Manoj Mahabaleshwar Bhat (Audit Assistant) (49 Points)
18 February 2016Hi,
Can any one have case law about Opus Software Sales (P) Ltd. vs. ACIT, 139 ITD 427 (Pune).
Sathish M
(Management Accountant)
(40581 Points)
Replied 18 February 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCHES "A", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER
ITA No. 584/PN/2011
(Assessment Year: 2002-03)
M/s Opus Software Solutions Pvt. Ltd.
Commerzone, Building No. 4
1st Floor, Samrat Ashoka Path
Opp. Airport Road, Yerwada
Pune - 411 006
PAN : AAACO 2203 N .... Appellant
Vs.
Asstt. Commissioner of Income Tax
Circle - 3, Pune .... Respondent
ITA No. 643/PN/2011
(Assessment Year: 2002-03)
Joint Commissioner of Income Tax (OSD)
Circle - 3, Pune .... Appellant
Vs.
Opus Software Solutions Pvt. Ltd.
22 Gaurishankar Senapati
Bapat Marg Shivaji CHS, Pune
PAN : AAACO 2203 N .... Respondent
Appellant by : Mr. Nikhil Pathak
Respondent by : Mr. Mukesh Verma
Date of hearing : 02-04-2013
Date of pronouncement : 28-05-2013
ORDER
PER G. S. PANNU, AM The captioned cross-appeals, each by the assessee and the Revenue, pertaining to the assessment year 2002-03, were heard together and are being disposed-off by way of a consolidated order for the sake of convenience and brevity. The captioned appeals are directed against the order of the Commissioner of Income Tax (Appeals) - II, Pune dated 24.02.2011 which, in turn, has arisen from an assessment order dated 31.12.2009 passed by theA.Y. 2002-03 Assessing Officer, under Section 144 read with Section 147 of the Income Tax Act, 1961 (in short "the Act"), for the assessment year 2002-03.
2. Firstly, we may take up the appeal of the assessee wherein two issues have been raised. The first issue is with regard to the validity of the initiation of proceedings under Section 147 of the Act. As the same has not been pressed at the time of hearing, accordingly the same is dismissed as not pressed.
3. The second issue, raised by the assessee, is with regard to the disallowance made by the Assessing Officer of Rs.4,02,11,000/- representing product development expenses. The Assessing Officer had made the disallowance by relying on his stand in assessee's own case for the assessment year 2003-04 vide assessment order under Section 143(3) of the Act dated 28.02.2006. Before the CIT(A), assessee pointed out that in the assessment order, the Assessing Officer has wrongly taken the figure of disallowance under this head at Rs.2,77,07,736/-, which was the figure for assessment year 2003-04 whereas the actual amount of product development expenses claimed as deduction was at Rs.4,02,11,000/-. Moreover, the Assessing Officer had allowed depreciation on the same, and the same @ 25% worked out to Rs.1,52,750/- instead of Rs. 69,26,934/- mentioned in the assessment order. Pertinently, as per the Assessing Officer, the product development expenses were not allowable as revenue expenditure and instead he granted depreciation @ 25% on the same basis as for assessment year 2003-04.
4. With regard to the error in stating the correct amount of disallowance, the CIT(A) directed the Assessing Officer to verify the same and correct the error. With regard to the merits of the claim, CIT(A) relied upon his order for the assessment year 2003-04 in assessee's own case and held that the assessee's claim of product development expenses as revenue expenditure A.Y. 2002-03 was not allowable. On this aspect, the CIT(A) decided the matter against the assessee.
5. At the time of hearing before us, it was a common point between the parties that the order of the CIT(A) for the assessment year 2003-04 was a subject matter of appeal before the Tribunal in ITA No. 1179/PN/2009 dated 27.07.2012 wherein the assessee has been found to be eligible for claiming the product development expenses as a revenue expenditure. The relevant discussion in the order of the Tribunal dated 27.07.2012 (supra) is as under :-
"9. We have carefully considered the rival submissions. Before we proceed to adjudicate the controversy relating to the nature of the product development expenditure, it would be appropriate to briefly touch upon the nature of business carried out by the assessee. The appellant company is engaged in developing various software products, which are in turn used in the banking sector. The assessee had explained that expenditure in question has been incurred on development of various products, like, Trade Now, Electra ATM, Electra Card and Electra Product Gateway (EPG). From the explanation of the assessee rendered to the lower authorities, it emerges that the product Electra Product Gateway (EPG) is an end-to-end software solution product which can support 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 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 A.Y. 2002-03 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 is in the business of software development which entails fast technological changes and in that view, there is no permanence attached to any product developed. In fact, it is quite understandable that the business of the assessee is exposed to volatility of new and upcoming technological advances and the products developed by it may not be sustainable over a period of time to compete in the market place. Therefore, in this background one has to examine as to whether the expenditure incurred on development and launching of new products in the same line of business results in an advantage in the revenue field or in the capital field. The Hon'ble Supreme Court in the case of Empire Jute Co Ltd (supra) has held that the true test to ascertain the nature and import of the expenditure is to examine the same from a commercial perspective. Even if, it has to be accepted that the expenditure results in an enduring benefit to the assessee, yet following discussion by the Hon'ble Supreme Court would show that each and every incidence of enduring benefit would not result in classification of expenditure as a capital expenditure:-
"There may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and 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 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.
A.Y. 2002-03
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 of account cannot be demonstrative of the true nature of a transaction. The true nature of a transaction is to be assessed not on the basis of the entries in the books of account alone, but having regard to the realities of the transaction. In this view of the matter, the aforesaid objection is of no consequence.
