THE COMMISSIONER OF INCOME TAX V. M/S TALISMA CORPORATION PVT LTD

ITA/515/2007

AI Insights

The case revolves around an appeal by the Revenue against the decision of the Tribunal, which had affirmed the Appellate Authority's ruling that allowed the assessee, M/s. Talisma Corporation Pvt. Ltd., a deduction for expenses incurred on software development under Section 35(1)(iv) of the Income Tax Act, 1961. The primary contention was whether these expenses, although capitalized, could be considered as deductions for scientific research. The Tribunal and the Appellate Authority had accepted the assessee's argument that the expenses were related to scientific research, thus eligible for deduction, despite being capital in nature. The Revenue challenged this interpretation, leading to the present appeal in the High Court.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 745979 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 30-10-2013
• Assessment Year: misc
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K P KUMAR
• Assessee Lawyers: K V ARAVIND
• Keywords: Capital expenditure; Deduction; Intellectual Property; Scientific research; Software Development
• Section: 143(3); 35(1)(iv); 260-A; 35(2)(iv); 43(4)(iii)(a)

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 30TH DAY OF OCTOBER 2013 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MRS.JUSTICE RATHNAKALA INCOME TAX APPEAL NO.515 OF 2007 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE, C R BUILDING, QUEENS ROAD, BANGALORE. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE – 12(3), C.R BUILDING, QUEENS ROAD, BANGALORE. .. APPELLANTS (By Sri K.V. Aravind, Adv.) AND: M/s. TALISMA CORPORATION PVT. LTD., 214/6, RAMANAMAHARISHI ROAD, SADASHIVANAGAR, BANGALORE – 560 080. .. RESPONDENT (By Sri. K.P. Kumar Sr.Counsel for M/s King and Partridge, ADVS.) - 2 - This appeal is filed under Section 260-A of I.T. Act 1961, arising out of Order dated 18-01-2007 passed in ITA No.825/BANG/2005 for the Assessment Year 2001-02, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the orders passed by the ITAT, Bangalore in ITA No.825/Bang/2005 dated 18- 01-2007 confirming the order of the Appellate Commissioner and confirm the order passed by the Asst. Commissioner of Income Tax, Circle-12(3), Bangalore, in the interest of justice and equity. This Appeal coming on for hearing this day, KUMAR J., delivered the following: J U D G M E N T The Revenue has preferred this appeal challenging the order passed by the Tribunal, which has upheld the order of the Commissioner of Income Tax (Appeals), who held that, the expenditure incurred is in the nature of a capital expenditure and therefore, the assessee is entitled to deduction out of the total income under Section 35(1)(iv) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 2. The assessee – Company is in the business of software development and software product sales and services. It filed its return of income on 31.10.2001 declaring - 3 - a total loss of Rs.17,60,09,818/-. The case was selected for scrutiny under Section 143(3) of the Act. After service of notice, the assessee entered appearance and supported the return which it had filed earlier. The assessee has claimed an amount of Rs.9,27,34,277/- as product development cost whereas in the books, the assessee has capitalized this amount. It also claimed deduction as revenue expenditure. The Assessing Officer rejected the case of the assessee that it constituted revenue expenditure and levied taxes on the ground that it is a capital asset, disallowing the expenses incurred, but he allowed the depreciation. Aggrieved by the said order, assessee preferred an appeal before the Commissioner of Income Tax (Appeals). 3. Before the Appellate Authority, the assessee not only reiterated its stand as set out before the Assessing Authority, but also in the alternative contended that even if it is held as a capital asset, it is in the nature of a scientific research and therefore, the entire amount spent is deductable under Section 35(1)(iv) of the Act. The Appellate Authority accepted the said claim and allowed the appeal, granting the said benefit, and it also upheld the order of the Assessing - 4 - Authority that it is a capital asset. Aggrieved by the said order, it is the Revenue, who preferred an appeal before the Tribunal. The Tribunal dismissed the appeal affirming the order of the Appellate Authority. It is against the said order, the Revenue is before this Court. 4. The substantial questions of law, which arise for consideration in this appeal, are as under: 1. Whether the Appellate Authorities were correct in holding that the expenses incurred by the assessee were improvement of capital assets, should be treated as a capital asset as held by the Assessing Officer but also should be given deduction u/s.35(1)(iv) of the Act, based on an alternative plea raised by the assessee before the Appellate Commissioner for the first time without raising this issue before the Assessing Officer? 