treating it as revenue in nature. Before the AO, it was submitted that the expenditure represents amount incurred towards computer software including, but not limited to the cost of licensing software used by the designers for product design and verification [EDA software]. The EDA expenditure is allocated to the assessee based on number of seconds assessee’s personnel are logged on to any of the EDA software packages and hence it is in the nature of revenue expenditure. The AO, however, disallowed the expenditure treating it as capital in nature, relying on the following case laws:- i. CIT v. Arawali Construction Co. (P) Ltd., 259 ITR 30 (Raj) ii. Amway India Enterprises v. DCIT, 111 ITD 112 (Del)(SB). 7. On appeal, the CIT(Appeals) allowed the issue in favour of the assessee based on his order in assessee’s own case for AY 2008-09. Aggrieved, the revenue is in appeal before the Tribunal. 8. The ld. DR submitted that EDA software is purchased and charged to the assessee on usage basis, therefore the original software is capital in nature and the usage charges also would be capital in nature. He therefore supported the order of the AO in treating the data automation expenditure as a capital expenditure. 9. The ld. AR drew our attention to the decision of the coordinate Bench of the Tribunal in assessee’s own case for AYs 2010-11 & 2012-13 to 2014-15 wherein following its own order for AY 2008-09 on identical issue, the Tribunal in ITA Nos.1967/Bang/2018 & connected appeals vide order dated 17.05.2022 held the issue in favour ITA Nos. 852 & 831/Bang/2017 Page 5 of 59 of the assessee. He also submitted that the revenue had not preferred any further appeal against the order of the Tribunal for AY 2008-09 and thus it had reached finality. He further submitted that the treatment of original software in the hands of AE is not relevant and there is no basis for the revenue to contend that the expenditure incurred towards usage charges is capital in nature on the ground that the expenditure is capitalized in AE’s books. 10. We have considered the rival submissions and perused the material on record. We notice that the coordinate Bench of the Tribunal in assessee’s own case for AYs 2010-11 & 2012-13 to 2014- 15 (supra) has considered similar issue and held that :- “9. Learned DR pointed out that the agreement for rendering EDA services was used for manufacturing certain semiconductor components and products and the EDA expenditure in question helps the assessee to bring into existence the capital asset and therefore the expenditure ought to have been treated as a capital expenditure. It was submitted that the expenditure was part of the profit making operative and therefore ought to be considered as capital expenditure. Learned Counsel for the assessee pointed out that identical expenditure was allowed in assessee’s own case by the Tribunal in Assessment Year 2008-09 in IT(TP)A No.149/Bang/2014, order dated 06.03.2020. The Tribunal in the aforesaid order held as follows: “28. Gr.No.3 raised by the revenue is with regard to the grievance of the revenue in treating amount paid towards automation software as revenue expenditure. The facts with regard to this ground of appeal are that the Assessee claimed deduction of a sum of Rs.135,52,51,594/- while computing income from business under the head “Data Automation software Expenses”. The AO called upon the Assessee to explain the nature of the aforesaid expenditure. The Assessee vide its letter dated 28.7.2011 explained to the AO that the software in question were “Electronic Design Automation”(EDA) which are used by the Assessee’s designers for product design and verification. The Assessee pointed out that EDA software license is ITA Nos. 852 & 831/Bang/2017 Page 6 of 59 acquired by the Texas Instruments Inc. USA under a global agreement from vendors of such software like Synopsis, Cadence, Mathwork, Magma, Rational etc., and the Assessee is allowed to use such software and billed on the basis of actual hours the Assessee uses the software. The Assessee therefore submitted that the expenditure was a payment for license to use software and the Assessee never acquired any right or interest in the software and therefore the payment made for right to use such software was purely revenue expenditure and should be allowed as deduction. The AO however did not allow the claim of the Assessee by concluding that the expenditure was capital expenditure and therefore only depreciation at 60% would be allowed and not the entire expenditure. The following were the relevant observations of the AO:- “5.3 The assessee's submission is carefully considered. The Data Automation Software is a computer software which is being used by the assessee for designing its products. Electronic design automation (EDA) is a category of software tools for designing electronic systems such as printed circuit boards and integrated circuits. The tools work together in a design flow that chip designers use to design and analyze entire semiconductor chips. The expenditure on computer software under the head. "Data Automation Software expenses" is necessarily an expenditure which is required to be capitalized by the assessee. Assessee's relies on the Hon'ble Supreme court decision in the case of Empire Jute Co Ltd Vs CIT [124 ITR 1] is misplaced since the decision was given by the Hon'ble Court in a different set of facts and circumstances. The assessee has not stated or clarified in its submission dated 28.07.2011 as to how it has applied the judgment in the case of Empire Jute Co Ltd in its case. 5.4 The computer software expenses have been held to be capital in nature by the Hon'ble Rajasthan High Court in the case of CIT Vs Arawali Construction Co. (P) Ltd. (259 ITR 30). The Hon'ble Court held as under: "The fact on record is that the payment of Rs 1,38,360/- was not made as consultancy fee to Hindustan Computers Ltd_ in fact, the payment was made for outright sale of 'computer software' which is used as technique in mining operations. The finding of the Commissioner (Appeals) was that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation, why it should not be ITA Nos. 852 & 831/Bang/2017 Page 7 of 59 treated as capital asset and expenditure on that, capital expenditure. Considering these facts and decision of their Lordships and later decision of the Bombay High Court, in our view, the acquisition of technical know-how is a capital expenditure, therefore, the assessing officer has rightly treated the expenditure on acquiring the computer software as expenditure of capital nature and rightly allowed depreciation as per rules." 5.5 Reliance is also placed on the decision in the case of Amway India Enterprises Vs. DCIT (ITAT, Del-Special Bench) [111 ITD 112]. In this case the Hon'ble ITAT held that computer software was tangible asset eligible for depreciation @ 60%. In the result, the Automation software expenses of Rs. 135,52,51,594/- are held to be capital in nature. The amount as claimed in P 86 L a/c is disallowed and added back. Instead, the assessee is allowed depreciation on the amount @ 60%. [Addition Rs. 54,21,00,637/-]” 29. On appeal by the Assessee, the CIT(A) deleted the addition made by the AO holding that the Assessee acquired on purchase by the Assessee and as per the Agreement with the owner of the software the Assessee had only a right to use the software and that the software was an enabling tool in the business of the Assessee and therefore the expenditure question was revenue expenditure. Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal. 30. We have heard the rival submissions. A copy of the group cost allocation Agreement dated 24.3.2006 is at page - 406 of Assessee’s paper book. The agreement is between Texas Instruments Inc., USA and the Assessee. The Agreement refers to the US parent company of the Assessee having acquired license to use EDA tools from the vendors and the right of the Assessee to use the same and the fact that billing will be done on the Assessee on the basis of actual use of the software by the Assessee. It is thus clear that the Assessee had acquired no right or interest whatsoever in the EDA tools and had only a right to use the software. It is not the case of the revenue that the EDA tools was not connected to the business of the Assessee. In such circumstances, we are of the view that the deduction was rightly allowed by the CIT(A) as revenue expenditure. We find no grounds to interfere with the order of the CIT(A) and dismiss Gr.No.2 raised by the revenue.” ITA Nos. 852 & 831/Bang/2017 Page 8 of 59 10. He also pointed out the clause of the agreement and highlighted the fact that what was paid by the assessee was of the expenses incurred by TI Incorporated, USA, for use of computer software which it allowed its group companies to use. He pointed out that US parent company charged the assessee on the basis of the actual use of software. He therefore submitted that the expenditure was nothing but the right to use the computer software on the basis of actual usage which did not give any benefit of enduring nature to the assessee nor did it result in any asset coming into existence. 11. We have carefully considered the rival submissions and are of the view that the nature of expenses is identical to the expenses that was considered by the Tribunal in Assessment Year 2008-09. The Tribunal, after analyzing the terms of the agreement, has come to the conclusion that assessee acquired no right or interest of whatsoever in the EDA tools and had only the right to use software. The use of the software was no doubt connected to the business but did not result in any asset coming into existence. The Tribunal held that the expenditure was revenue in nature. We are of the view that in the light of the similarity of facts with regard to these expenses, the decision by the Tribunal for Assessment Year 2008-09 will equally apply to Assessment Year 2010-11 also. Following the aforesaid decision of the Tribunal, we uphold the order of the CIT(A) and dismiss ground No.2 raised by the Revenue.” 11. Considering the fact that the revenue has not gone in further appeal on this issue for the AY 2008-09 and the binding effect of the above order of the Tribunal, we uphold the order of the CIT(Appeals) in treating the data automation expenses as revenue expenditure. Therefore, the appeal of the revenue is dismissed. Assessee’s appeal 12. Ground No.2 by the assessee is regarding deduction u/s. 80JJA of the Act. The grounds raised are as follows:- ITA Nos. 852 & 831/Bang/2017 Page 9 of 59 “2.1 The learned CIT(A) and the AO have erred in law and on facts in denying the deduction under section 80JJAA of the Act amounting to Rs 7,78,51,741 without appreciating the fact that the Appellant has complied with all the conditions to be entitled for the deduction under section 80JJAA of the Act. 2.2 The learned CIT(A) and the AO have erred in law and on facts in concluding that the employees employed for a period of less than 300 days in the previous year relevant to the assessment year cannot be considered as regular workmen. 2.3 The learned CIT(A) has erred in law in not adjudicating the other grounds raised by the Appellant and in summarily denying the deduction claimed by holding that the Appellant does got satisfy the eligibility conditions under section 80JJAA of the Act.” 13. During the year, the assessee claimed a sum of Rs.7,78,51,741 as deduction u/s. 80JJA towards 30% additional wages paid to new workmen recruited/joined in the year 2006-07. The AO noted that section 2(s) of the Industrial Disputes Act, 1947 applies and the following facts are crucial for eligibility of deduction:- (i) The workman should be newly recruited. (ii) It is evident that only the person employed in any industry to do any manual, unskilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment are express or implied is eligible workman. (iii) It does not include a person who is mainly employed in a managerial or administrative capacity. (iv) Further as per the provision the salary/wage payable to them shall not exceed Rs.1,600/pm. 14. Against the show cause notice issued by the AO, the assessee filed detailed written submissions justifying the claim. The AO ITA Nos. 852 & 831/Bang/2017 Page 10 of 59 rejected the claim of deduction u/s. 80JJA of the Act on various grounds as follows:- “1. Section 80JJAA is applicable only to an industrial undertaking that has engaged in manufacture or production of article or thing. It is not applicable to IT/ITES/Software development companies as they are not engaged in manufacture or production of article or thing. 