9911796707
TMI Blog2012 (11) TMI 619X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. The assessee had claimed such expenditure as revenue expenditure whereas the income-tax authorities have denied the claim of the assessee and, instead treated the expenditure as capital expenditure. 4. The background of the dispute can be summarized as follows. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and it is engaged in the business of development of software products. In the return of income filed for the assessment year 2003-04, it declared a loss of Rs. 2,42,68,399/-, which was subject to scrutiny assessment under section 143(3) of the Act whereby the total income has been determined at a loss of Rs. 24,11,209/- as per the normal provisions of the Act, whereas the income under the provisions of section 115JB of the Act has been determined at Rs. 2,66,185/-. Be that as it may, the dispute before us relates to an expenditure of Rs. 2,77,07,736/- incurred by the assessee towards product development, which has been disallowed. The assessee explained that it was engaged in the development of various software packages, like Trade Now, Electra ATM, Electra Card and Electra Payment Gateway (EPG), etc. It was explained that the soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. constitute the development activity. It was pointed that the impugned expenditure has not resulted in creation of any fixed asset, inasmuch as the products which are manufactured are intended for sale. It was in this background, the assessee pointed out that the software packages developed by the assessee support multiple types of financial instruments and transactions on the internet, which are used by the banking industry. The assessee further submitted that the treatment in the account books was not a conclusive factor to determine the nature of expenditure and in that context, relied upon the judgment of the Hon'ble Supreme Court in the case of CIT v. Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC). Secondly, the assessee also pointed out that it was in the business of software development since 1999 and that it was not as if the impugned expenditure resulted in any new business, whereas it was an expenditure directed towards obtaining products for sale in the existing business. Therefore, according to assessee, such expenditure was liable to be treated as a revenue expenditure. With regard to the registration of the products with the Registrar of Trade Marks, it was submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture is towards employee costs, administrative cost and other costs, namely, software consultancy, training expenses, printing and stationery, etc. as per the details on record. It was vehemently pointed out that the assessee was already in the business of software development since 1999 and that the expenditure was incurred on developing of products in the existing line of business and, therefore, it could not be said that the same was a capital expenditure. In support of such proposition, reliance was placed on following decisions: (i) Glaxo Smith Kline Consumer Healthcare Ltd. v. ACIT 112 TTJ (Chd) 94; (ii) M/s Softlink International P Ltd, Pune v. ACIT vide ITA No 417 to 419/PN/08; dated 14.02.2011 and, (iii) M/s Renu Electronics P Ltd, Pune v. DCIT, vide ITA No 1709/PN/05, dated 30.4.2009. Further, it is sought to be pointed out that even if the assessee was obtaining a benefit of enduring nature, the same was to be considered on revenue account and, for that matter, such expenditure was liable to be treated as revenue expenditure in terms of the decision of the Hon'ble Supreme Court in the case of Empire Jute Co Ltd c. CIT 124 ITR 1 (SC). Further, the learned Counsel p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... multiple types of financial instruments and transactions on the internet. The assessee explained that it was in the business of software development since 1999 and the various products developed by it are sold to different customers. A pertinent factor which was brought out and has also been articulated by the learned Counsel before us is to the effect that the products developed and sold by the assessee are not customer-specific, but are developed specific to the business processes. For instance, the software packages, namely, EPG, Electra Card and Electra ATM are products which are developed for use in the banking and financial services sector. In this background of the nature of business being carried out by the assessee, we may now examine the expenditure referred to as product development expenditure of Rs. 2,77,07,736/-, which is in dispute. Details of such expenditure show that the same comprises of employees' salaries, software consultancy/training expenses and indirect costs by way of administrative/ other expenses, e.g. power and fuel, printing & stationery, marketing expenses, rent, professional fees, office expenses, rates and taxes, books and periodicals, etc. The de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be of revenue account, even though the advantage may endure for an indefinite future." In the present case, in our view, the expenditure on development of new product in the line of business being carried out by the assessee is an expenditure related to such business and benefit to the assessee is in the revenue field, inasmuch as it seeks to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The parity of reasoning laid down by the Hon'ble Apex Court in the case of Empire Jute Co Ltd (supra), as extracted above, clearly supports the stand of the assessee, inasmuch as the expenditure in question merely results in development of new products by the assessee in its existing line of business. Even otherwise, it is noteworthy that n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's business of software development and selling, is to be regarded as in the nature of revenue expenditure. Thus, on this issue the assessee succeeds. 14. The only other Ground in this appeal raised by the assessee is with regard to its alternative plea that in case the expenditure of Rs. 2,77,07,736/- of product development is not held to be revenue expenditure, then the same is allowable in terms of section 35(1)(i) or section 35(1)(iv) of the Act while computing business income as expenditure in the nature of scientific research expenditure. Since the assessee has succeeded on its substantive plea that the impugned expenditure is of revenue nature, the alternative plea is rendered academic and is, therefore, not being adjudicated at the present. 