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TMI Blog2012 (11) TMI 619X X X X Extracts X X X X X X X X Extracts X X X X ..... ue expenditure. - Decision in Empire Jute Co Ltd (1980 (5) TMI 1 - SUPREME COURT) followed - Decided in favour of assessee Carry forward of loss/ depreciation u/s 10A – Whether carry forward of loss/ depreciation can be set off against other normal business income - Assessee was eligible to claim benefit of Sec. 10A – AO argued that Sec 10A was contained in Chapter III which dealt with “incomes which do not form part of total income”, therefore, assessee was not eligible to carry forward unabsorbed loss/depreciation – Held that:- As the provisions of Sec. 10A as it stood w.e.f. 1.4.2001 continued to be a provision for exemption. Sec. 10A(6)(ii) provides that no loss which relates to the business of the undertaking shall be carried forward or set off where such loss relates to any of the relevant assessment years ending before 1.4.2001. - Therefore, losses which are sought to be carried forward by the assessee are for the assessment year ending after 1.4.2001 and, therefore, do not fall in the restriction contained in section 10A(6)(ii). - Decided in favour of assessee Deduction u/s 10A- Foreign exchange fluctuation gain - Whether Foreign exchange fluctuation gain is eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may, the dispute before us relates to an expenditure of ₹ 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 software packages developed by the assessee are basically used in the banking sector. The assessee explained that the expenditure incurred on development of such products was to be tune of ₹ 2,77,07,736/- and the same was claimed as revenue expenditure. The Assessing Officer and, thereafter, the Commissioner of Income-tax (Appeals) has held that such development expenditure was capital in nature and against such a disallowance, the assessee is in further appeal before us. 5. From the orders of the authorities below, it emerges that the objections of the Department against the assessee s claim of treating it as revenue expenditure are three-fold. Firstly, as per the Department, the assessee has itself treated such expenditure in its account books as deferred revenue expenditure and it has been claimed as a revenue exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 999 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 submitted that the same was no criteria to hold that the expenditure in question was a capital expenditure or an expenditure incurred towards acquisition of an intangible asset. All the aforesaid pleas set up by the assessee have not found favour with the incometax authorities. The Commissioner of Income-tax (Appeals) noticed that the products resulting as a consequence of the impugned expenditure were being sold by the assessee on license basis even in the subsequent years and, therefore, it could not be said that there was no enduring benefit to the assessee. According to the Commissioner of Income-tax (Appeals), in fact the expenditure on development of the products has resulted in an enduring benefit to the assessee. The Commissioner of Income-tax (Appeals) also referred to the decision of the Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 pointed out that merely because the assessee had made an application to the Registrar of Trade Marks of such products would not make such expenditure as capital expenditure. Apart therefrom, the learned Counsel also made an alternative plea to the effect that the expenditure is also otherwise fully allowable while computing the business income in terms of section 35(1)(iv) of the Act. As per the assessee, the expenditure in question was incurred on research and development and was in the nature of scientific research as understood for the purposes of section 35(1)(iv) of the Act and, therefore, on this alternative plea also the expenditure was fully allowable. 8. On the other hand, the learned Departmental Representative, appearing for the Revenue, has defended the orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as product development expenditure of ₹ 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 details of such expenditure are found placed in the Paper Book as submitted at the time of hearing. Be that as it may, it is quite evident that the expenditure in question cannot be said to have resulted in acquisition of any new asset. So, however, the plea of the Revenue is that such expenditure has resulted in development of software products, which in turn are being sold by the assessee to various customers over a period of time including in the subsequent years and, therefore, it results in an enduring benefit, and accordingly, such expenditure was to be held as capital expenditure. 10. In our considered opinion, the aforesaid proposition of the Revenue is quite alien to the business realities under which the assessee is operating. Quite clearly, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itability 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 none of the expenditures in question are of capital nature and in fact, the expenditure which has been referred to by us in the earlier paragraph clearly are such expenditure, which are incurred in the course of carrying on of business. 11. The other objection of the Revenue that the assessee had treated the impugned expenditure as a deferred revenue expenditure in the books of account and claimed it as a revenue expenditure in the computation of income, is of no consequence. The Hon ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd (supra) and also thereafter in the case of Tuticorin Alkali Chemicals v. CITR 227 ITR 172 (SC) and Sutlej Cotton Mills Ltd v. CIT 116 ITR 1 (SC) has supported the proposition that the entries in the books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) of the Act, pertaining to the assessment year 2003-04. 17. In this appeal, the first issue raised by the Revenue is with regard to the decision of the Commissioner of Income-tax (Appeals) in holding that the assessee was eligible to carry forward loss incurred in respect to the undertaking which is otherwise eligible for the benefits of section 10A of the Act. 18. In brief, the relevant facts are that the assessee filed a return of income declaring loss of ₹ 2,42,68,399/-. The Assessing Officer also noticed that for assessment year 2001-02, assessee had brought forward loss of ₹ 79,40,665/- and similarly for the assessment year 2002-03, assessee had brought forward loss of ₹ 2,12,42,622/- and bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hand, the learned Counsel for the respondent-assessee pointed out that the order of the Commissioner of Income-tax (Appeals) is in terms of the provisions of the Act and it is further pointed out that the plea of the assessee to the effect that after amendment to section 10A with effect from 1.4.2001, provision of section 10A is no longer a provision granting exemption of tax, but is a provision for a deduction as approved by the Hon ble jurisdictional High Court in the case of Hindustan Unilever Ltd. v. DCIT 325 ITR 102 (Bom), though in the context of section 10B of the Act. At this point, it has also been pointed out by the learned Counsel that the amendment to section 10B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a), 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 off where such loss relates to any of the relevant assessment years ending before 1.4.2001: (ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or subsection (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years ending before the 1st day of April 2001. Quite clearly, losses which are sought to be carried forward by the assessee are for the assessment year ending after 1.4.2001 and, therefore, do not fall in the restriction contained in section 10A(6)(ii) of the Act. As a consequence, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 ₹ 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 claim of deduction under section 10A of the Act and the Commissioner of Income-tax (Appeals), in our view, made no mistake in holding so. Thus, the Revenue fails on this Ground. 30. In the result, Revenue s appeal, vide ITA No 1205/PN/09 is dismissed. 31. We now take up Revenue s appeal, vide ITA No 1206/PN/09 for the assessment year 2004-05. This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-II, Pune dated 22.07.2009 which, in turn, has arisen from the order passed by the Assessing Officer under section 143(3) of the Act, pertaining to the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 ₹ 81,95,159/- from the sale proceeds of the computer software exported and, accordingly, the deduction was scaled down to the extent of ₹ 24,88,707/-. Sub-section (3) of section 10A prescribes that the deduction envisaged under section 10A applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1 thereof further explains that the expression competent authority as Reserve Bank of India or such other authority as is authorized under the law for the time being in force for regulating payments and dealings in foreign exchange. 38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-tax (Appeals) in holding that the assessee was eligible to carry forward loss incurred in respect to the undertaking which is otherwise eligible for the benefits of section 10A of the Act. Similar issue has been considered by us in the Revenue s appeal for the assessment year 2003-04, vide ITA No 1205/PN/09, wherein we have affirmed the order of the Commissioner of Income-tax (Appeals). The facts and circumstances and arguments of both sides being similar, our decision given in Revenue s appeal for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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