2. Though it was contended before CIT(A) that software establishments have been declared as public utility services under Industrial Disputes Act by Karnataka Government, the enquiries revealed a fact that the company had made false representation before appellate authorities whereas no such notification was issued by State Govt. of Karnataka. 3. On the other hand the State Government (Labour Commissioner) has given the reply that the Govt. of Karnataka has exempted the IT and IT enabled services/Software Establishments from all the provisions of Industrial Establishment (Standing Orders) Act 1946 from the date of publication of the notification in the Official Gazette till 30-3-2013. 4. Without prejudice to the above said findings it was also noticed that many of the alleged new workmen were not recruited afresh and rather they had joined from various other software companies and the assessee company themselves have admitted this fact that those employees were not new as contemplated by legislature. The very purpose of such legislation was defeated by the assessee company. 5. In few cases though it was claimed that the mode of recruitment was campus recruitment no evidence was submitted. 6. It is also learnt that the alleged new workman had not worked for more than 300 days in the year of recruitment. 7. Not ever a single workman was paid wage as prescribed in Industrial Dispute Act and the salary has exceeded the prescribed limit in all cases and many of them were recruited in managerial capacity contrary to Industrial Disputes Act, 1947. ITA Nos. 852 & 831/Bang/2017 Page 11 of 59 15. On appeal, the CIT(Appeals) confirmed the disallowance stating that the ITAT in assessee’s own case for AYs 2001-02 to 2002-03 decided the issue against the assessee and also that the assessee does not satisfy the eligibility conditions u/s. 80JJA of the Act during the FY 2008-09. Hence, the assessee is in appeal before the Tribunal. 16. Before us, the ld. AR submitted that deduction u/s. 80JJA during the year under appeal is claimed towards 3 rd year deduction of 30% for the employees who joined/were recruited during 2006-07. He drew our attention to the fact that similar deduction claimed during the second year i.e., AY 2008-09 was also denied by the lower authorities and the matter travelled upto the High Court where the issue was decided in favour of the assessee. The ld AR submitted that in the year under consideration, the deduction is claimed for the same number of workmen who joined in 2006-07 and invited our attention to the statement of computation of income at page 52 of PB to substantiate the claim. 17. The ld. DR, on the other hand, vehemently supported the order of the AO and reiterated the observations of the AO in terms of the definition of “new workmen”. He also submitted that given the attrition rate in the software industry, there is very minimum possibility of same set of ‘new workmen’ who joined in 2006-07 who continued to work with the assessee during the year under consideration so as to enable the assessee to claim the deduction in the third year. He submitted that the assessee has not produced any details to substantiate its claim before the AO. The ld. DR also raised contentions with ITA Nos. 852 & 831/Bang/2017 Page 12 of 59 regard to the Notification referred to by the ITAT, Bangalore in the order in assessee’s own case for AY 2008-09 and whether, ‘new workmen’ would include employees who have already worked in another organization or only fresh graduates. 18. We have considered the rival submissions and perused the material on record. The impugned issue was subject matter of consideration before the Tribunal in IT(TP)A Nos.149 & 169/Bang/2014 for AY 2008-09 which was the second year of claim of deduction for the same set of employees recruited in the year 2006-07. The reasons for denying deduction u/s. 80JJA by the AO for that year (AY 2008-09) are similar for the present year under consideration. The Tribunal vide order dated 6.3.2020 has passed a very detailed order addressing each of the objections of the AO. The relevant observations of the Tribunal are reproduced below:- “3. The next issue raised by the Assessee in its appeal in Gr.No.3.1 (sub grounds 3.1.1 to 3.1.4) is with regard to the action of the revenue authorities in not allowing deduction u/s.80JJAA of the Act amounting to Rs. 7,57,22,069/-. The provisions of Sec.80JJAA of the Act, as applicable for AY 2008-09 reads as follows: "80JJAA. Deduction in respect of employment of new workmen.—(1) Where the gross total income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year ITA Nos. 852 & 831/Bang/2017 Page 13 of 59 relevant to the previous year in which such employment is provided. (2) No deduction under sub-section (1) shall be allowed— (a) if the industrial undertaking is formed by splitting up or reconstruction of an existing undertaking or amalgamation with another industrial undertaking; (b) unless the assessee furnishes along with the return of income the report of the accountant, as defined in the Explanation below sub-section (2) of section 288 giving such particulars in the report as may be prescribed. Explanation.—For the purposes of this section, the expressions,— (i) "additional wages" means the wages paid to the new regular workmen in excess of one hundred workmen employed during the previous year : Provided that in the case of an existing undertaking, the additional wages shall be nil if the increase in the number of regular workmen employed during the year is less than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year; (ii) "regular workman", does not include— (a) a casual workman; or (b) a workman employed through contract labour; or (c) any other workman employed for a period of less than three hundred days during the previous year; (iii) "workman" shall have the meaning assigned to it in clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947)." 4. The first reason assigned by the AO for denying the claim for deduction u/s.80JJAA of the Act was that persons working in software industry cannot be said to be "Workmen" for the purpose of Sec.80JJAA of the Act. According to the AO the ITA Nos. 852 & 831/Bang/2017 Page 14 of 59 definition of workmen for the purpose of Sec.80JJAA was the definition of the term as per Sec.2(s) of the Industrial Disputes Act, 1947 and that definition lays down that "Any person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical and supervisory work for hire or reward, but does not include employees employed mainly in a managerial or administrative capacity. According to the AO Software professionals are highly skilled workers and the nature of work performed by them were highly skilled whereas the skilled work contemplated by the definition of workmen in the Industrial Disputes Act, 1947 is ordinary skill and therefore the workmen of the Assessee cannot be considered as "Workmen" for the purpose of Sec.80JJAA of the Act. The AO also noticed that in Assessee's own case for AY 2001-02 and 2002-03, the Tribunal had not accepted the stand of the revenue in this regard but still chose not to follow the decision of the Tribunal as the revenue has not accepted the decision of Tribunal and had preferred appeal to the Hon'ble High Court on this aspect of deduction u/s.80JJAA of the Act. On the question whether the employees employed in software industry can be said to be "Workmen", the Bangalore Bench of ITAT has already settled this issue in Assessee's own case. The Tribunal held that Software Industry has also been notified as Industry for the purpose of Industrial Disputes Act, 1947 by the State of Karnataka and that the employees employed in software development industry render technical services and not services in the nature of supervisory or management character. In view of the aforesaid decision of the Tribunal, we are of the view that the above reason given by the AO for denying the benefit of deduction u/s.80JJAA of the Act cannot be sustained. In fact the CIT(A) in the impugned order has also not sustained the disallowance of deduction u/s.80JJAA of the Act on this ground and has followed the earlier order of the Tribunal in Assessee's own case. 5. Before we deal with the other surviving reasons assigned by the AO for denying the benefit of deduction u/s.80JJAA of the Act, it is appropriate to recapitulate the conditions that need to be fulfilled for claiming deduction. The conditions that need to be fulfilled by an Assessee to claim benefit of deduction u/s.80JJAA of the Act, are: ITA Nos. 852 & 831/Bang/2017 Page 15 of 59 (1) The Assessee should be an Indian Company and the gross total income of the Assessee should include profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing. Admittedly this condition is satisfied in the case of the Assessee. (2) There are certain prohibition laid down in Sec. 80JJAA(2) of the Act and it is not the case of the AO that these prohibitions are applicable in the case of the Assessee. (3) The new workmen employed must be a regular workmen and the number of such new workmen employed should be in excess of one hundred workmen employed during the previous year. (4) The increase in the number of regular workmen employed during the year should not be less than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year; (5) If the above conditions are satisfied then 30% of the additional wages paid to new regular workmen employed by the assessee in the previous year, shall be allowed as deduction for three assessment years including the assessment year relevant to the previous year in which such employment is provided. 6. The following are the details regarding the number of regular workmen and new workmen employed by the Assessee during the FY 2002-03 to 2007-08 relevant to AY 2003-04 to 2008-09: Details of Number of regular workmen : Particulars Number of Regular "Workmen" Number of new workmen added As on March, 31, 2003 FY 2002-03(AY 2003-04) 775 170 As on March, 31, 2004 FY 2003-04(AY 2004-05) 846 186 As on March, 31, 2005 FY 2004-05(AY 2005-06) 1048 351 ITA Nos. 852 & 831/Bang/2017 Page 16 of 59 As on March, 31, 2006 FY 2005-06(AY 2006-07) 1,056 211 As on March, 31, 2007 FY 2006-07(AY 2007-08) 1,187 295 As on March, 31, 2008 FY 2007-08(AY 2008-09) 1,105 131 7. The details of the new employees in respect of whom the Assessee claimed deduction u/s.80JJAA of the Act are given at page 176 to 182 of paperbook. From a perusal of the said list and the report of auditor for claiming deduction u/s.80JJA of the Act in Form No. 10DA, a copy of which is at pages 80 to 85 of the Assessee's paper book, it can be seen that the deduction was claimed by the Assessee u/s.80JJAA of the Act on salary paid to 287 employees. It is also clear from the said report that the Salary paid to new workmen were nil for the Financial Year ending 31.3.2006 and 31-3-2008. Deduction has been claimed only in respect of wages paid to new regular workmen who were employed during the previous year 1-4-2006 to 31-3-2007. All the 287 employees were new employees who joined during the FY 2006-07, on or after 12-6-2006 and therefore could not have put in service of 300 days or more during the FY 2006-07 relevant to Ay 2007-08. It is undisputed that they worked for 300 days during the previous year relevant to AY 2008-09. 8. The second reason given by the AO for denying the benefit of deduction u/s.80JJAA of the Act, which is the reason that survives for consideration by the Tribunal is according to the AO since the additional wages paid to these 287 employees were not eligible to deduction u/s.80-JJAA of the Act because these employees did not work for more than 300 days in FY 2006-07 relevant to AY 2007-08, the wages paid to these employees in AY 2008-09 will also not qualify for deduction u/s.80JJAA of the Act. In other words according to the AO if the condition for grant of deduction u/s.80JJAA of the Act is not satisfied with reference to additional wages paid to new employees in the first year of their employment, then the additional wages paid to such new employees will not allowed in the second and third Assessment ITA Nos. 852 & 831/Bang/2017 Page 17 of 59 Years also. There is a reference in the AO's order that only 236 out of the 287 employees were new employees but these observations in the order of assessment is incorrect and contrary to the report of the Chartered Accountant in Form No. 10DA. It is admitted position that in respect of additional wages paid to new employees employed in the previous year relevant to AY 2008-09 was not claimed by the Assessee, as the increase in the number of regular workmen employed during the year was not more than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year. It is also not disputed that these 287 employees worked for 300 days in the previous year relevant to AY 2008-09. The total wages paid to new workmen was Rs. 25,24,06,897 and deduction u/s.80JJAA of the Act was claimed by the Assessee at 30% of the above viz., a sum of Rs. 7,57,22,069/-. 