15. In the result, the appeal of the assessee, vide ITA No 1179/PN/09 for the assessment year 2003-04 is allowed. 16. Now, we take up Revenue's appeal vide ITA No 1205/PN/09 for the assessment year 2003-04. This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-II, Pune dated 22.7.2009 which, in turn, has arisen from the order passed by the Assessing Officer under section 143(3) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was allowable. The assessee also referred to the specific provisions of section 10A(6)(ii) of the Act which disentitled carried forward of losses which related to assessment years prior to the assessment year 2001-02. The assessee, however, pointed out that the losses sought to be carried forward by the assessee pertained to the assessment year 2001-02 and subsequent assessment years. 20. Considering the aforesaid submissions of the assessee, the Commissioner of Income-tax (Appeals) upheld the stand of the assessee and observed that there was no bar in section 10A to carry forward unabsorbed depreciation/losses and has referred to the provisions of section 10A(6)(ii) of the Act in this regard. Against the aforesaid, Revenue is in appeal before us. 21. Before us, the learned Departmental Representative submitted that the Commissioner of Income-tax (Appeals) erred in allowing the plea of the assessee, inasmuch as section 10A(6)(ii) of the Act does not specifically permit the carried forward and set off losses relating to the assessment year 2001-02 onwards. In this manner, the action of the Commissioner of Incometax (Appeals) is sought to be assailed before us. 22. On the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd it is no longer a provision which provides for excluding an income from the total income of an assessee. Therefore, there is weight in the plea set up by the assessee that in so far as the nature of section 10A with effect from 1.4.2001 is concerned, it is a section which seeks to allow a deduction of the prescribed profits while computing total income of the assessee and not a provision which provides for an exemption or to exclude certain income from the total income of the assessee. In coming to such conclusion, we have been guided by the parity of reasoning laid down by the Hon'ble jurisdictional High Court in the case of Hindustan Unilever Ltd. (supra), wherein similar phraseology contained in section 10B of the Act inserted with effect from 1.4.2001 was the subject-matter of consideration. In this context, we, therefore, are unable to subscribe to the view of the Assessing Officer that the provisions of section 10A as it stood with effect from 1.4.2001 continued to be a provision for exemption. Further-more, section 10A(6)(ii) of the Act, which reads as under, clearly provides that no loss which relates to the business of the undertaking shall be carried forward or set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. 28. On the other hand, the learned Representative for the assessee submitted that the foreign exchange in question was clearly derived from the export of computer software, inasmuch as it reflected increased collection of export proceeds and, therefore, the Commissioner of Income-tax (Appeals) made no mistake in considering such income as eligible for the benefit of section 10A of the Act. 29. Quite clearly, provisions of section 10A(1) of the Act envisage deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software. The prescription that an income is to be derived by an undertaking from export of articles or things or computer software is not disputed by both the parties before us, so however, it is canvassed by the Revenue that the foreign exchange fluctuation gain of Rs. 77,288/- cannot be said to have been derived from the export of software. In our considered opinion, as long as gain on foreign exchange fluctuation is on account of collection of export proceeds, it has a direct nexus with the exports undertaken by the assessee and, to that extent, it will also form part of an income eligible for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-II, Pune dated 21.1.2011 which, in turn, has arisen from the order passed by the Assessing Officer under section 143(3) of the Act, pertaining to the assessment year 2007-08. 37. In this appeal, the dispute raised by the Revenue relates to the computation of deduction eligible to the assessee under section 10A of the Act in relation to the profits and gains derived by the assessee from the export of article or thing or the computer software. In brief, the facts are that the assessee was, inter alia, engaged in the business of development and export of computer software in its undertaking located in the STPI unit and claimed exemption on such profits in terms of section 10A of the Act. While computing the eligible deduction under section 10A of the Act, the Assessing Officer excluded an amount of Rs. 81,95,159/- from the sale proceeds of the computer software exported and, accordingly, the deduction was scaled down to the extent of Rs. 24,88,707/-. Sub-section (3) of section 10A prescribes that the deduction envisaged under section 10A applies to the undertaking, if the sale pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been disposed of by the Assessing Officer on 27.1.2011 whereby the amount of Rs. 36,14,071/- has been found to be includible as export proceeds for the purpose of computing deduction under section 10A, since the said sums have been received within the norms prescribed in section 10A(3) of the Act. The learned Representative pointed out that the correct amount is Rs. 36,14,071/- as determined by the Assessing Officer in the proceedings under section 154 of the Act and not Rs. 37,34,412/- as considered by the Commissioner of Income-tax (Appeals) in the impugned order. As per the learned Representative for the respondent-assessee, the assessee has no objection if the direction of the Commissioner of Income-tax (Appeals) is modified to the said extent. In this view of the matter, while dismissing the Ground of appeal raised by the Revenue, the Assessing Officer is directed to consider the fact-position brought out by the assessee while giving appeal effect to the order of the Commissioner of Income-tax (Appeals). Resultantly, the Ground of appeal raised by the Revenue is dismissed. 41. The next issue raised by the Revenue is with regard to the decision of the Commissioner of Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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