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2020 (5) TMI 132 - AT - Income TaxClaim of deduction u/s.10A - Used machinery employed in the new business is 28% and transfer of employees of the existing unit to the new unit holding it to be reconstruction of already existing business. - findings of the AO that the new Software Technology Parks of India (STPI) unit is only an extension of existing business with the old machinery and also with old employees and hence deduction is not allowable in view of provisions of sub-section (2)(ii) of section 10A - HELD THAT - CIT(A) considering the value of plant and machinery purchased prior to the setting up of new unit had came to conclusion that value of old machinery is less than 20% and transfer of the employees from the existing unit to new unit cannot be construed as reconstruction of existing business. This finding of the CIT(A) is contrary to the finding of the AO that the total value of old machinery employed by the assessee and new machinery. This variation in the value of the old machinery and new machinery has bearing on the issue on hand. CIT(A) had not addressed the reason, given by the AO nor was it the case of the assessee company that the total value of asset adopted by the AO is incorrect. In view of the discrepancies in the total value of fixed assets adopted by ld. CIT(A) and AO, we are of the considered opinion that the matter should be remitted back to the file of ld. CIT(A) for fresh adjudication on the merits of the appeal after affording due opportunity of hearing to the appellant in accordance with law. Grounds of appeal Nos. 2 to 2.2 filed by the Revenue are partly allowed for statistical purposes. Cost of software as revenue expenditure - HELD THAT - CIT(A) considering fresh evidence filed before him came to conclusion that expenditure was incurred wholly towards renewal of subscription for software. Accordingly, allowed the same as revenue expenditure placing reliance on the decisions of Jurisdictional High Court in the cases of Southern Roadways Ltd 2007 (6) TMI 193 - MADRAS HIGH COURT and Karur Vysa Bank 2014 (10) TMI 2 - MADRAS HIGH COURT . From the perusal of para 4.3 of the order of ld. CIT(A), it is clear that ld. CIT(A) had considered additional evidence in violation of provisions of Rule 46A of Income Tax Act, 1962. We are of the considered opinion that this issue should be remitted back to the file of the ld. CIT(A) for de novo assessment in accordance with law. Depreciation @60% as against 25% allowed by the Assessing Officer, as the allocated common expenditure - HELD THAT - Admittedly, assessee derives income in the form of licence fees for software so developed. But from the material on record, it is not clear whether it is application software embedded recorded on CD or disc, tape, perforated media or other information storage devices or in the nature of an intangible asset. Other issues are also remanded back to the file of the ld. CIT(A), we remit this issue also back to the file of the ld. CIT(A) with a direction that issue shall be adjudicated afresh keeping in view of the decision of Hon ble Jurisdictional High Court in the case of CIT vs. Computer Age Management Services P. Ltd 2019 (7) TMI 1153 - MADRAS HIGH COURT Claim of deduction u/s. 35 - HELD THAT - CIT(A) allowed the claim considering the approval granted by DSIR. However, ld. CIT(A) had not addressed reasons of the Assessing Officer that no research activities was carried on. Further very fact that expenditure was incurred in the form of salary and overheads only goes to suggest that there is no research activities carried out. In the absence of any capital assets employed for the purpose of research activities, this issue requires to be adjudicated with reference to the evidence of research activities if any carried on by the assessee. Thus, in our considered opinion, the ld. CIT(A) has clearly fell in error in allowing the claim of the assessee.
Issues Involved:
1. Deduction under Section 10A of the Income Tax Act. 2. Treatment of expenditure on the purchase of software as capital or revenue expenditure. 3. Depreciation rate applicable to software development. 4. Allowability of provision for travel expenses. 5. Deduction under Section 35 for scientific research expenditure. Detailed Analysis: 1. Deduction under Section 10A of the Income Tax Act: The Revenue challenged the CIT(A)'s decision to allow the assessee's claim for deduction under Section 10A. The Assessing Officer (AO) disallowed the claim on the grounds that the new unit was formed by reconstructing an existing unit, utilizing 28% old machinery and transferring employees. The CIT(A) found that the value of old machinery was less than 20% of the total machinery value and that transferring employees did not constitute reconstruction. However, discrepancies in the valuation of old and new machinery between the AO and CIT(A) were noted. The Tribunal remitted the issue back to the CIT(A) for fresh adjudication, considering the discrepancies in the fixed assets' values. 2. Treatment of Expenditure on the Purchase of Software: The Revenue contended that the expenditure on software should be treated as capital expenditure, not revenue expenditure. The AO treated the software purchase as capital expenditure and allowed depreciation at 60%. The CIT(A) allowed it as revenue expenditure, considering it as a renewal of subscription for software licenses. The Tribunal noted that the CIT(A) considered additional evidence in violation of Rule 46A and remitted the issue back to the CIT(A) for de novo assessment. 3. Depreciation Rate Applicable to Software Development: The AO allowed depreciation at 25% on the software development expenditure, treating it as intangible assets, while the CIT(A) allowed 60% depreciation. The Tribunal remitted this issue back to the CIT(A) for fresh adjudication, directing consideration of the Hon’ble Jurisdictional High Court's decision in CIT vs. Computer Age Management Services P. Ltd, which distinguished between general and specific entries for depreciation rates. 4. Allowability of Provision for Travel Expenses: For the assessment year 2003-04, the AO disallowed the provision for travel expenses, treating it as a mere provision and not an actual liability. The CIT(A) partly allowed the claim based on the subsequent reversal of the provision. The Tribunal remitted the issue back to the CIT(A), emphasizing that provisional deductions can only be allowed if the liability is crystallized. 5. Deduction under Section 35 for Scientific Research Expenditure: For the assessment year 2006-07, the AO disallowed the deduction under Section 35, citing the absence of evidence for research activities. The CIT(A) allowed the claim based on DSIR approval and the nature of expenses (salary and overheads). The Tribunal found that the CIT(A) did not address the AO's reasons adequately and noted the absence of capital assets for research activities. The Tribunal allowed the Revenue's grounds, indicating the need for evidence of actual research activities. Conclusion: The Tribunal remitted several issues back to the CIT(A) for fresh adjudication, emphasizing the need for proper evaluation of evidence and adherence to legal provisions. The appeals were partly allowed for statistical purposes, requiring further examination and adjudication by the CIT(A).
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