8.1 On appeal by the Assessee against the order of AO denying deduction u/s.80JJAA of the Act, the CIT(A) endorsed the view of the AO on this aspect of deduction under Sec.80JJAA of the Act. Hence this appeal by the Assessee before the Tribunal. 8.2 The learned counsel for the Assessee brought to our notice the order of the AO for AY 2007-08 in which he has while disallowing the claim for deduction u/s.80JJAA of the Act for that AY has accepted the position that on additional wages paid to new workmen employed during the previous year relevant to AY 2005-06 who have worked more than 300 days during the previous year relevant to AY 2007-08, the Assessee is entitled to deduction u/s.80JJAA of the Act. It was pointed out that the ITAT in the appeal relating to AY 2007-08 in the case of the Assessee in IT(TP)A.No.1032/Bang/2011 order dated 16-6-2017 confirmed the disallowance u/s.80JJAA of the Act only on the basis the increase in the number of regular workmen employed during the year was not more than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year. He relied on the decision of ITAT rendered in the case of Bosch Ltd. v. Asstt. CIT [2016] 74 taxmann.com 161 (Bang. - Trib.) wherein at paragraph 23 of the aforesaid order the Tribunal observed that the deduction u/s.80JJAA of the Act is allowed for three years including the year in which the employment is provided. Hence, in each year it has to be seen ITA Nos. 852 & 831/Bang/2017 Page 18 of 59 that the workmen was employed for at least 300 days during that previous year and that such workmen was not a casual workmen or workmen employed through contract labour. Therefore, if some workmen were employed for a period of less than 300 days in the previous year then no deduction is allowable in respect of payment of wages to such work men in the present year even if such workmen was employed in the preceding year for more than 300 days but in the present year, such workmen was not employed for 300 days or more. It was submitted that by the very same reasoning the fact that in the first year of employment the additional wages paid is not allowed deduction for the reason that the workmen did not work for 300 days or more but if the next two Assessment years, if he works for more than 300 days each, then the deduction u/s.80JJAA of the Act has to be allowed. He also drew our attention to the insertion of a second proviso to Explanation (ii) to Sec.80JJAA of the Act (which defines additional employee) by the Finance Act, 2018, w.e.f. 1-4-2019, which reads as follows : "Provided Further that where an employee is employed during the previous year for a period of less than two hundred and forty days or one hundred and fifty days, as the case may be, but is employed for a period of two hundred and forty days or one hundred and fifty days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly;" 8.3 It was his submission that though the aforesaid amendment is applicable w.e.f 1-4-2019, the aforesaid amendment which is intended to remove hardship to getting benefit of an incentive provision, should be held to be curative in nature in nature and should be held to be retrospective in operation on the principle laid down by the Hon'ble Supreme Court in the case of CIT v. Calcutta Export Company [2018] 93 taxmann.com 51/255 Taxman 293/404 ITR 654 (SC). The learned DR relied on the order of the AO. However, the ld. AR submitted that the assessee is claiming benefit of deduction for second year only, as it has accepted the fact that it is not eligible to claim deduction in the first year i.e., AY 2007-08 due to non-fulfilment of condition of 300 days. ITA Nos. 852 & 831/Bang/2017 Page 19 of 59 9. We have given a very careful consideration to the rival submissions. The only reason given by the AO for denying the benefit of deduction u/s.80JJAA of the Act, which is the reason that survives for consideration by the Tribunal is according to the AO since the additional wages paid to these 287 employees were not eligible to deduction u/s.80JJAA of the Act because these employees did not work for more than 300 days in FY 2006-07 relevant to AY 2007-08, the wages paid to these employees in AY 2008-09 will also not qualify for deduction u/s.80JJAA of the Act. In other words according to the AO if the condition for grant of deduction u/s.80JJAA of the Act is not satisfied with reference to additional wages paid to new employees in the first year of their employment, then the additional wages paid to such new employees will not allowed in the second and third Assessment Years also. As pointed out by the learned counsel for the Assessee, this approach of the revenue authorities is contrary to the AO's stand on claim for similar deduction u/s.80JJAA of the Act in AY 2007-08. In the order of assessment passed by the AO for AY 2007-08, he has while disallowing the claim for deduction u/s.80JJAA of the Act for that AY, accepted the position that on additional wages paid to new workmen employed during the previous year relevant to AY 2005-06 who have worked more than 300 days during the previous year relevant to AY 2007-08, the Assessee is entitled to deduction u/s.80JJAA of the Act. In the decision rendered in the case of Bosch Ltd. (supra) the Bangalore ITAT at paragraph 23 of the aforesaid order the Tribunal observed that the deduction u/s.80JJAA of the Act is allowed for three years including the year in which the employment is provided. Hence, in each year it has to be seen that the workmen was employed for at least 300 days during that previous year and that such workmen was not a casual workmen or workmen employed through contract labour. Therefore, if some workmen were employed for a period of less than 300 days in the previous year then no deduction is allowable in respect of payment of wages to such work men in the present year even if such workmen was employed in the preceding year for more than 300 days but in the present year, such workmen was not employed for 300 days or more. By the very same reasoning the fact that in the first year of employment the additional wages paid is not allowed deduction for the reason that the workmen did not work for 300 days or more but if the next two Assessment years, if he works ITA Nos. 852 & 831/Bang/2017 Page 20 of 59 for more than 300 days each, then the deduction u/s.80JJAA of the Act has to be allowed. It is not proper to say that if the deduction is refused in the first year of employment of the new employee then for the next two succeeding Assessment Years also, the benefit of deduction will not be available. Such an approach defeats the very purpose for which deduction u/s.80JJAA of the Act is allowed for three consecutive Assessment years. This aspect has now been clarified in the Finance Act, 2018 by adding a second proviso to the definition of additional employee in Explanation (ii) to Sec.80JJAA of the Act. Even prior to such curative or clarificatory amendment, we are of the view that the claim for deduction u/s.80JJAA of the Act cannot be and ought not to have been disallowed on this ground. We therefore direct that the deduction claimed by the Assessee should be allowed.” 19. The revenue carried the matter in appeal to the High Court of Karnataka and the following substantial question of law on the issue was formulated:- “1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance of Rs. 7,57,22,069 made under section 80JJAA of the Act by holding that the employees in software industry are covered by definition of 'Workman' in Explanation (iii) to section 80JJAA of the Act read with section 2(s) of the Industrial Dispute Act and employees who have worked for 300 days in a previous are eligible for the purpose of deduction under section 80JJAA in the succeeding year if he completes 300 days in such succeeding year without appreciating that person working in software industry cannot be said to be 'Workman' for the purpose of section 80JJAA of the Act and conditions prescribed for claiming said deduction are not satisfied by Assessee?” 20. The Hon’ble High Court answered the above question in the affirmative and held as under:- “16.1 The Assessee had claimed deduction under section 80JJ- AA of the Act on account of the payments made to the employees ITA Nos. 852 & 831/Bang/2017 Page 21 of 59 hired by the Assessee in the previous year even though they had not completed 300 days of service in that year since they continued on the rolls of the Assessee in the next year totalling up to more than 300 days as required under section 80JJ-AA of the Act. The issue raised by the Revenue is that the employees of the Assessee would not come within the purview of the definition of workman under section 2(2) of the Industrial Disputes Act, 1947 (for short 'ID Act') and that since the employee has not completed 300 days of employment in the previous year, no deduction could be claimed by the Assessee. 16.2 As regards the first contention of the Revenue, the same does not require much examination by this Court inasmuch as at the first instance; the Assessing Officer had held that the Assessee's employees would not come within the purview of workman under section 2(s) of the I.D. Act and disallowed the claim, on an appeal filed by the Assessee, the Commissioner, Income-tax (Appeals) CIT(A) accepted the Assessee's contention and held that the Assessee's employee would come within the purview of Section 2(s) of the ID Act. This aspect was not challenged by the Revenue, although the Revenue had filed an appeal against the order of the CIT(A). Having accepted the said finding of the CIT(A) and not having filed any appeal, the Revenue cannot now seek to challenge the said finding in the present appeal. 16.3 Section 2(s) of the ID Act is reproduced hereunder for easy reference: "workman" means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person- ITA Nos. 852 & 831/Bang/2017 Page 22 of 59 (i) who is subject to the Air Force Act, 1950 (45 of 1950), or the Army Act, 1950 (46 of 1950), or the Navy Act, 1957 (62 of 1957); or (ii) who is employed in the police service or as an officer or other employee of a prison, or (iii) who is employed mainly in a managerial or administrative capacity; or (iv) who, being employed in a supervisory capacity, draws wages exceeding one thousand six hundred rupees per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature. 