2016 (6) TMI 1407 - AT - Income Tax

Deduction u/s 35(1)(iv) - expenditure incurred by the assessee for development of software products - Whether this expenditure pertains to the R D activity of the assessee as per the provisions of section 35(1)(iv) r.w.s. 43(4)(ii)(a) of the Act wherein the definition of scientific research has been provided? - HELD THAT - Since the proper record and other details are not available before us in respect of the actual nature of the expenditure in question therefore we cannot give a conclusive finding regarding the real nature of the expenditure incurred by the assessee whether it is incurred on R D activity of the assessee or not. In the facts and circumstances of the case as well as in the interest of justice we set aside this issue to the record of CIT (Appeals) for limited purpose of verifying the real nature of the expenditure incurred by the assessee whether it is for the R D activity of the assessee. The CIT (Appeals) has to decide this issue after verification and examination of the relevant record and in the light of the decision of Hon ble jurisdictional High Court in the case of Talisma Corporation Pvt. Ltd. 2013 (12) TMI 1419 - KARNATAKA HIGH COURT . Needless to say the assessee shall be afforded an opportunity of hearing. Nature of expenses - software application - revenue or capital expenditure - CIT- A allowed claim - HELD THAT - There is no dispute that the assessee claimed the said expenditure was incurred for acquiring the application software to enable carrying on its business more efficiently and smoothly.The finding of the learned CIT (Appeals) is contrary to the claim of the assessee and further the learned CIT (Appeals) has not referred any specific evidence or record on the basis on which he has come to the conclusion that the application software in question is a stock in trade and was actually exported to the clients. In view of the above facts and circumstances we set aside this issue to the record of the learned CIT (Appeals) for proper verification of the record and giving a specific finding on this issue. Needless to say the assessee be afforded an opportunity of hearing. Deduction under Section 10A - DR submitted that when the assessee did not claim the deduction under Section 10A in the return of income then after expiry of the limitation for making such declaration under Section 10A(8) the assessee is not eligible to claim the deduction - HELD THAT - There is no dispute that initially the assessee did not claim the deduction under Section 10A as it has filed return of income by declaring loss. Subsequently when the Assessing Officer proposed to make certain addition the assessee withdrew the declaration under Section 10A(8) and the claim of deduction under Section 10A on the positive income assessed by the Assessing Officer. The revenue is taking a technical objection that after the expiry of the time period provided under Section 10A(8) the assessee cannot withdraw the earlier declaration and make a claim of deduction under Section 10A - There are precedents on this issue and the Delhi Bench of the Tribunal in the case of Moser Baer India Ltd. 2006 (11) TMI 245 - ITAT DELHI-D held that the time limit provided under Section 10A(8) is only directory if the claim made during the assessment proceedings is legally admissible then the same cannot be denied merely because it was not made in the return of income. The eligibility of the assessee in the case on hand to claim exemption under Section 10A of the Act is not denied otherwise being a software export unit registered with STPI. Therefore we do not find any error or illegality in the order of the learned CIT (Appeals) the same is upheld.

Summary

Issues Involved:
1. Treatment of product development expenditure as capital or revenue expenditure.
2. Allowability of software application expenses as revenue expenditure.
3. Withdrawal of declaration under Section 10A(8) and eligibility for deduction under Section 10A.

Detailed Analysis:

1. Treatment of Product Development Expenditure:
The primary issue concerns the treatment of product development expenditure amounting to ?7,31,81,241. The Assessing Officer (AO) classified this expenditure as capital in nature, disallowing the assessee's claim of it being revenue expenditure. The AO also rejected the alternate plea for deduction under Section 35(1)(iv) of the Income Tax Act, 1961, suggesting amortization through depreciation instead. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the alternate claim under Section 35(1)(iv), treating the expenditure as capital but deductible for research and development (R&D) purposes.

Upon appeal, the Tribunal noted that the CIT(A) did not verify whether the expenditure was genuinely incurred on R&D activities, as required under Section 35(1)(iv) read with Section 43(4)(ii)(a). The Tribunal remanded the issue back to the CIT(A) for a detailed verification of the nature of the expenditure, ensuring it aligns with R&D activities.

2. Allowability of Software Application Expenses:
The second issue involves the classification of ?85,43,242 spent on software applications. The AO treated this expenditure as capital, while the assessee claimed it as revenue expenditure necessary for efficient business operations. The CIT(A) overturned the AO’s decision, holding that the software was stock-in-trade and not for the assessee's business use.

The Tribunal found inconsistencies in the CIT(A)’s findings, which contradicted the assessee's initial claim that the software was for business use. The Tribunal remanded this issue back to the CIT(A) for proper verification and specific findings on whether the software was indeed stock-in-trade or used for business operations.

3. Withdrawal of Declaration under Section 10A(8):
The third issue pertains to the assessee's eligibility to withdraw a declaration under Section 10A(8) and claim a deduction under Section 10A. Initially, the assessee did not claim the deduction due to declared losses but sought to withdraw the declaration during assessment proceedings when the AO proposed additions, resulting in positive income.

The CIT(A) allowed the claim, referencing the Karnataka High Court's decision in CIT Vs. Infosys Technologies Ltd., which held that the time limit for such declarations is directory, not mandatory. The Tribunal upheld the CIT(A)’s decision, affirming that the assessee is entitled to the deduction under Section 10A, provided all other conditions are met.

Conclusion:
The Tribunal partially allowed the Revenue’s appeal for statistical purposes, remanding the issues related to product development expenditure and software application expenses back to the CIT(A) for further verification. The Tribunal upheld the CIT(A)’s decision regarding the withdrawal of the declaration under Section 10A(8) and the subsequent claim for deduction under Section 10A.