2009 (1) TMI 535 - AT - Income Tax

Revision u/s 263 - deduction of project expenses and deduction u/s 10B, claimed by the assessee so allowed in the assessment by assessing officer is erroneous and prejudicial to the interest of revenue - project expenses are revenue in nature or not - HELD THAT - In regard to deduction under section 10B, the only grievance of the ld. CIT is that provision contained in sub-section (5) of section 80HHE comes in the way of grant of the deduction in the subsequent year. It does appear to us that the section may require further elaboration notwithstanding the order of the Tribunal in the case of Legato Systems India (P.) Ltd. 2004 (11) TMI 294 - ITAT DELHI-E . This is so because a particular income can be brought to tax only in one year and, therefore, the deduction under section 80HHE or 10B can be claimed only in one year. It will be inconceivable that income is taxed in one year and deduction is allowed in that year in section 80HHE; and thereafter deduction is also claimed in respect of the same income in some other year in which it has not been offered for tax. Therefore, order of the Tribunal makes the words or in any other assessment year , used in sub-section (5), as redundant. Having considered the rival submissions, we are of the opinion that in view of the order of the Tribunal in the case of Legato Systems India (P.) Ltd. (supra), the issue is debatable. Therefore, we are also of the view that the order of AO could not have been revised on this ground by the ld. CIT as the Assessing Officer had followed one of the possible views in the matter. Capitalization of the project expenses - The case of the assessee was that these were the expenses in executing projects regarding development of packaged software. The expenses were revenue in nature. However, the case of the ld. DR is that these were ongoing expenses on projects, which lead to benefit of enduring nature on development of packaged software. We are of the view, on the basis of reasoning given in respect of deduction under section 10B, that the issue is debatable. Therefore, the order of AO in allowing this expenditure after considering the same cannot be said to be erroneous and prejudicial to the interest of the revenue. In view of the disposal of the appeal on merits, the application of the assessee become infructuous, therefore, the same is dismissed. Therefore, appeal of the assessee is allowed and the stay application is dismissed.

Issues Involved:
1. Validity of the CIT's order under section 263 of the Income-tax Act, 1961.
2. Deduction of project expenses amounting to Rs. 19,39,452.
3. Deduction under section 10B of the Act amounting to Rs. 38,83,45,866.

Detailed Analysis:

1. Validity of the CIT's Order under Section 263:
The assessee challenged the CIT's order under section 263, arguing it was "bad in law, beyond jurisdiction and void ab initio." The CIT had found that the Assessing Officer's (AO) order was erroneous and prejudicial to the interests of the Revenue. The CIT's order was based on the findings that project expenses should have been capitalized and that the deduction under section 10B was wrongly allowed.

The Tribunal emphasized that for invoking jurisdiction under section 263, two conditions must be met: the order must be erroneous and prejudicial to the interests of the revenue. It was noted that where proper inquiries have been conducted by the AO, and he has followed the principles of natural justice, the order cannot be said to be erroneous and prejudicial simply because the CIT disagrees with it. Additionally, if two opinions are possible, and the AO follows one, the order cannot be said to be erroneous and prejudicial provided it follows a possible view.

2. Deduction of Project Expenses Amounting to Rs. 19,39,452:
The CIT argued that the project expenses related to software development should have been capitalized as they provided enduring benefits to the assessee, referencing the Supreme Court decision in Empire Jute Co. Ltd. v. CIT. However, the assessee contended that these expenses were revenue in nature, incurred in the ordinary course of developing packaged software.

The Tribunal noted that whether an expenditure is capital or revenue in nature is a debatable question. The AO had called for the details of the expenditure and allowed it after considering the assessee's submissions. Therefore, the Tribunal concluded that the issue was debatable and the AO's order could not be said to be erroneous and prejudicial to the revenue.

3. Deduction under Section 10B Amounting to Rs. 38,83,45,866:
The CIT held that the deduction under section 10B was wrongly allowed because the assessee had claimed deduction under section 80HHE in respect of some units in the past, which was not permissible under sub-section (5) of section 80HHE. The assessee argued that the income of any unit was not claimed under both sections 80HHE and 10B for the same income in one or more years, citing the Tribunal's decision in Legato Systems India (P.) Ltd. v. ITO.

The Tribunal acknowledged that the interpretation of section 80HHE(5) was debatable. Given that a coordinate Bench had already placed a particular interpretation on these sections, the Tribunal concluded that the issue was debatable. Therefore, the AO's order could not be revised on this ground as it followed one of the possible views.

Conclusion:
The Tribunal concluded that both issues-the deduction under section 10B and the capitalization of project expenses-were debatable. The AO had followed one of the possible views in both matters. Consequently, the CIT's order under section 263 was set aside, and the appeal of the assessee was allowed. The stay application was dismissed as infructuous.

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