2. whether the Appellate Authorities were correct in granting relief to the assessee u/s.35(1)(iv) of the Act, when the Assessing Officer had treated this improvement as a capital asset and had allowed depreciation over it and when such double deduction is not permissible in accordance with Section 35(2)(iv) of the Act? - 5 - 5. Learned Counsel for the Revenue assailing the impugned order contends that, though in respect of any expenditure of capital nature on scientific research related to the business, the assessee is entitled to deduction, but in the instant case, there is no such scientific research, eligible for exemption under Section 35(1)(iv) of the Act and therefore, he submits that the Appellate Authority has committed a serious error in granting the relief to the assessee. 6. The material on record discloses that the assessee acquired an intellectual property through M/s.Aditi Technologies Pvt.Ltd. for Rs.10.82 crores, which was capitalized in the books. The assessee spent a sum of Rs.9,27,34,277/- in further developing and improving the same product. The expenditure incurred was for improving the intellectual rights to secure an enduring benefit. The development expenditure mainly included salary cost of the employees and other general administrative expenses incurred in connection with development of the product called “Talisma”. The development activity is a continuous process and was carried out to develop a multi channel customer relationship management solution, which would provide sales, - 6 - marketing and services solution to the end user, as the resulting facility resulted in poor customer service. With a view to integrate customer information for all business functions in an organization, an improved version of product “Talisma Enterprise 2.5” was developed. That is a new product, which is a Customer Relationship Management solution that captures, documents and integrates customer information for all business functions like marketing, sales, services, human resources and finance through the medium of e-mail, chat, wireless, fax, phone, etc. The Revenue’s contention was that the expenditure and purchase of Talisma software had been capitalized by the assessee. Therefore, any expenditure incurred on further development of the software has to be treated as capital in nature. 7. Section 43 of the Act defines certain terms in the Act. One such term defined is “scientific research” at Section 43 of the Act. Section 43(4)(iii)(a) reads as under: “43.(4)(i) “scientific research” means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries; (ii) ………. - 7 - (iii) references to scientific research related to a business or class of business include- (a)any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class; (b)……….” Therefore, the said definition makes it clear that any activities for the extension of knowledge in the fields of natural science falls within the definition of “scientific research”. With reference to a business or class of business, it includes any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class. 8. Section 35 of the Act deals with expenditure on scientific research. Section 35(1)(iv) speaks about the deductions which are allowed in respect of expenditure on scientific research and the aforesaid provision provides that in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2) are deductable. - 8 - 9. It is the specific case of the Revenue that, the amount of Rs.10.82 crores spent by the assessee in acquiring an intellectual property is capitalized in the books. Now further amount of Rs.9,27,34,277/- is spent in developing and improving the said product. Therefore, the expenditure on further development of software, which is treated as a capital in nature, is also capital in nature. This development is on account of scientific research. The evidence on record shows most of the money is spent towards cost of the employees, who had developed the product “Talisma Enterprise 2.5”, multi channel customer relationship management solution, which provides sales, marketing, services, human resources and finance through the medium of e-mail, chat, wireless, fax, phone, etc. to the end users. Therefore, the expenditure in respect of the scientific research, even if it is capital in nature as it was incurred in relation to the business carried on by the assessee under Section 35(1)(iv) of the Act, the said expenditure is to be deducted. That is what the Appellate Authority as well as the Tribunal have held. Accordingly, we answer the substantial questions of law in favour of the assessee and against the Revenue. - 9 - In that view of the matter, we do not see any infirmity in the order passed by the Tribunal, which calls for interference. Hence, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE KNM/- "