16.4 In terms of section 2(s) of the ID Act, the definition of a workman is very wide inasmuch as the said definition would cover any person who has the technical knowledge, self skilled in an industry. It cannot be disputed that the Assessee's business is an industry. It also cannot be disputed that the employees of the Assessee are technical persons skilled in software development and, as such, engaged by the Assessee to render services in the industry being run by the Assessee. Thus the software engineer would also come within the purview and ambit of workman under section 2(s) of the ID Act so long as such a person does not take a supervisory role. The software engineer per se would be a workman; a software engineer rendering supervisory work would not be a workman. In the present case, it is not the case of the Revenue that the persons employed by the Assessee are rendering any supervisory work or assistance. Admittedly, the said persons have been engaged for the purpose of software development, and as such, they are to be regarded as a workman in terms of section2 (s) of the ID Act. 16.5 The Apex Court has in the case of Devinder Singh's (supra) categorically held that when a person is employed in an industry for hire or reward for doing manual, unskilled, skilled, operational, technical or clerical work, such a person would satisfy the requirement and would fall within the definition of the 'workman'. In the present case, a software engineer is a skilled person, a technical person who is engaged by the employer for ITA Nos. 852 & 831/Bang/2017 Page 23 of 59 hire or reward. Therefore, all the said persons would satisfy the requirement of being a workman in terms of section 2(s) of the I.D.Act. 16.6 In our considered view, the concept of the workman has undergone a drastic change and is no longer restricted to a blue collared person but even extends to white-collared person. A couple of decades ago, an industry would have meant only a factory, but today industry includes software and hardware industry, popularly known as the Information technology industry. Thus the undertaking of the Assessee being an industrial undertaking, the persons employed by the Assessee on this count also would satisfy the requirement of a workman under section 2(s) of the ID Act. 16.7 Sri. Aravind, learned Senior Panel counsel of the Revenue, has strenuously argued that the period of 300 days in a year would mean 300 days in the financial year alone, not in the calendar year or otherwise. He has submitted that if the period of 300 days is not satisfied, no such deduction could be allowed. 16.8 Admittedly, the provisions concerned, i.e. Section 80JJ-AA, comes under Chapter-VI-A of the IT Act, which deals with deductions in certain income; this deduction is issued and or permitted as an incentive to the Assessee on fulfilling certain criteria as required under the various provisions under Chapter- VI-A. The incentive of the deduction provided under section 80JJ-AA is with an intention to encourage the Assessee to employ more and more people, provide employment and, in lieu thereof, permit the employer/assessee to deduct certain amounts from the income when the returns are filed. It is with this object, purport and intent of section 80JJ-AA of the Act that the present facts and circumstances would have to be considered. It is also required for the Assessing Officer, CITA, Income-tax Appellate Tribunal, as also any other officer to always interpret and or apply the provisions of the Act, taking into consideration the intent and purport of the said provision. 16.9 The meaning or interpretation now sought to be given by Sri. Aravind, learned Senior Panel counsel is that only if the employee were employed for a period of 300 days in a particular ITA Nos. 852 & 831/Bang/2017 Page 24 of 59 financial year, only then deductions could be claimed, if not the deductions could not be claimed even though such employee has been employed for 300 continuous days or more. 16.10 We would disagree with the said contention. What is required is for a person to be employed for a period of 300 days continuously. There is no such criteria made out for a person to be employed in any particular year or otherwise. If such a restrictive interpretation is given, then any person employed post 5th June of a particular year would not entitle the Assessee to claim any deduction. Thus in order to claim the benefit under section 80JJ-AA, an employer would have to hire the workmen before 5th June of that year. As a corollary, since the Assessee would not get any benefit if the workmen were engaged post 5th June, the employer/Assessee may not even employ anyone post 5th June, which would militate against the purpose and intent of section 80JJ-AA, which is the encourage creation of new employment opportunities. 16.11 The Income-tax Appellate Tribunal, while considering a similar situation as in Bosch Ltd. (supra) held that so long as the workman employed for 300 days, even if the said period is split into two blocks, i.e. the assessment year or financial year, the Assessee would be entitled to the benefit of Section 80JJ-AA in the next assessment year and so on so forthwith for a period of three years. The Income-tax Appellate Tribunal, having held to that effect, in our considered opinion, it would not be open for the Revenue to now contend otherwise, more so since the said order has attained finality on account of the Revenue not having filed an appeal. 16.12 It is sought to be contended by Sri. K.V. Aravind, learned Senior Panel counsel that the fact that such an interpretation could not be given is established by the curative amendment carried out in the year 2018 wherein it is clarified that an assesses whose employee completes 300 days in a second year would also be entitled to a deduction for three years therefrom. Thus he submits that the amendment having been brought into force in the year 2018 the present matter relating to the year 2007-2008, the said curative or clarificatory amendment would not come to the ITA Nos. 852 & 831/Bang/2017 Page 25 of 59 rescue of the Assessee and as such, the finding of the Tribunal in this regard is required to be set aside. 16.13 We are unable to agree with such a submission- the amendment of the year 2018 though claimed curative by Sri. Aravind, we are of the considered opinion that the same is more an explanatory amendment or a clarificatory amendment which clarifies the methodology of applying section 80JJ-AA of the Act. If the submission of Sri. K.V. Aravind is accepted, then no employer/assessee would be able to fulfil the requirement of employing its labour/assessee prior to 5th June of that assessment year so as to claim the benefit of Section 80JJ-AA. Such a narrow and pedantic approach is impermissible. It also being on account of the fact that section 80JJ-AA relating to deductions under Chapter is an incentive and, therefore, has to be read liberally. In this aspect, we are also supported by the decision of the Apex Court in Mavilayi Service Co-operative Bank Ltd.'s case (supra), wherein the Apex Court has held that a benevolent provision has to be read liberally and reasonably and if there is an ambiguity in favour of the Assessee. 16.14 The Apex Court in the case Vatika Township (P.) Ltd. (supra) has also held similarly, in that if there is a benefit conferred by legislation, the said benefit being legislative's object, there would be a presumption that such a legislation would operate with retrospective effect by giving a purposive construction. Thus the clarificatory amendment of the year 2018 can also be said to apply retrospectively for the benefit of the Assessee even though the Revenue contends that there was no provision in the year 2007 permitting the Assessee to avail the benefit of deduction when the employee works for a period of 300 days in consecutive years. 16.15 In view thereof, the substantial question No. 1 is answered by holding that the software professional/engineer is a workman within the meaning of section 2(s) of ID Act, so long as such a software professional does not discharge supervisory functions, the benefit of section 80JJ-AA can be claimed by an employer/assessee even if the employee were not to complete 300 days in a particular assessment year but in the subsequent year so long as there is continuity of employment, the Assessee could ITA Nos. 852 & 831/Bang/2017 Page 26 of 59 continue to claim further benefit in the next two years as provided in under section 80JJ-AA of the Act. 16.16 Accordingly, we answer Question No. 1 by holding that a software engineer in a software industry is a workman within the meaning of section 2(s) of the Industrial Disputes Act so long as the Software engineer does not discharge any supervisory role. 16.17 The period of 300 days as mentioned under section 80JJAA of the Act could be taken into consideration both in the previous year and the succeeding year for the purpose of availing benefit under section 80JJAA. It is not required that the workman works for entire 300 days in the previous year. 16.18 Hence, in the facts and circumstances of the case, the software engineer being workman having satisfied the period of 300 days, the assessee is entitled to claim deduction under section 80JJAA.” 21. Respectfully following the decision of the jurisdictional High Court in assessee’s own case for AY 2008-09, we hold that assessee is entitled for deduction u/s. 80JJA and delete the disallowance made in this regard. 22. The next issue for consideration is disallowance of expenses on discontinued capital project of Rs 7,419,000. Ground Nos. 3.1 to 3.4 in this regard by the assessee are as follows:- “3.1 The learned CIT(A) and the AO have erred in law and on facts in denying a deduction a 7,419,000 claimed by the Appellant in relation to discontinued capital projects holding that expenses incurred towards expansion of business which did not materialize was a capital expenditure and not eligible for deduction under section 37 of the Act. 3.2 The learned CIT(A) and the AO have erred in law and on facts in not appreciating the fact that claim for discontinued project is not in nature of 'capital expenditure' and no new asset of enduring nature was brought into existence. ITA Nos. 852 & 831/Bang/2017 Page 27 of 59 3.3 The learned CIT(A) and the AO have erred in law and on facts in in treating the expenditure as capital in nature which is contrary to the order of the Transfer Pricing Officer ("TPO") where the same has been considered as part of operating expenditure. 3.4. Without prejudice to the above, the CIT(A) and the AO ought to have allowed depreciation under section 32 of the Act in respect of the claim for discontinued capital projects.” 23. The assessee had debited the P&L account for a sum of Rs.74,19,000 towards discontinued projects. It was submitted before the AO that the assessee was planning expansion of its premises and had made certain payments towards planning, designing and architectural fees. The assessee had initially debited these payments under capital work-in-progress. However, this expansion project was called off and according to the agreement entered into with the contractor, the assessee paid certain damages and claimed this expenditure towards expansion of the building premises as write off in the P&L account. The AO denied the claim stating that:- i. the amount is paid under unregistered contract; ii. amount paid is penal in nature; iii. TDS is wrongly deducted to misrepresent the amount paid as professional fees/contract charges. iv. no prudent man can pay such huge compensation; & v. similar payment to the contractor under the same agreement was disallowed in AY 2008-09. 24. On appeal, the CIT(Appeals) relying on the decision for AY 2008-09 upheld the order of the AO. 25. The ld. AR submitted that similar issue came up for consideration before the Tribunal in assessee’s own case and prayed for a similar direction. ITA Nos. 852 & 831/Bang/2017 Page 28 of 59 26. We have considered the rival submissions and perused the material on record. We notice that this issue was held against the assessee in its own case for the AY 2008-09 (supra) with the following observations:- “15. We have given a careful consideration to the rival submissions and are of the view that since identical claim has been considered capital expenditure by the tribunal in AY 2007- 08, we find no reason to take a contrary view. The nature of the capital work in progress written off being identical, respectfully following the decision of the Tribunal, we uphold the orders of the revenue authorities. We also find all the case laws cited by the learned counsel for the Assessee before us were dealt with and distinguished by the AO. We are also of the view that the damages of Rs. 3,81,10,000/- though was in connection with a claim for not engaging the services of the contractor in future for other contracts cannot be regarded as having no nexus with the capital work in progress written off in the books of accounts of the Assessee and therefore to that extent the claim for deduction and cannot be allowed as deduction and were rightly held to be capital expenditure by the revenue authorities. We however find that in Gr.No.3.2.9 the Assessee has submitted that a sum of Rs. 61,04,942/- was disallowed u/s.40(a)(i)/(ia) of the Act and that sum is also part of the sum of Rs. 4,42,14,942 which was disallowed by the AO as capital expenditure and therefore to the extent of Rs. 61,04,942/- there has been a double addition made by the revenue authorities. We are of the view that it would be just and appropriate to direct the AO to look into this aspect while giving effect to the decision of the Tribunal after affording opportunity of being heard to the Assessee and if the contention is found to be correct, allow relief to the Assessee. Thus the relevant grounds of appeal being Gr.NO.3.2.1 to 3.2.8 are dismissed while Gr.No.3.2.9 is treated as allowed for statistical purpose.” 