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TMI Blog2014 (6) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... directed to allow entire expenditure as claimed – Decided partly in favour of Assessee. Disallowance of the claim u/s 35(2AB) of the Act – Held that:- The statutory formalities for getting approval u/s 35(2AB) are that application in Form No. 3CK and 3CL are to be submitted and an order of approval has to be obtained in Form No. 3CM from the prescribed authority - the assessee has not furnished Form No. 3CM for claiming weighted deduction u/s 35(2AB) - The AO has allowed this claim earlier without examining the allowability in the absence of certificates - there is justification for reopening of assessment – thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO with a direction to allow weighted deduction u/s 35(2AB) as and when the assessee receives the approval under Form No. 3CM from the prescribed authority – Decided in favour of Assessee. Disallowance made u/s 35(1)(ii) of the Act - Claim made for weighted deduction – Held that:- The assessee filed list of payments i.e. payees list consisting of various Universities and Institutions for purpose of testing and sample note for approval from Central Rice Research Institute, Cuttack has been produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company filed its e-return of income for the A.Y. 2004-05 on 01.11.2004 disclosing income of Rs. 11,04,18,840/-. The return was processed under section 143(1) of I.T Act on 27.10.2005. Thereafter, assessment U/s 143(3) was completed on an income of Rs. 11,56,87,950/-. Consequent to the order dated 23.02.2009 of Commissioner of Income Tax(Appeals), relief of Rs. 41,11,828/- was granted thereby determining the income at Rs. 11,15,76,122/-. Thereafter it was found that income of Rs. 55,90,739/- had escaped assessment on account of the fact that 100% of the capital expenditure amounting to Rs. 1,39,76,847/- on purchase of software was allowed instead of allowance of 60% as per the provisions of Income Tax Act. It was further found that the assessee had claimed higher deduction U/s 80HHC to the tune of Rs. 12,20,129/- which escaped assessment. It was also found that the assessee is not eligible for deduction U/s 35(2AB) of the I.T. Act and is eligible for deduction U/s 35(1) of the IT Act. On the basis of the above, the assessment has been reopened U/s 147 of the IT. Act and notice U/s 148 was issued to the assessee on 30.03.2009 which was served on 01.04.2009. 4. Before the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 139,76,847/- which was claimed by the company as Revenue Expenditure which the AO proposed to treat the same as Capital Expenditure and allow depreciation @60%. (b) Provision for Bad Debts RS.12,27,845/- which the AO proposed to add back. (c) Mistake in calculation of Deduction u/s 80HHC which the AO proposed to add back. (d) Disallowance of Expenditure u/s 35(2AB) and Sec.35(1)(ii). (e) Excessive claim of MAT credit which the AO proposed to restrict to RS.9,55,830/- instead of RS.27,47,561/- claimed by the Company. The Company had filed a reply to the AO and the AO rectified the assessment u/s 154 only on the issue of MAT credit. As the said letter was based on Audit objections, it has been held in Transworld International Inc. V. JClT (2005) 273 ITR 242 (Delhi) that an Audit objection by itself cannot justify notice of reassessment. Similarly the Bombay High Court in the case of M.J. Pharmaceuticals Ltd V. DClT (2008) 297 ITR (Bom) held that reassessment proceedings based on change of opinion is not valid. In CIT V Feather Foam Enterprises Pvt. Ltd (2008) 296 ITR 342 (Del.) it was held that where the explanation of assessee has been accepted in original assessment sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the assessee has been accepted in the original assessment, subsequent rejection of explanation for the purpose of reassessment amounts to change of opinion. 8. The learned DR, on the other hand, submitted that certain issues were not discussed in the original order, hence, reopening is valid. The learned DR relied on the following cases: 1. ITO Vs. Purushottam Das Bangur & Anr., [1997] 224 ITR 362 (SC) 2. Ess Kay Engg. Co. (P) Ltd. Vs. CIT [2001] 247 ITR 818 (SC) 9. We have heard the arguments of both the parties, perused the record and have gone through the orders of the revenue authorities. We find from the assessment order that the AO has completed the assessment without forming any opinion. The AO has pointed out that the assessee's claim cannot be allowed as such without compliance of provisions of the Act. In the case before us only after collection of additional information, which was not on record earlier, the AO made up his mind that certain income had escaped assessment and, thereaf ter, reasons were recorded and notice u/s 148 was issued. According to the AO, the following three issues