12. Regarding the objection of the Revenue to the effect that the assessee was seeking to register its trade-mark in relation to the produces developed, same, in our view, is irrelevant to decide the nature of the expenditure incurred on development of products. In section 32(1)(ii), a trade- mark is considered as an intangible asset, so however, it is clear that in the present case the expenditure is not incurred on a trade-mark developed and accordingly, the plea of the Revenue that such expenditure resulted in creation of an intangible asset is quite irrelevant. Similarly, the reference made by the Commissioner of Income-tax (Appeals) to the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises (supra) is also of no help, inasmuch as it deals with expenditure on acquisition of a software package in the hands of a customer and the dispute in the present case stands on a qualitatively different footing, inasmuch as in the present case the assessee has developed the products in order to market the same in its line of business of development and selling of software packages.
13. In conclusion, having regard to the aforesaid discussion, in our considered opinion, the expenditure in question which has been incurred on development of various software packages, for being sold in the 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."
A.Y. 2002-03
6. Following the aforesaid precedent in assessee's own case which is in relation to the similar dispute before us, the claim of the assessee deserves to be allowed. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to allow the claim of the assessee in accordance with the order of the Tribunal dated 27.07.2012 (supra). Thus, on this Ground assessee succeeds.
7. The assessee has also raised an alternative plea to the effect that if the said claim is not allowed under Section 37(1) of the Act, the same is allowable under Section 35(1)(i) or under Section 35(1)(iv) of the Act. Since the assessee has succeeded on its substantive plea that the impugned expenditure is revenue in nature, the alternative plea is rendered academic and is accordingly dismissed as infructuous.
8. In the result, the appeal of the assessee is partly allowed.
9. Now, we may consider the cross-appeal of the Revenue wherein the following Grounds of appeal have been raised by the Revenue :-
"2. The learned CIT(A) grossly erred in blanketly holding that "the claim of the appellant u/s 10A in so far as income has arisen out of the eligible business is liable to be allowed, if the conditions are otherwise fulfilled, after set off of the unabsorbed carry forward losses/depreciation etc."
3. The learned CIT(A) grossly erred in failing to appreciate that the loss relating to the business of the undertaking to which sec. 10A applies is not permitted to be carried forward in view of the embargo imposed by sec. 10A(6) and, therefore, such loss cannot be carried forward and adjusted against the Gross Total Income of the assessee.
4. Without prejudice to the foregoing, the learned CIT(A) grossly erred in holding as above in an unqualified manner whereas there is nothing in sec. 10(6)(ii) permitting carry forward and set off of loss relating to A.Y. 2001-02 onwards against any other income or any other business income of an assessee."
10. In so far as issue raised in Ground of appeal no. 2 is concerned, the relevant facts are that while determining the total income in the assessment A.Y. 2002-03 order dated 31.12.2009, the Assessing Officer made an addition of Rs.1,21,57,820/- on account of "Disallowance of Exemption under Section 10A and carry forward of loss". Before the CIT(A), assessee pointed out that the Assessing Officer erred in making the aforesaid disallowance inasmuch as the assessee did not claim any such exemption. It was explained that the return of income for the assessment year under consideration was filed at a loss of Rs.3,39,49,369/-. The assessee clarified that though it was eligible for the exemption under Section 10A of the Act and the same was worked out in Form No. 56F attached with return of income but due to loss in the computation of income, no such exemption was actually claimed but was only mentioned by way of a Footnote. The assessee submitted copies of computation of income and statement of losses in support of the said plea before the CIT(A).
11. At the same time, assessee pointed out that subsequent to the assessment order dated 31.12.2009 and after rectification order made by the Assessing Officer under Section 154 of the Act, the assessed income was determined at a positive figure of Rs. 95,58,610/- and in view of the same, assessee be granted relief under Section 10A of the Act. In this background, the CIT(A) deleted the disallowance of Rs.1,27,06,747/- and with regard to the assessee's claim for exemption under Section 10A of the Act on the revised assessed income, he held as under :-
"It is now stated that claim u/s. 10A be allowed on the revised working made of profit at Rs. 92,58,610/- after order u/s 154 dtd. 27.01.2011. The claim of the appellant u/s. 10A in so far as income has arisen out of the eligible business is liable to be allowed, if the conditions are otherwise fulfilled, after set off of the unabsorbed carry forward losses/depreciation etc. Accordingly, ground No. 10 & 11 will be treated as allowed for statistical purposes."
12. In the aforesaid background, we have heard the rival parties and find that the CIT(A) made no mistake in holding that the claim of the assessee A.Y. 2002-03 under Section 10A of the Act be allowed, subject to fulfillment of all the conditions. Ostensibly, there is no dispute to the position that the disallowance of Rs.1,21,57,820/- made by the Assessing Officer is erroneous as no such claim has been made in the return of income, and the CIT(A) rightly deleted the same. Thus, Ground of appeal no. 2 raised by Revenue is dismissed.
13. In so far as Grounds of appeal no. 3 and 4 are concerned, at the time of hearing the learned Departmental Representative did not substantiate the same and fairly conceded that they do not arise out of the impugned orders of the lower authorities, and accordingly the same are dismissed, as announced at the time of the hearing.
14. Resultantly, whereas the appeal of the assessee is partly allowed, that of the Revenue is dismissed.
Order pronounced in the open Court on 28 th May, 2013.
Sd/- Sd/-
(R.S. PADVEKAR) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated: 28 th May, 2013
Sujeet
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A)-II, Pune;
4) The CIT-II, Pune;
5) The DR, "A" Bench, I.T.A.T., Pune;
6) Guard File.
By Order
//True copy//
Private Secretary
I.T.A.T., Pune.
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