27. We notice that the disallowance made during the year under consideration is also part of the same contract under which similar ITA Nos. 852 & 831/Bang/2017 Page 29 of 59 payment was made during AY 2008-09 and the disallowance was upheld by the Tribunal. Respectfully following the decision of the above order of the Tribunal, we uphold the disallowance. The disallowance u/s. 40(a)(ia) of the Act is already allowed by the CIT(Appeals) and the question of double disallowance does not arise for the present year. 28. The next issue that arises for consideration is write-off of capital work-in-progress on the following grounds:- “4. The learned CIT(A) and the AO have erred in law and on facts in denying deduction of Rs 1,246,021 (net of depreciation — actual amount debited - Rs 1,311,601, depreciation allowed at the rate of 5 percent being Rs 65,580) claimed by the Appellant representing capital work in progress written off. 4.2. The learned CIT(A) and the AO have erred in law and on facts in holding that expenses incurred towards expansion of business which did not materialize (in essence, not bringing into existence a new asset of an enduring nature) was a capital expenditure and not eligible for deduction under section 37 of the Act. 4.3. The learned CIT(A) and the AO have erred in law and on facts in in treating the expenditure as capital in nature which is contrary to the order of the Transfer Pricing Officer ("TPO") where the same has been considered as part of operating expenditure.” The assessee incurred certain expenditure to the tune of Rs.13,11,601 towards Cafetaria upgradation and breakout area upgradation. The expenses incurred were in the nature of payments for planning, designing and architecture fees. These projects were closed and therefore the expenses towards the same were written off. The AO treated the amount as an addition to the fixed asset i.e., building, and disallowed the entire amount claimed. He, however, allowed ITA Nos. 852 & 831/Bang/2017 Page 30 of 59 depreciation @ 5% and arrived at a net disallowance of Rs.12,46,021. The CIT(Appeals) confirmed the disallowance after verification of two sample invoices. Aggrieved, the assessee is in appeal before the Tribunal. 29. Before us, the ld. AR submitted that the amount incurred towards planning, designing and architecture fees satisfied all the conditions specified in section 37 of the Act viz., (i) the expenditure is not in the nature of expenditure described in sections 30 to 36; (ii) it is not a personal expenditure, (iii) it is incurred wholly & exclusively for the purpose of business; and (iv) it is not a capital expenditure. Reliance was placed on the Supreme Court decision in the case of Empire Jute Co. Ltd. v. CIT, 124 ITR 1 (SC). The ld. AR also submitted that since the project of expansion of Cafeteria and breakout area was closed, the expenditure incurred did not bring any new asset into existence and there is no advantage or enduring benefit accrued to the assessee and therefore the same should be allowed as a deduction u/s. 37 of the Act. 30. The ld. DR supported the orders of the lower authorities. He also contended that had the project not been closed down, the same would have resulted in a capital asset and the same analogy should be applied while deciding the allowability u/s. 37 of the Act. 31. We have considered the rival submissions and perused the material on record. The assessee engaged M/s. Raj Consultants towards planning, designing and architecture for expansion of ITA Nos. 852 & 831/Bang/2017 Page 31 of 59 Cafetaria and breakout area and incurred the expenses. The invoices raised by the Consultants for upgradation are as under:- • 20% on design submission • 40% on completion of tender document • 25% on commencement and progress at work. 32. From the above, it is clear that the invoices are raised for design & planning and for part completion of the work. We see merit in the submissions of the ld. AR with regard to the key observations of the Hon’ble Supreme Court in the case of Empire Jute Co. (supra) in classification of expenditure as revenue and capital which are extracted below:- • There is no clear-cut test to determine whether an expenditure is revenue or capital — each case is to be determined on the basis of facts and circumstances surrounding the case; • One test is whether the expenditure is incurred not only once and for all but with a view to bring into existence an asset or an advantage for the enduring benefit of a trade, there is a very good reason (unless there are circumstances leading to a contrary conclusion) that the same would be capital expenditure — this test may fail in cases where the expenditure has resulted in enduring benefit, but the same could still fall in the revenue filed; • If the advantage resulting from the expenditure, consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future; • If the expenditure has not resulted in any addition to the "fixed capital" of the assessee, ie where the permanent structure from which income is produced remains the same, the expenditure cannot be said to be capital expenditure; • Where the profit making apparatus remains untouched or unaltered, the expenditure cannot be said to be capital expenditure. ITA Nos. 852 & 831/Bang/2017 Page 32 of 59 33. In view of the above discussion, we are of the considered view that the above expenditure written off towards discontinued project of Cafeteria and breakout area expansion does not bring any benefit of enduring nature to the assessee and hence it is allowable as a revenue expenditure u/s. 37 of the Act. This ground of the assessee is allowed. 34. With regard to disallowance of repairs & maintenance expenditure, grounds are as follows:- 5.1 The learned CIT(A) and the AO have erred in law and on facts in disallowing an amount of Rs 9,233,401 in the following manner: - Rs 4,187,113 - disallowed by the AO for non-submission of 100 percent invoices, and by the CIT(A) for non-satisfaction of the conditions as laid out in Rule 46A of the Income-tax Rules, 1962 ("the Rules"); - Rs 5,438,094 - held to be capital expenditure which is disallowed net of depreciation by the AO and CIT(A); - Rs 1,580,977 - held to be prior period expenses by the AO but disallowed by the CIT(A) as capital expenditure. 5.2. The learned CIT(A) has erred in law and on facts in disallowing the amount of Rs 4,187,113 by not considering the reason of "paucity of time" as a relevant criteria to justify the submission of additional evidence. The learned AO has erred in disallowing the same merely because 100 percent of the invoices were not furnished, despite the Appellant having furnished substantial invoices/documents. 5.2 The learned CIT(A) and the AO have erred in law and on facts in treating the amount of Rs 5,438,094 (net-off depreciation) and Rs 1,580,977 as capital expenditure without appreciating the Appellant's claim that the expenses were in nature of 'repairs and maintenance' and no new asset with enduring benefit came into existence. 5.4. The learned CIT(A) and the AO have erred in law and on facts in in treating the expenditure as capital in nature which is ITA Nos. 852 & 831/Bang/2017 Page 33 of 59 contrary to the order of the Transfer Pricing Officer ("TPO") where the same has been considered as part of operating expenditure.” During the year the assessee claimed a sum of Rs.2,18,82,313 under the head ‘repairs & maintenance – Building and Plant & Machinery’. After calling for various details from the assessee, the AO analysed the break-up of expenditure and arrived at a disallowance of Rs.92,33,401 as follows:- Sr. No. Particulars Amount (Rs) Amount (Rs) 1. Prior Period expenditure 15,80,977 2. Bills not submitted 41,87,113 3. Capital assets additions 5,950,663 Less: Depredation 512,569 54,38,094 Total Disallowances 92,33,401 35. The CIT(Appeals) upheld the disallowance made by the AO with regard to items (2) & (3) listed above. Regarding item (1) which the AO disallowed as prior period item, the CIT(A) confirmed that the bills relate to AY 2009-10 (year under appeal) but held it to be capital in nature eligible for depreciation. With regard to item (2) which the AO disallowed for want of bills, the assessee submitted the bills before the CIT(Appeals) in the form of additional evidence under Rule 46A of the I.T. Rules and prayed for admission of the same. However, the CIT(A) rejected the additional evidence on the ground that why the same was not produced before the AO and upheld the disallowance. 36. Before us, the ld. AR submitted that these expenditure were incurred in the normal course of business towards repairs & maintenance and it does not bring any capital asset into existence. He submitted that the invoices pertaining to the expenses in the form of ITA Nos. 852 & 831/Bang/2017 Page 34 of 59 additional evidence ought to have been admitted by the CIT(Appeals) in the interest of justice. It was thus prayed for deletion of the disallowance. 37. The ld. DR, on the other hand, supported the orders of the lower authorities where the break-up of expenditure is examined to conclude it as capital in nature. 38. We have considered the rival submissions and perused the material on record. The ld. AR submitted a letter dated 20.6.2022 with break-up of expenditure which was before the lower authorities consisting of details of invoice and whether the expenditure was incurred in ‘own premises’ or ‘leased premises’. We notice that these details of invoices have not been looked into by the lower authorities, and in our view, this aspect needs to be examined by the revenue authorities for the purpose of deciding its allowability. We are also the view that the additional evidence filed by the assessee before the CIT(Appeals) goes to the root of the matter for deciding the issue and therefore we admit the additional evidence filed before the CIT(Appeals). Hence, we remit this issue back to the AO to examine the evidence submitted by the assessee vide letter dated 20.6.2022 as well as the documents in the form of additional evidence and decide the allowability of the same in accordance with law, after giving reasonable opportunity of being heard to the assessee. ITA Nos. 852 & 831/Bang/2017 Page 35 of 59 39. Ground No.6 is regarding disallowance of lease rentals paid on equipment and motor cars. The grounds raised by the assessee in this regard are as follows:- “6.1 The learned CIT(A) and the AO have erred in law and on facts in disallowing an amount of Rs 25,500,765 and Rs 77,520,788 pertaining to lease rentals paid by the Appellant on account of assets taken on lease being equipment and motor car respectively by treating the same as capital in nature. 6.2. Without prejudice to the above, the learned AO has erred on facts in disallowing an amount of Rs 25,500,765 pertaining to lease rentals on equipment as against the amount of Rs 23,059,332 claimed by the Appellant in the computation of income. 6.3. The learned CIT(A) and the AO have erred in law and on facts in disregarding the reliance placed by the Appellant on the decision of the Honourable Supreme Court in the case of M/s ICDS Limited Vs CIT (350 ITR 527). 6.4. Without prejudice to the above, the CIT(A) and the AO have erred in law and on facts in failing to allow depreciation in respect of such assets even though it has been held that lease rentals are capital expenditure in nature. 