TMI Blog2014 (6) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 –revenue contented that the directions should be given to verify whether approval has been in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of 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 or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that where the explanation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of one year from the date of this agreement. 3.4 As 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown on the screen in the cinema halls. Since the assessee 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition of any capital asset. The same enhances the productivity or efficiency 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ific research related to its business then the same can be allowed as deduction. Therefore, the assessee is eligible for 100% deduction of expenditure since the nature of expenditure laid out by the assessee is not capital. However, the 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 lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce payment of Rs. 79,78,975/-, the AO found that the payments were made to various Universities and Research Institutes and export related testing fees, as below: Name of the Vendor Amount in (Rs.) Acharya NG Ranga Agricultural University 136,000.00 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 Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added back to income returned. 27. Before the CIT(A), the assessee stated that the disallowance cannot be made completely and even if the weighted deduction is not allowed, the expenditure for business purpose and is to be allowed under section 37(1). After considering the submissions of the assessee, the CIT(A) held that the assessee has not demonstrated that it is eligible for weighted deduction as claimed and the AO has himself given a list of Universities and Testing Institutes to whom these amounts have been paid, as it is not the case of the AO that the payments are bogus or that they are not made for business purpose. He further held that a mere look at the relevant expenditure would reveal that the same is made for certain testing and export related services pertaining directly to the assessee s business. He finally concluded as under: I do not see any reason for disallowing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HC amounting to Rs. 20,66,392/-. 33. On appeal, before the CIT(A) the assessee stated that the calculations made by the AO were correct and deemed export sales were to be added to the total export sales. The AR of the assessee submitted that the details of deemed exports were never asked for during assessment proceedings, however, the same were produced during the appeal proceedings before the CIT(A). After considering the submissions, the CIT(A) held that deemed exports are duly certified by the concerned agencies and are fully documented and the AO did not take a look at these documents. He, therefore, held that the deemed exports are to be treated as part of the export turnover and the rest of the calculations have been made correctly made by the AO. 34. After hearing the parties and perusing the record, it is observed that the CIT(A) has given a finding that deemed export sales are duly certified by the concerned agencies and fully documented and, therefore, the same are to be treated as part of the export 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable, it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. 41. Respectfully following the ratio laid down by the Hon ble Supreme Court in the said case, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue. 42. Ground NO. 3 is as follows: The learned CIT(A) ought to have held that the entire outside R D expenditure of Rs. 79,78,975/- is not an allowable expenditure u/s 35(i)(ii) since the assessee has not furnished proof of approvals of the Institutions u/s 35 in accordance with Rules5C and 5D or notified by the Central Govt. 43. This ground is similar to the ground that has been decided by us in ground No. 5 of assessee s appeal vide paras 24 to 30 wherein we have set aside the issue to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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