have not been considered at the time of original assessment proceedings: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the agreement, As per the agreement, the assessee was to pay Rs.52,50,OOO//towards net licence fee within the month of November, 2002 as per the agreement. The software will be installed at the designated site. The ledger extract of SAP expenses furnished by the company has been examined. From this, it can be observed that Rs.54,60,0001- in all has been paid to SAP in the f in. year 2002-03 and has been transferred to the present head of expenditure through a journal entry passed on 01.07.2003. The remaining expenses of Rs.82,16,957/- represent expenses incurred on purchase of computer parts and charges for initial uploading of SAP and systems installation charges, network installation accessories cost etc. They are all of the nature of expenses to enable initial set up of the SAP enabled computer software programmes. Hence, on facts of the case, it can be easily observed that they are all capital expenditure and not expenses of revenue nature. 3.5. As per the provisions of Clause(ii) of Sub-section(l) of Sec.32, know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was deriving the benefit of expenditure of advertisement through video clippings spread over certain period, it had adopted a policy of spreading over the expenses for a number of years depending upon the period during which the clippings were likely to be used instead of claiming the entire expenses for one year in which the amount has been paid to the producer of the clippings. The AO was of the opinion that there was no categorization of deferred revenue expenditure. The Tribunal allowed assessee to spread expenses incurred in a particular year over a number of years. The Tribunal held that the assessee was entitled to spread the claim proportionately over a period of ensuing years. According to the Tribunal entire expenses incurred and spread over for four years had to be allowed as a whole up to the assessment year 1993-94. 6.3.1 Respectfully following the above judgement, I too hold that the expenditure on purchase of license of SAP software for 25 years has to be spread over as a deferred revenue expenditure for 25 years. In this way, the principle of matching of revenue and expenses will be adhered to and this is the correct way of booking the expenditure. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy and hence to be treated as revenue expenditure. " "In Sonata Information Technology Ltd VS Add/. ClT 103 ITD 324, it was held that Software acquired under a license on terms and conditions wherein the ownership is retained by the licensor and where such Software only adds to the efficient running of day to day operation of business, cannot be held to be expenditure of capital nature as they are only copyrighted articles." 16. The learned DR on the other hand pointed out that from AY 2003- 04 as per Rule-5 of IT Rules read with old appendix-1 indicates that the items falling under the category of computers including computer software are eligible for depreciation of 60% and hence the AO has rightly treated it as capital expenditure and allowed depreciation at 60%. 17. After hearing the parties and perusing the record, we are of the opinion that as it is one time expenditure and grant of licence is tied up to the payment made by the user, the same shall be allowed as revenue expenditure. Ld CIT(A) has rightly came to a conclusion that expenditure is revenue in nature but that of deferred revenue. We do not agree with the later conclusion. The expenditure is revenue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee also has claimed weighted deduction under sub-sec(2AB) for 50% of the above expenditure amounting to RS.31,34,928/-. The relevant approvals for claim of weighted deduction as prescribed have not been produced by the assessee. Neither form 3CL nor form 3CM have been furnished by the assessee to be eligible for the weighted deduction. Therefore, the Assessee-Company is not eligible for th same and the claim for deduction of RS.31,34,928/- is disallowed." 20. On appeal, before the CIT(A) the assessee stated that the company's R&D facility was approved by Ministry of Science & Technology, Government of India. It was further stated that once the approved is granted, the remaining part of CCO & CCM is purely statistical in nature. After considering the submissions of the assessee the CIT(A) discussed the issue elaborately at paras 8.2 to 8.4 of the impugned order and analyzing section 35(2AB), confirmed the order of the AO. 21. The learned counsel submitted that the assessee is eligible for weighted deduction though the assessee has not complied with the statutory formalities. For this proposition, he relied on the decision of Hon'ble Delhi High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36,000.00 Central Leather Research Institute 243,000.00 