6.5. The learned AO has erred in law and on facts in proposing to disallow the lease rentals under section 40(a)(ia) of the Act by concluding that the lease rentals, if treated to be as revenue expenses would be liable to Tax Deduction at Source ("TDS") under section 1941 of the Act, without appreciating the fact that the expense does not warrant tax withholding under the provisions of section 1941 of the Act.” 40. As far as this ground is concerned, the material facts are that the assessee entered into a lease agreement with IBM Global Services India Pvt. Ltd., whereby it took certain equipment on lease. This ITA Nos. 852 & 831/Bang/2017 Page 36 of 59 agreement is dated 29.08.2005. A copy of the lease agreement is available on pages 181 to 189 of the assessee’s PB. The assessee also entered into a lease agreement in respect of certain vehicles with GE Capital Transportation Financial Services Ltd. This agreement is dated 28.12.2004 , which is placed at page Nos.568 to 585 of the assessee’s PB. Another lease agreement for vehicles dated 21.03.2007 was entered into by the assessee with GE Mani Financial Services Ltd., which is at pages 586 to 603 of the assessee’s PB. Under this agreement also, the assessee took certain vehicles on lease. The assessee paid lease rentals amounting to Rs.2,30,59,332 towards lease rentals for lease of equipment and a sum of Rs.7,75,20,,788 towards lease of motor cars. 41. In view of Accounting Standards AS-19 issued under the Companies (Accounting Standards) Rules, 2006, the assessee in its books of accounts treated itself as the owner of the asset and capitalized the value of the equipment as well as the vehicles in its books of accounts. Depreciation was computed and debited in the P&L A/c. The following accounting treatment was adopted by the assessee as per AS 19, in the case of finance lease, the lessee (to whom significant risks and rewards have been transferred) would for all practical purposes be treated as the owner of the asset and expenditure on the same shall be capitalised in his books, while the lessor would not be considered as the owner, but the lease rentals received by the lessor shall be recorded as revenue in its books of accounts. In ITA Nos. 852 & 831/Bang/2017 Page 37 of 59 summary, the accounting treatment prescribed for finance leases for a lessee is as follows:- - The assets taken on finance lease are capitalised in the books of accounts of the lessee and depreciation is computed in the books of accounts. However, the value at which the purchase is recorded does not contain margin on sale of the lessor; - This margin is accounted by way of interest in the books of the lessee (ie finance lease): - The monthly instalments paid by the lessee are towards principal and interest charges components – - The interest component is booked as finance charges in the books of accounts; and The principal amount is reduced from the lessor's account in the books of the lessee; - Any profit / loss on account of disposal of the leased asset are to be charged to the profit and loss account. 42. As far as Tax treatment of finance lease for income tax purposes is concerned, as per Circular No. 2 dated February 9, 2001 ("the Circular") issued by the Central Board of Direct Taxes ("CBDT"), pertaining to finance lease arrangements, it has been clarified that the provisions of AS 19 shall not be applicable for tax purposes. This Circular seeks to confirm that the introduction of AS-19 will not have any impact on the tax treatment for finance leased assets in as much as the depreciation allowance will be available to the lessor, if he is the owner of the asset (in accordance with the contract between the lessor and the lessee) and if he satisfies the provisions of section 32 of the Act. The Circular therefore, essentially confirms that the tax treatment for leased assets will not get affected by accounting treatment ITA Nos. 852 & 831/Bang/2017 Page 38 of 59 prescribed by AS-19. The above tax treatment has also been upheld by the Supreme Court in its decision in the case of ICDS Limited Vs CIT (350 ITR 527) wherein Hon’ble Supreme Court has held that in a leasing transaction, the lessor would be entitled to claim depreciation under section 32 of the Act on the leased assets and the lessee would be entitled to deduction with respect to the lease rentals. Given the above, the tax treatment of the assets taken on finance lease (both equipment and car lease) in the case of lessee was as summarised below. • The depreciation on the leased assets which are capitalised in the books is added back to the taxable income; • Interest component which is already debited in the books as finance charges is added back to the taxable income; • The entire monthly instalments (which includes the interest charges) is claimed as deduction from the taxable income; • Any profit / loss arising on account of disposal of the leased asset which is charged to the profit and loss account are to reduced / added back respectively to the taxable income. 43. In light of the above, the Assessee submitted that the Assessee has made the following adjustments (on account of the leased assets) to its net profits to arrive at its taxable profits:-  The depreciation on assets acquired under finance lease is added back to net profits;  The finance charges of Rs 15,250,304 have been added back to the net profits; ITA Nos. 852 & 831/Bang/2017 Page 39 of 59  The profit of Rs 5,570,701 on account of the foreclosure of the lease has been excluded from the net profits; and  The aggregate amounts of monthly instalments amounting to Rs 77,520,788 towards vehicles and Rs 23,059,332 towards equipment have been claimed as a deduction. 44. The AO however, disallowed the claim of the assessee for deduction on account of lease rentals for the following reasons:-  The Assessee is the owner of the assets acquired under finance lease. Therefore, Assessee is only eligible to claim depreciation on the assets acquired under finance lease and not the lease rental paid towards acquisition of these assets;  If the Assessee claims the lease rentals as revenue expenditure, the Assessee ought to have debited the same to profit and loss account. An expenditure not debited to profit and loss account cannot be claimed as revenue expenditure;  The assessee has not deducted tax on the lease rental paid under section 1941 of the Act. Therefore, lease rentals are disallowed under section 40(a)(ia) of the Act;  The Assessee and the lessor have collided with each other, wherein both the parties have made undue claims with an intention to suppress their profits. 45. On appeal by the assessee, the CIT(A) upheld the order of the AO. Aggrieved by the order of the CIT(A), the assessee has preferred ground No.6 before the Tribunal. 46. We have heard the rival submissions. We have also perused copies of the lease agreement entered into between the assessee and the lessor. It is clear from the terms of the agreement that the assessee was ITA Nos. 852 & 831/Bang/2017 Page 40 of 59 only a lessee and the lessor was the owner of the equipment as well as the vehicles. The AO in the order of assessment has culled out certain clauses of the agreement and came to the conclusion that the assessee is the owner of the assets and the lease rentals paid was nothing but an expenditure paid for acquiring an asset which was to be regarded as a capital expenditure. This conclusion of the AO, in our view, is clearly erroneous. Even assuming that the expenditure has to be regarded as a capital expenditure, the AO ought to have allowed depreciation to the assessee. In this regard, we find that in the computation of total income which is at page 52 of the assessee’s PB that the assessee has added to the profit as per the P&L A/c the finance charges on lease and reduced lease rentals paid. Therefore, whatever be the position with regard to the books of account in compliance with AS-19; as far as computation of the total income for the purpose of the Act is concerned, the assessee has made claim only for deduction on account of lease rentals paid. There is no basis for the Revenue authorities to come to a conclusion that the assessee has adopted a colourable device with a view to gain tax advantage. In this regard, we find that the AO as well as the CIT(A) have quoted various clauses of the lease agreement out of context, ignoring the main clause in the agreement which clearly lays down that the assessee is only a lessee and the lessor is the owner of the assets leased. In such a scenario, the conclusion of the Revenue authorities cannot be sustained. The assessee is entitled to claim deduction on account of lease rentals paid as it is a Revenue expenditure. ITA Nos. 852 & 831/Bang/2017 Page 41 of 59 47. In so far as the applicability of the provisions of section 40(a)(ia) of the Act is concerned, the Hon’ble High Court of Karnataka in assessee’s own case on an identical issue for Assessment Year 2008-09 in the decision reported in [2021] 127 taxmann.com 59 (Karnataka) held that neither provisions of 194I nor 194C of the Act are attracted to lease financing of motor vehicles and therefore there could be no disallowance under section 40(a)(ia) of the Act. In so far as the applicability of provisions of section 40(a)(ia) of the Act in respect of lease rentals paid for lease of equipment is concerned, it is seen from the submission made by the Assessee before the CIT(A) at page 672 of the Assessee’s PB that the Assessee has duly deducted tax at source on payment of lease rentals. On a perusal of the order of the Revenue authorities, we do not find any specific discussion on this issue. In these circumstances, we deem it fit and proper to remand the question whether the lease rentals were subjected to TDS by the Assessee. The AO will afford due opportunity of being heard being to the Assessee. Thus, ground No.6 is partly allowed. 48. Ground No.7 raised by the assessee reads as follows: 7. Disallowance of profit on foreclosure of leased assets 7.1. The learned CIT(A) and the AO have erred in law and on facts in disallowing an amount of Rs 5,570,701 pertaining to the profit (as per books) on foreclosure of finance leased assets. 7.2. The learned CIT(A) and the AO have erred in law and on facts in not appreciating the fact that the profits so arrived are ITA Nos. 852 & 831/Bang/2017 Page 42 of 59 only for the purpose of the books of accounts and the gains, if any, are only notional and therefore are not chargeable to tax. 7.3. Without prejudice to the above, the AO and CIT(A) has erred in law and on facts in disallowing lease rentals and also disallowing profit on foreclosure of leased assets which tantamount to double disallowance of the amount of Rs 5,570,701. 49. We have already seen that in respect of leased assets, the assessee follows AS-19. At the time of foreclosure of the lease as a result of following AS-19, there is either a profit or loss. In this year, there was a profit of Rs.55,70,701. In the computation of total income, this was reduced from the P&L A/c. The assessee contended before the revenue authorities that in case of lease agreement, the deduction available to the assessee is with respect to the lease rentals. In case of a finance lease arrangement, the asset would be recorded as an asset in the books of the lessee. The asset would also be depreciated for books (under the provisions of the Companies Act, 1956). However, while foreclosing the asset, the book value of the asset and the corresponding amount due to the lessor would not be the same and the amount paid on final settlement may either result in a profit or a loss. In the current scenario, the foreclosure of assets has resulted in a profit of Rs.55,70,701/-. Since the Assessee is entitled to a deduction with respect to the lease rentals, the accounting entries passed result in a credit to the profit and loss account which does not reflect real gain to the Assessee and the gains, if any, are only as per the accounting system. Under the tax provisions, there is no scope for taxing such accounting income and Assessee has therefore reduced the same from ITA Nos. 852 & 831/Bang/2017 Page 43 of 59 the profit as per the profit and loss account in arriving at the taxable total income. It was therefore submitted that the reduction made from the profit as per profit and loss account should not be denied and the claim made by the Assessee should be accepted. Without prejudice to the above, it was submitted that in case the Assessee’s claim for deduction with respect to lease rentals on finance leased assets is not accepted, the amount reduced with respect to profit on foreclosures of leased assets should separately not be disallowed in the tax computation. 50. The AO, however, held that the reply was very vague and there was no proper explanation as to why the profit should not be treated as income of the assessee. Accordingly, the AO added a sum of Rs.55,70,701/- to the total income of the assessee. On appeal by the assessee, the CIT(A) confirmed the order of the AO. The line of reasoning adopted by the AO and CIT(A) is that in respect of lease rentals, it has been treated as capital in nature and therefore the gain on foreclosure of lease should be taxed as income. 