2012 (9) TMI 70 - HC - Income Tax

Disallowance of deduction u/s 80-IA & 80-IB - SILVASSA unit did not produce or manufacture articles or thing as contemplated under Section 80-IA(iv) - Held that - The Sales Tax Authorities of Dadra and Nagar Haveli verified the books of accounts and after fulfilling all the conditions imposed, sales tax exemption was given. The Sales Tax Authorities are primarily interested in collecting the sales tax. In the instant case, being fully satisfied by themselves that the assessee has fulfilled all the conditions, the exemption has been given. Hence the contention of the revenue that the assessee has not conducted any business at Silvassa and the assessee has diverted the sales and profit from the other Units cannot be accepted As the software products are different from other commercial products and development of the software can be undertaken in a short span of time, thus disallowance on ground that within 18 days of establishment of new industrial Unit, the assessee has shown the profit of 94.8% for the assessment year 1999- 2000 with an investment of Rs.2,06,000/- on the computers is not acceptable - As for the assessment years 2000-2001 and 2001-2002 also they have shown the turnover of Rs.2,15,41,550/- and Rs.1,82,82,043/-. Hence, it is very difficult to doubt the genuineness of the business activities of the software carried on by the assessee at Silvassa - in favour of assessee Payment made for acquiring the name of VESESH and intellectual properties, copy right - capital receipt OR revenue expenditure - Held that - At any stretch of imagination that amount cannot be treated as revenue expenditure only to get the brand name and restrain M/s.Seshadri Group from doing business with assessee s customers. The said amount has to be treated as capital expenditure. Hence, the assessee is not entitled for deduction in the litigation expenditure. The order passed by the Appellate Tribunal allowing deduction of Rs.19,00,000/- as revenue expenditure is contrary to law - against assessee.

Summary

Issues Involved:
1. Deduction under Section 80-IA for the assessment year 1999-2000.
2. Deduction under Section 80-IB for the assessment years 2000-2001 and 2001-2002.
3. Litigation expenditure of Rs.19,00,000/- for the assessment year 2000-2001.

Detailed Analysis:

1. Deduction under Section 80-IA for the assessment year 1999-2000:
The respondent-assessee, a software development company, established a new industrial unit at Silvassa on 13-03-1999 and claimed a deduction under Section 80-IA of the Income Tax Act. The Assessing Authority initially accepted the claim but later reopened the assessment under Section 147, disallowing the deduction. The Appellate Tribunal found that the assessee had proved its business operations at Silvassa and directed the Assessing Authority to adopt a profit margin of 55% instead of 94.8%. The High Court upheld the Tribunal's decision, noting that the Sales Tax Authorities had verified the records and granted sales tax exemption, indicating genuine business activities. Thus, the assessee was entitled to the deduction under Section 80-IA.

2. Deduction under Section 80-IB for the assessment years 2000-2001 and 2001-2002:
For the assessment years 2000-2001 and 2001-2002, the assessee claimed deductions under Section 80-IB, which were disallowed by the Assessing Authority due to insufficient evidence of software production. The Appellate Tribunal, however, allowed the deductions, recognizing the assessee's business operations and turnover at Silvassa. The High Court agreed, emphasizing that the Sales Tax Authorities had granted exemptions after verifying the records. The Court noted that the software industry could achieve high turnover in a short period and that the assessee had a substantial customer base. Thus, the deductions under Section 80-IB were justified.

3. Litigation expenditure of Rs.19,00,000/- for the assessment year 2000-2001:
The assessee claimed Rs.19,00,000/- as litigation expenditure for acquiring intellectual properties, trade marks, and copyrights. The Assessing Authority and the Appellate Authority disallowed this claim, treating it as capital expenditure. The Appellate Tribunal allowed the deduction, but the High Court reversed this decision. The Court held that the payment was made to acquire capital assets and restrain a competitor, which constituted capital expenditure. Therefore, the assessee was not entitled to the deduction for litigation expenditure.

Conclusion:
The High Court upheld the Tribunal's decision to grant deductions under Sections 80-IA and 80-IB, recognizing the genuine business activities at Silvassa. However, it reversed the Tribunal's decision on litigation expenditure, treating it as capital expenditure. The appeals by the Revenue were dismissed in part, and the assessee's claims for deductions were largely upheld, except for the litigation expenditure.