Central Rice Research Institute, Cuttack 30,000.00 Cotton Research Station 7,000.00 Directorate of Rice Research 75,000.00 Directorate of Wheat Research 120,000.00 International Institute of Bio-technology and Toxicology (IIBAT) - Tamilnadu 1,418,575.00 Inveresk Research International ltd., UK 3,434,558.00 Mandya Research Station 5,000.00 Other Institutes 1,922,181.00 Plant Protection Consultants 338,404.00 University of Agricultural Sciences 105,000.00 Sub Total - A 7,834,718.00 R&D Export Related Expenses: Clearing and other incidental charges 144,257.00 Sub Total - B 7,834,718.00 Total (A+B) 7,978,975.00 26. Giving the following reasons, the AO disallowed the entire amount: "5.5. The details furnished have been verified. Except fdr clearing and other incidental charges of Rs.1,44,257/-, all other expenses are payments made to different universities totaling to Rs.78,34,718/-. According to the provisions of clause(ii) : [an amount equal to one and one-fourth times of] any sum paid to a scientific research association which has as its object the undertaking of scientific research or to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowing the entire expenditure. Given the facts and circumstances, I agree with the weighted deduction is not to be allowed on this amount, but expenditure is definitely allowable as business expenditure u/s 37(1) of the Act. The appellant gets relief accordingly. " 28. Before us, the learned counsel submitted that the company made payments of Rs. 1,30,26,571/- to various universities and research institutions for the purpose of testing. It is further submitted that the entire list of parties to whom the above payments were made were furnished to the AO in the re-assessment proceedings once again and out of this the AO has simply reduced Rs. 50,47,593/- and for the remaining balance the AO has merely picked up some items in the list and disallowed the same on the reasoning that it was not known whether the research institutes/universities are approved or not. The learned counsel contended that this is contrary to facts since from a perusal of the list of parties to whom payments are made it will be very clear that they are either central Government research institutions or other research institutions / universities which are approved institutions and the expenditure is allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt turnover. We find no infirmity in the order of CIT(A) and uphold the same. Further, we direct the AO to modify the calculation u/s 80 HHC af ter including the deemed export sales as part of export turnover. Hence, we set aside the issue to the f ile of the AO. 35. In the result, appeal of the assessee is partly allowed for statistical purposes. ITA No. 285/Hyd/2011 - by the revenue 36. Ground No. 1 raised by the revenue is as follows: "The learned CIT(A) ought to have held the software expenditure of Rs. 1,39,76,847/- is capital expenditure in nature and ought not to have held that it is of the nature of deferred revenue expenditure spread over a period of 25 years. 37. This ground has already been decided in Ground No.3 of the asesssee's appeal vide paras 11 to 17, wherein we have allowed the full claim of the assessee. Therefore, this ground of appeal of the revenue is dismissed. 38. Ground No. 2 is directed against the action of the CIT(A) in allowing the bad debts claim of Rs. 12,27,854/-. 39. After considering the rival submissions and perusing the orders of the revenue authorities, we confirm the order of the CIT(A) taking into consideration the written submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... file of the AO with a direction to allow the claim after furnishing the proof of approvals of the institutions u/s 35 in accordance with Rules 5C and 5D or notified by the Central Govt. Therefore, this ground of the revenue is allowed for statistical purposes. 44. Ground No. 4 is as follows: "The learned CIT(A) ought not to have held that the deemed export sales of technicals of Rs. 56,08,050/- and deemed export sales of formulations of Rs. 1,37,64,135/- forms part of export turnover for calculating eligible deduction u/s 80HHC." 45. This issue has also been decided in ground No. 6 of assessee's appeal vide paras 31 to 34 wherein we have upheld the order of the CIT(A) and set aside the issue to the file of the AO to modify the calculation u/s 80HHC af ter including the deemed export sales as part of export turnover. Therefore, this ground of appeal of the revenue is dismissed. 46. In the result, appeal of the revenue is partly allowed for statistical purposes. 47. To sum up appeal of the assessee being ITA No. 272/Hyd/2011 and the appeal of the revenue being ITA No. 285/Hyd/2011 are partly allowed for statistical purposes. Pronounced in the open court on 13th day of November, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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