51. We have heard the rival contentions and we are of the view that the profit on foreclosure of leased assets is purely a notional entry in compliance with the requirements of AS-19 and no income can be said to have accrued to the assessee by reason of such accounting treatment. It was made clear by the Assessee that as per tax treatment for the purpose of the Act is concerned, the treatment accorded was that the Assessee was only a lessee of the assets and could neither gain or lose ITA Nos. 852 & 831/Bang/2017 Page 44 of 59 on foreclosure of the lease. Further, on the issue of allowing lease rentals as a deduction, we have already held that the said expenditure is a revenue expenditure and therefore the entire premise on which the impugned addition has been made by the Revenue authorities does not survive. Hence, the addition made as above is directed to be deleted and ground No.7 is allowed. 52. Ground No.8 raised by the assessee read as follows:- 8. Disallowance of software development expenses 8.1. The learned CIT(A) and the AO have erred in law and on facts in disallowing an amount of Rs 214,825,509 in relation to the software development expenses. 8.2. The learned CIT(A) and the AO have erred in law and on facts in not considering the reconciliation provided by the Appellant in relation to the amount of Rs 48,075,547 disallowed under section 40(a)(ia) of the Act. 8.3. The learned CIT(A) and the AO have erred in law and on facts in not considering the fact that the amount of Rs 23,795,808 paid to Aricent Technologies Mauritius Limited did not warrant tax deduction at source by applying the beneficial provisions of India-Mauritius DTAA and therefore, the same ought not to have been disallowed under section 40(a) of the Act. 8.4. The learned CIT(A) and the AO have erred in law and on facts in wrongly making an adjustment under section 69C of the Act as unexplained expenditure, without appreciating the fact that the provisions of section 69C of the Act were altogether not applicable to the facts of the case. 53. The material facts of the issue are that the assessee had debited a sum of Rs.159,55,40,621 as software development charges. The AO ITA Nos. 852 & 831/Bang/2017 Page 45 of 59 called upon the assessee to submit party wise breakup of software development charges as well as the evidence of TDS. The assessee gave the party wise breakup of software development expenses only to the tune of Rs.143,73,03,338/- as per the following details: Sl.No Name of the party Amount [in Rs.] 1 Wipro technologies 43,38,47,329 2 Saskin technologies 56,46,94,281 3 Karnataka Micro electrical 26,09,29,533 4 Symphony services 1,79,10,371 5 Tessolle services 4,55,28,093 6 Salkulp semi conductor 4,12,88,805 7 Tata Elxsi 3,30,79,840 8 Path partner technology - 4,00,25,086 Total 143,73,03,338 54. The Assessee gave further details of TDS in respect of 4 parties totaling Rs.8,51,41,793/-. The details of which were as follows:- (1) Aricent Technologies Rs.2,37,95,808 (2) Intra Systems Rs.2,98,11,670 (3) Lossen and toubro Rs.1,93,42,367 (4) Poseidon Design Rs.1,21,91,857 -------------------- Rs.8,51,41,793 -------------------- 55. There was a difference of Rs.7,30,95,490 (Rs.159,55,40,621 – Rs.152,24,45,131) for which the name of the parties to whom payment of Software development charges were paid was not given by the Assessee. ITA Nos. 852 & 831/Bang/2017 Page 46 of 59 56. The Assessee gave further details of TDS certificates of 16 parties totaling Rs.19,46,79,429 as per the following details:- Sl.No. Name of the party Ledger total (in Rs.) 1. Australian Semiconductor Technology 49,66,000 2. Couth Infotech Ltd. 10,02,645 3. Cranes Software International Ltd. 17,23,959 4. Dr.Sushil Kumar Sinha 29,98,937 5. E4e Business Solutions India 93,78,398 6. Embwise Technologies Ltd. 11,71,711 7. Mindtree Consulting Ltd. 8,27,43,181 8. Mistral Solutions 13,58,750 9. Processor Systems 45,12,056 10. Qai India Ltd. 89,44,627 11. Aualcore Logic Ltd. 38,12,588 12. Soliton Technologies 71,91,556 13. Symphony Services India Ltd. 3,12,67,883 14. Tes Pvt.Electronic Pvt.Ltd. 1,08,02,661 15. Wipro Infotech 1,70,02,557 16. 3i Infotech Ltd. 58,01,920 Total 19,46,79,429 57. In all there were 27 parties (Symphony Services India Ltd., appears twice in the first and the third chart. The AO made a disallowance of Rs.4,80,75,547/- u/s. 40(a)(ia) of the Act for non- deduction of tax at source as per the following details:- (i) In respect of payment of Rs.2,37,95,808 being payment made to Aircent Technologies no evidence of TDS was filed.\ (ii) In respect of payment made to Karnataka Micro Electronic, Sankulp Semi Conductor, Tata Elxsi and Poseidon design, the ledger total of these parties and the amount on which TDS was done was lesser by Rs.2,42,79,739/- meaning thereby ITA Nos. 852 & 831/Bang/2017 Page 47 of 59 that the Assessee did not deduct tax at source on a sum of Rs.2,42,79,739/-. 58. The AO further made an addition of Rs.4,51,66,023 as unexplained expenditure u/s.69C of the Act. The basis of this addition was that in respect of gross amount on which TDS was deducted at source as per the TDS certificate in respect of 7 parties was Rs.119,63,25,317 whereas as per the ledger account of these 7 parties the amount payable to these parties was only Rs.115,11,59,294/-. The details of the 7 parties are listed out at the top of page 70 in a chart. According to the AO, the Assessee has incurred expenditure to the tune of Rs.4,51,66,023 (Rs.119,63,25,317 – Rs.115,11,59,294) outside the books of account and hence addition of the said sum u/s.69C of the Act. 59. The AO further made an addition of Rs.12,15,83,939/- and the basis of this addition was that there was a difference of Rs.7,30,95,490 as per paragraph 15 of this order between the details of persons furnished by the Assessee to whom software development charges were paid and the actual software development expenses claimed by the Assessee. According to the AO in the third list of names of 16 persons to whom software development charges were paid totaled Rs.19,46,79,429. The AO added a sum of Rs.12,15,83,939/- with the following observations: “It is not known whether the 28 vendors total payment includes Rs.7,30,95,490/- gap discussed in the introductory paragraph for which no ledger account was given. Presuming that the 28 vendors details also includes the said gap of RS.7,30,95,490/- the ITA Nos. 852 & 831/Bang/2017 Page 48 of 59 balance amount of Rs.12,15,83,939/- (Rs.19,46,79,429 – Rs.7,30,95,490) is also to be treated as unexplained expenditure u/s.69C only.” 60. In all a sum of Rs.21,48,25,509 was added by the AO as follows: (i) Rs.4,80,75,547 u/s.40(a)(ia); (ii) Rs.4,51,66,023 u/s.69C of the Act; and (iii) Rs.12,15,83,939 also u/s.69C of the Act. 61. The aforesaid additions were confirmed by the CIT(A). The CIT(A) however gave relief accepting the explanation of the Assessee with regard to discrepancy in the account of 3i Infotech Ltd., and Processor’s Systems (India) Pvt.Ltd. 62. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. We have considered the rival submissions. The first aspect which we have noticed in the order of the CIT(A) is that despite submissions made with regard to unexplained expenditure under section 69C of the Act of Rs.4,51,66,023/- and another sum of Rs.12,15,83,939/-, the CIT(A) has not rendered any findings on the above submissions. These submissions are at pages 844 to 851 of the Assessee’s PB. In so far as the reconciliation with regard to the gross amount as per TDS Certification and as per the ledger of the assessee is concerned, the CIT(A) has held that the assessee was unable to file reconciliation except in respect of 2 parties viz., Processors Systems India Pvt. Ltd., and 3i Infotech Ltd. It is the plea of the assessee that such reconciliation was provided by the assessee before the CIT(A). ITA Nos. 852 & 831/Bang/2017 Page 49 of 59 63. Another disallowance under section 40(a)(ia) of the Act was a sum of Rs.2,37,95,808/- which was a payment made to Aricent Technologies Ltd., Mauritius. In so far as the payment made to this party is concerned, it was the plea of the assessee that Aricent Technologies is a tax resident of Mauritius and therefore in terms of DTAA between India and Mauritius, the payment made by the assessee has to be regarded as only a business income and not as FTS. Since Aricent Technologies did not have a Permanent Establishment (PE) in India, the said payment is not chargeable to tax in the hands of Aricent Technologies in India. In this regard, it is an admitted position is that there is no clause for taxing FTS in the DTAA between India and Mauritius. While it is the case of the Department that in the absence of a FTS clause in DTAA, the provision of the Act will apply. While it is a case of the assessee that in the absence of FTS clause in DTAA, the payment has to be regarded as business income only and hence such payment will be taxable in India only if a non-resident has a PE in India. The first question that had to be addressed was with regard to whether Aricent Technologies can be regarded as a tax resident of Mauritius. In this regard, the assessee had filed a Tax Residency Certificate (TRC) wherein it has been mentioned that Aricent Technologies is a tax resident of Mauritius but that certificate mentions that it is issued under an agreement between a Government of South Africa and a Government of Republic of Mauritius. Hence, this certificate was disregarded by the Revenue authorities. It is the plea of the assessee before the Tribunal that a TRC has been issued even with ITA Nos. 852 & 831/Bang/2017 Page 50 of 59 reference to (Treaty) Agreement between India and the Republic of Mauritius and a copy of that was also furnished before the Tribunal. 64. After hearing the parties, we are of the view that the entire issue of disallowance of Rs.21,48,25,509/- in respect of software development expenses should be set aside for fresh examination by the AO in the light of the several contentions that were raised before the CIT(A), which were not considered in proper perspective by the CIT(A). In our view, the entire issue with regard to various aspects of the additions especially the additions under section 69C of the Act have be looked into afresh. The AO will afford opportunity of being heard to the assessee in the set aside proceedings. 65. Ground No.9 raised by the assessee reads as follows: 9. Disallowance of information technology support services 9.1 The learned CIT(A) and the AO have erred in law and on facts in disallowing the amount of Rs 8,517,018 (net of 60 percent depreciation) in relation to a portion of the Information Technology Support Services ("ITSS") expenses. 9.2 The learned CIT(A) and the AO have erred in law and on facts in concluding that the expenditure incurred was in relation to purchase of software and not in relation to rendering of service. The learned CIT(A) and the AO have erred in not considering the Appellant's contentions that there was neither any enduring benefit nor new capital asset which was acquired by TI India pursuant to incurring of such expense. 9.3 The CIT(A) has erred in law and on facts in not admitting the evidence (in the form of a confirmation letter from the holding company to which payment was made) submitted by ITA Nos. 852 & 831/Bang/2017 Page 51 of 59 the Appellant as the said evidence was produced on the specific direction of the CIT(A) (As per Rule 46A(4) of the Rules). 9.4 The learned CIT(A) and the AO have erred in law and on facts in in treating the expenditure as capital in nature which is contrary to the order of the Transfer Pricing Officer ("TPO") where the same has been considered as part of operating expenditure. 