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TMI Blog2022 (7) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of Rs.6,18,80,241 and if found in order, the A.O. is directed to grant depreciation on the same. It is ordered accordingly. Disallowance of software development expenses - Allowable business expenditure or not? - HELD THAT:- CIT-A without appreciating the business model of the assessee, held that the same software and same testing may not be done every year. It was further held by the CIT(A) that the assessee may test different software in different years and once developed, tested and customized according to a country specification will give an enduring benefit to the assessee. Accordingly, the CIT(A) held that the expenditure incurred on the software development is capital expenditure - CIT(A) failed to appreciate that the assessee does not test on a single software during the entire year. Further, a software is not customized and deployed on the electronic products and a new product is launched every year and the same is a continuous activity. Since the CIT(A) has not understood the business model of the assessee, it is necessary that the matter needs to be examined afresh by the A.O. Accordingly, the issue raised in ground 2 is restored to the files of the A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c)The learned CIT(A) erred in concluding that the software development expenses provides enduring benefit to the Appellant without fully appreciating the facts of the case. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 3. The assessee has also raised additional ground. The additional ground raised read as follows:- Ground no. 3: Deduction in respect of 'education cess on income-tax' and 'secondary and higher education cess on income-tax' for the year under consideration. while assessing the total income of the Appellant 3.1 The Learned Assessing Officer (Ld. AO') and Learned Commissioner of Income-tax Appeals (Ld. CIT(A),), while assessing the total income of the Appellant for the year under consideration, have erred in not allowing a deduction for education cess and secondary higher education cess (collectively known as 'education cess') for the year under consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. The assessee re-submitted copies of the invoices pertaining to the additions of block of `computer equipments along with the statement of reconciliation with tax audit report in soft copy. However, the CIT(A) concluded in the impugned order dated 25.02.2020 that the invoices produced were not legible and that no new evidence / bills were produced except what has been produced before the A.O. The relevant finding of the CIT(A) reads as follows:- 12. In view of the above, the matter is decided on merits. I have examined the invoices presented before me were sent to the AO for examination and as seen from the remand report the AO has clearly stated that the invoices for Rs.6,18,80,241/- were not produced. I have also gone through the copies of invoices produced before me and I find that the invoices are either not clear / legible or are already produced before the AO on which AO has commented in his remand report. There are no new or different evidence / bills produced before me except what has been produced before the AO. In view of this, the claim of the appellant is rejected and the addition on account of depreciation on Computer Equipments to the extent of Rs.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, we are, prima facie, of the view that the assessee was not given a proper hearing before the A.O. Inspite of the assessment taken up during the fag end of the limitation period, the assessee had produced sample copies of invoices relating to the additions made under block of computer equipments (refer page 911 to 1044 of the paper book). However, the A.O. disallowed the entire depreciation of Rs.3,62,98,140 by stating that the invoices were not reconciled with the tax audit report. The assessee filed rectification application and submitted statement of reconciliation of invoices with the tax audit report along with copies of all the invoices pertaining to the block of computer equipments vide rectification application filed on 22nd March, 2016 (refer page 783 to 861 of the paper book). The A.O., however, did not consider the same and did not grant the claim of depreciation on additions made during the relevant year to the computer equipments. The CIT(A) called for a remand report from the A.O. and the A.O. in the remand report stated that the invoices for an amount of Rs.6,18,80,241 were not produced and conveyed his objections for allowing the claim of depreciation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out at pages 342 and 343 of the paper book. The assessee is a subsidiary of LG Electronics Inc., Korea. The assessee provides software development and convergence solutions to its holding company from its development centre in India. The assessee is not a product development company. The assessee is mainly into country adaption and model development. It is a part of its parent company s Research Development (R D) Centre. The assessee purchases prototypes and builds on the base software developed by LG Korea, tailoring it to the specifications/ requirements for the Indian consumers. It tests on the various functionalities like GPS, network quality testing etc., in different telecom circles based in India. To test in the various telecom circles, the assessee purchases sim cards of multiple telecom operators to test the various functionalities on their sample phones. On perusal of the details of expenditure (at pages 922 to 925 of the paper book), it is seen that it represents testing charges, purchase of electronic items, etc. The electronic items and testing equipments become redundant on completion of the project or after the use. The said phones are discarded post the testin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue raised in the additional ground is a pure legal issue, which does not require any verification of facts. Therefore, we admit the same for adjudication. The Hon ble Bombay High Court in the case of Sesa Goa Limited v. JCIT (supra) had held education cess is an allowable expenditure as the word cess is conspicuously absent under the provisions of section 40(a)(ii) of the I.T.Act. The relevant finding of the Hon ble High Court reads as follows:- 23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, education cess or any other cess , then, the legislature could have easily included reference to cess in clause (ii) of Section 40(a) of the I.T.Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the cess , when it comes to computing income chargeable under the head profits and gains of business or profession . 6.2 The Hon ble High Court also placed reliance on the CBDT Circular dated 18.05.1967, which clarified that upon omission of the term cess from the present section 40(a)(ii) of the I.T.Act, only rates or ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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