THE COMMISSIONER OF INCOME TAX V. M/S ENCORE SOFTWARE LTD

ITA/1143/2006

AI Insights

The case involves the Commissioner of Income Tax and the Assistant Commissioner of Income Tax as appellants against M/s. Encore Software Ltd., the respondent. The dispute arose from the assessment year 2001-2002, concerning the treatment of development costs incurred by the respondent, which were claimed to be set off against the sale realization of semi-finished goods. The respondent argued for a proportionate write-off of development costs against the sales of semi-finished goods, which the revenue contested. The High Court of Karnataka, after hearing the arguments, decided to remand the case back to the Assessing Officer for a fresh assessment, citing unclear submissions and the need for a thorough examination of the facts.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 736336 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 08-10-2012
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR; M LAVA
• Assessee Lawyers: E SANMATHI INDRAKUMAR
• Keywords: Income tax appeal; Research and Development Expenditure; Revenue expenditure; Semi-finished Goods Inventory
• Section: 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 8TH DAY OF OCTOBER, 2012 PRESENT THE HON'BLE MR. JUSTICE K.SREEDHAR RAO AND THE HON'BLE MR. JUSTICE B.V. PINTO I.T.A. No.1143 OF 2006 BETWEEN:- 1. The Commissioner of Income Tax, Central Circle, C.R. Building, Queens Road, Bangalore. 2. The Assistant Commissioner of Income Tax, Circle-11(2), C.R. Building, Queens Road, Bangalore. Appellants (By Sri E. Sanmathi Indrakumar, Advocate) AND:- M/s.Encore Software Ltd., No.44 & 45, 6th Floor, Leo-Complex, Residency Road Cross, Bangalore. Respondent (By Sri A. Shankar & Sri M. Lava, Advocates) 2 This I.T.A. is filed U/s.260-A of I.T. Act, 1961 arising out of order dated 24.03.2006 passed in I.T.A.No.794/Bang/2005 for the Assessment Year 2001- 2002, praying that this Hon’ble Court may be pleased to (i) formulate the substantial questions of law stated therein and (ii) allow the appeal and set-aside the order of the ITAT, Bangalore in ITA No.794/Bang/2005 dated 24.03.2006 and confirm the order of the Appellate Commissioner confirming the order of the Assistant Commissioner of Income Tax, Circle-11(2), Bangalore, in the interest of justice and equity. This appeal is coming on for final hearing this day, SREEDHAR RAO, J., delivered the following: J U D G M E N T The respondent/assessee who is dealing in manufacture of software development and telephone/fax, modems, said to have incurred expenditure of Rs.7,28,14,022/- towards development costs upto 31.03.2000 which is said to be towards research and development for the assessment year 2000-2001. The data/fax/modems sale realization was Rs.3,84,39,328/- and telephony and speech coders sale realization was Rs.31,01,950/-. It was contention of the assessee before the Assessing Officer for the assessment year 2001-2002 that a sum of Rs.1,85,71,285/- is a set off against development cost and the balance is shown in the balance sheet. The 3 assessee described the same as reduction in the value of the semi-finished inventory. It is the contention of the assessee that the reduction of the cost incurred towards research and development could be in three ways. (1) Write off of entire amount towards profit in the year of incurrence. (2) claim it as deferred reduction at the rate of 1/5th for each assessment year or proportionate to the estimated sales and (3) claim depreciation of the material value as per its value. 2. The assessee contends that in the present case, he has sought reduction proportionate to the sale realization. 3. Sri Indrakumar, learned Sr. counsel for the revenue, per contra strenuously submitted that the written and oral submissions made by the assessee could not suggest that the development costs incurred is towards research and development and the same is being set off against profit and loss account towards sale realization for the assessment year in question. The assessee submitted that he seeks proportionate write off against semi-finished goods inventory. That means for future anticipated inventory 4 sales the deduction sought for is impermissible. This Court had framed following substantial law for consideration while admitting the appeal. “Whether the Tribunal was correct in holding that semi finished goods to the extent of Rs.1,85,71,285/- should be allowed as a revenue expenditure which was purely based on estimate since the actual product had not been completed and sold in the open market.” 4. On thorough consideration of the submissions made at the Bar, we find that the arguments submitted in appeal does not appear to be one correctly projected before the Assessing Officer. Further, it is also not clear that whether Rs.7,28,14,022/- pertains to research and development of the products. It is also not clear the entire semi-finished products are made in the process of research and development or otherwise. The assessee had sought “proportionate write off against the semi-finished goods inventory”. The said expression used does not clearly suggest whether the assessee was seeking reduction on research and development expenditure proportionately towards the sale made in the year in question. 5 5. It is the contention of the counsel for the assessee that expression “reduction in value of semi-finished inventory” would pertain to research and development expenditure. This aspect also has not thoroughly gone into by the Assessing Officer. Therefore, in order to appreciate disputed facts correctly. Accordingly, the order of the Tribunal and authorities below are set aside and the matter is remitted to the Assessing Officer for fresh assessment after giving proper opportunity to the assessee. In view of the remand, the question of law is not answered. All contentions are kept open for both sides to establish their stand. The appeal is disposed of. Sd/- JUDGE Sd/- JUDGE NM* "