66. The material facts in so far as ground No.9 is concerned are that the assessee claimed deduction of a sum of Rs.53,73,98,714/- under the head IT support services. The AO came to the conclusion that on a perusal of the particulars that the assessee has purchased software as per group licence agreement and therefore the expenditure was capital in nature. On this basic premise, the AO disallowed the claim of the assessee for deduction of the aforesaid sum. The AO, however, allowed depreciation at 60% and therefore the disallowance made on this was only a sum of Rs.85,17,018/-. On appeal by the assessee, the CIT(A) confirmed the order of the AO. Before the CIT(A), assessee filed a confirmation from Texas Instruments Incorporated, USA, whereby they confirmed that there was only a right to use software that was given to the assessee and software was not sold to the assessee. This additional evidence was accepted by the CIT(A) and the CIT(A) confirmed the order of the AO. In fact, this document was required to be produced by the CIT(A) and this is evident from the fact that in the letter dated 14.07.2014 addressed by the assessee to the CIT(A), it has been mentioned that as requested by the CIT(A), this evidence of confirmation from the parent company is being produced. Aggrieved ITA Nos. 852 & 831/Bang/2017 Page 52 of 59 by the order of the CIT(A), the assessee is in appeal before the Tribunal. 67. We have heard the rival submissions. A copy of the invoices raised by the foreign AE is at pages 409, 459 of the PB of the assessee. Perusal of the same clearly shows that the invoices make a reference to the “SOE charged out”, which means software expenses charged on the basis of actual usage of licence. It is the case of the assessee that the licence for use of a particular software for which the parent company had license from the owner of the software were allowed to be used by the Assessee and on the basis of actual usage of the software, the assessee made payment to the parent company and therefore the said payment cannot be regarded as capital expenditure but only an expenditure for right to use licence in a software which is purely a revenue expenditure. Our attention was also drawn to the order of the ITAT in assessee’s own case for AY 2010-11 dated 17.05.2022 in ITA No.1967/Bang/2019 wherein this Tribunal on an identical issue held as follows:- “12. As far as ground No.3 raised by the Revenue is concerned, the facts are almost identical to the EDA expenses. As far as the ground No.3 is concerned, it relates to expenses incurred by the assessee towards information technology support services. The agreement by which the assessee received information technology support services is dated 01.01.2006 and the information technology services were provided by Texas Instruments, USA. The agreement clearly mentions that the assessee desires to avail information technology services from the parent company to better carry on its operations of the business. ITA Nos. 852 & 831/Bang/2017 Page 53 of 59 The nature of services for the following services to be performed by the parent company 1.0 Services to Be Performed By TI 1.1 Purchaser employs TI to provide it with services as to certain phases of its information technology needs, including but not limited to: • Maintenance and on-going support services for various information systems including but not limited to SAP. Oracle, Peoplesoft, UNIX, etc. • System malfunction and software repair. • Manage and coordinate with worldwide third party vendors such as SAP, Oracle, Peoplesoft, Unix, Network Appliance etc for required support for various information systems 13. The mode of payment is on the basis of allocation which is as follows: 2.0 Allocation of Expenses. Invoicing. and Payments 2.1 The IT costs incurred by TI and subject to allocation and reimbursement by Purchaser shall be calculated on a calendar year basis and reflect the actual costs and expenses incurred by TI in providing and coordinating such services and support. Only those costs and expenses which are wholly exclusively or otherwise attributable to the provision and coordination of the IT services and support provided shall be included in the total costs subject to allocation. Global IT costs will be pooled by TI and allocated to the purchaser and all other TI subsidiaries and affiliates on a consistent allocation method or methods based on usage as defined in 2.2 below. Accordingly, local IT costs incurred by the Purchaser will be included in the total IT cost pool subject to allocation and will be charged by the Purchaser to TI or credited to the Purchaser as provided in 2.4. 2.2 IT costs will be allocated to Purchaser on the basis of a fixed activity based per person charge. Any cost incurred ITA Nos. 852 & 831/Bang/2017 Page 54 of 59 by TI not covered by the per person charge will be allocated to Purchaser on a mutually agreed basis. TI will periodically notify Purchaser of the amounts of the per person charge used to determine the allocable charge. 14. The AO took the view that the expenditure was capital in nature and the assessee has purchased software licences and software from the parent company which is factually incorrect. The AO however allowed depreciation at 60%. 15. On appeal by the assessee, the CIT(A) held that the expenditure was Revenue in nature, as follows: “Having considered the submissions, it is evidently clear that the Appellant being charged for the licenses used by its employees from the software licenses purchased and owned by the parent company, i.e., TI Inc. The License Cost Allocation Agreement makes it amply clear. The AO, on the other hand, has relied only on the invoices on stand-alone basis. The cost allocation method provided in the License Cost Allocation Agreement makes it clear that the Appellant is only utilizing the softwares owned by the parent and there is no separate and exclusive purchase of any software from the parent company. The ownership rights in respect of these software vests with the parent company, i.e, TI Inc. Considering the above, and also considering the other supporting facts brought on record by the Appellant, I am of the view that the ITSS cost is to be treated as revenue expense. Accordingly, the addition made by the AO in this regard by treating the said expenditure as capital, is deleted. In the result, these grounds of appeal are allowed.” 16. At the time of hearing, learned Counsel for the assessee brought to our notice that in Assessment Year 2011-12, on identical expenditure in assessee’s own case, the Tribunal in ITA Nos.275, 525/Bang/2019, order dated 11.03.2022, upheld similar order of the CIT(A) deleting the addition made by the AO. The relevant observations of the Tribunal in this regard are contained in paragraph 6.3. It is not disputed before us that the facts and circumstances of the case are identical. In these circumstances, following order of the Tribunal in Assessment Year 2011-12, we ITA Nos. 852 & 831/Bang/2017 Page 55 of 59 uphold the order of the CIT(A) and dismiss ground No.3 raised by the Revenue.” 68. We are of the view that in the light of the aforesaid decision, the deduction claimed should be allowed. The expenditure in question was purely a revenue expenditure and cannot be disallowed as capital expenditure. We, therefore, direct that the addition made in this regard should be deleted. 69. Ground No.10 raised by the assessee reads as follows:- 10. Disallowance of employee stock option expenses 10.1 The learned CIT(A) and the AO have erred in law and on facts in disallowing the amount of Rs 1,419,397 in relation to the Employee Stock Option Plan ("ESOP") expenses. 10.2 The learned CIT(A) and the AO have erred in law and on facts in making incorrect inferences and drawing conclusions not consistent with the facts of the case, based on which the expense amount of Rs 1,419,397 has been wrongly disallowed. 10.3 The learned CIT(A) and the AO have erred in law and on facts in not appreciating the fact that the Appellant follows the mercantile system of accounting and accordingly, the expenses relating to AY 2009-10 have been rightly claimed in the AY 2009-10. 70. As far as ground No.10 is concerned, the material facts are that the parent company cross charged the assessee a sum of Rs.6,47,81,992/- towards Employees Staff Purchase Plan (ESPP) and Employee Staff Option Plan (ESOP). The details of the sum so charged were as follows:- ITA Nos. 852 & 831/Bang/2017 Page 56 of 59 71. It can be seen from the aforesaid chart that the last two items of payment of USD 27233 and 3113 were charged on the basis of invoice which pertain to May, 2009 which was a date after the end of the Financial Year relevant to Assessment Year 2009-10. The AO therefore made an addition of Rs.24,19,397/- for the following reasons:- “The case was also heard on the date of written submission. It is noticed from the submission that the company was booking the ITA Nos. 852 & 831/Bang/2017 Page 57 of 59 expenditure before getting the invoice. No accounting policy allows the assessee company to debit an expenditure without having any invoice copy raised by the respective creditor. The company's reply that this is the consistent accounting policy as well as in accordance with generally accepted accounting principles is not acceptable. No accounting policy or accounting principle allows an assessee to debit expenditure into the P&L account without having any invoice copies. If the assessee company follows such accounting policy consistently it may be attributed as serious defects in the accounts. An expenditure booked /debited into the P& L account without having the corresponding invoice shall be treated as bogus expenditure. In this connection, a detailed discussion made in the paragraph-7 on account of one such expenditure is once against highlighted. The expenditure debited into the P&L did not tally with the gross amount in TDS certificate and a separate addition was made on account of software development charges. Accordingly the sum of Rs.14,19,397/- is disallowed and added back.” 72. On appeal by the assessee, the CIT(A) confirmed the order of the AO. Aggrieved by the order of the CIT(A) the Assessee has raised Grd.No.10 before the Tribunal. We have heard the rival submissions. The two invoices in question based on which the impugned disallowance was made by the Revenue authorities is at pages 418, 419 of the assessee’s PB. These invoices are dated 15.05.2009. In a submission filed by the assessee before the AO dated 18.12.2012, the assessee has mentioned the dates of the invoice as 05.10.2012. It is pertinent to mention that the accounts of the assessee had not been finalized as on 15.05.2009 and therefore this sum was claimed as a deduction. It is because of the wrong date given in the submission before the AO dated 18.12.2012 that the AO has taken the view that the invoices are not pertaining to previous year relevant to Assessment Year 2009-10. In the light of the evidence available on record, we are ITA Nos. 852 & 831/Bang/2017 Page 58 of 59 of the view that the disallowance made by the AO and sustained by the CIT(A) has to be deleted and a sum of Rs.14,19,397/- being a revenue expenditure pertaining to Assessment Year 2009-10 has to be allowed as a deduction. We hold and direct accordingly. 73. Ground No.11 raised by the assessee reads as follows:- 11. Others 11.1. The learned CIT(A) has erred in law in not adjudicating on the issue and in directing the AO to verify and allow the claim made by the Appellant under section 40(a)(i) of the Act. 11.2. The learned CIT(A) has erred in law in not deleting the disallowance of miscellaneous expenses of Rs 3,77,40,114 made by the AO despite stating that the Appellant's claim appears to have prima facie merit, and in directing the AO to examine the claim and allow relief to the extent admissible under law. 11.3. The learned CIT(A) and AO have erred in law and on facts by levying interest under section 234B and section 234D of the Act. 11.4. The learned CIT(A) has erred in law and on facts in not quashing the initiation of penalty proceedings by the AO under section 271(1)(c) of the Act. 74. In so far as grounds 11.1 and 11.2 are concerned, we do not think that the assessee can have any grievance as the issue has been directed to be examined by the AO. In so far as ground 11.3 is concerned, levying of interest under sections 234B and 234D is purely consequential. Ground 11.4 cannot be a subject matter of appeal in the quantum proceedings. ITA Nos. 852 & 831/Bang/2017 Page 59 of 59 75. In the result, the appeal by the revenue is dismissed and the appeal by the assessee is partly allowed. Pronounced in the open court on this 29 th day of June, 2022.. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 29 th June, 2022. /NS/* //Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.