Ita/1143/2006 Of The Commissioner Of Income Tax v. M/S Encore Software Ltd

IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 8 DAY OF OCTOBER, 2012 PRESENT THR HON'BLE MR. JUSTICE K.SREBDHAR RAO ANT) THR HON'BLE MR. JUSTICE B.V. PINTO 1.T.A. No.1143 OF 2006 BETWEEN:! 1.The Commissioner of Income Tax,Central Circle,C.R. Building,Queens Road,Bangalore.Central Circle,C.R. Building,Queens Road,Bangalore. 2.The Assistant Commissioner of Income Tax,Circle-11(2),C.R. Building,Queens Road,Bangalore. Appellants (By Sri E. Sanmathi Indrakumar, Advocate) ANT)! M/s.Encore Software Ltd., No.44 & 45, 6[."]Floor,Leo-Complex,Residency Road Cross,Bangalore. Respondent (By Sri A. Shankar & Sri M. Lava, Advocates) This I.T.A. is filed U/s.260-A of I.T. Act, 1961 arising|Outotorder.dated24 O03 .AOOpassedinL.T.A.No.794/Bang/2005 for the Assessment Year 2001-2002, praying that this Hon’ble Court may be pleased to |(i) formulate the substantial questions of law stated thereinand (11) allow the appeal and set-aside the order of the ITAT,Bangalore in ITA No.794/Bang/2005 dated 24.03.2006 andconfirm the order of the Appellate Commissioner confirmingthe order of the Assistant Commissioner of Income Tax,Circle-11(2), Bangalore, in the interest of justice and equity. 2002, praying that this Hon’ble Court may be pleased to | This appeal is coming on for final hearing this day,|SREEDHAR RAO, J.,delivered the following: JU DGMENT Therespondent/assesSeewho1S dealinginmanufacture of software development and telephone/tfax,modems, saidTOhaveincurredexpenditureofRs.7,28,14,022 /-towardsdevelopment,COSTSupto31.03.2000 which is said to be towards research anddevelopment for the assessment year 2000-2001. Thedata/fax/modems sale realization was Rs.3,84,39,328/- andtelephonyand|speechcoderssale|realizationWa SRs.31,01,950/-. It was contention of the assessee before theAssessing Officer for the assessment year 2001-2002 that asum of Rs.1,85,71,285/- is a set off against developmentcost and the balance is shown in the balance sheet. The assessee described the same as reduction in the value of thesemi-finished inventory. It is the contention of the assesseethat the reduction of the cost incurred towards research anddevelopment could be in three ways. (1) Write off of entireamount towards profit in the year of incurrence. (2) claim it as deferred reduction at the rate of 1/5[."]for each.assessment year or proportionate to the estimated sales and(3) claim depreciation of the material value as per its value. iaThe assessee contends that in the present case,he has sought reduction proportionate to the sale realization. 3.sri Indrakumar, learned Sr. counsel for the|revenue, per contra strenuously submitted that the writtenand oral submissions made by the assessee could notsuggest that the development costs incurred is towardsresearch and development and the same is being set offagainst profit and loss account towards sale realization forthe assessment year in question. The assessee submittedthat he seeks proportionate write off against semi-finishedgoods inventory. That means for future anticipated inventory sales the deduction sought for is impermissible. This Court had framed following substantial law for consideration while admitting the appeal. 6Whether the Tribunal was correct inholding that semi finished goods to the extent otfRs.1,89,71,285/-shouldbe.allowedaS|arevenue expenditure which was purely based onestimate since the actual product had not beencompleted and sold in the open market.9 sales the deduction sought for is impermissible. This Court had framed following substantial law for consideration while admitting the appeal. 6Whether the Tribunal was correct inholding that semi finished goods to the extent otfRs.1,89,71,285/-shouldbe.allowedaS|arevenue expenditure which was purely based onestimate since the actual product had not beencompleted and sold in the open market.9 4.On thorough consideration of the submissionsmade at the Bar, we find that the arguments submitted in appeal does not appear to be one correctly projected before|the Assessing Officer. Further, it is also not clear that|whetherRs. 7,28, 14,022 pertainsTOresearchanddevelopment of the products. It is also not clear the entire|semi-finished products are made in the process of research|and development or otherwise. The assessee had sought|“oroportionate write off against the semi-finished goods|inventory’. The said expression used does not clearly suggestwhether the assessee was seeking reduction on research anddevelopment expenditure proportionately towards the sale|made in the year in question. 5It is the contention of the counsel for the|assessee that expression “reduction in value of semi-finishedinventory would pertain to research and developmentexpenditure. This aspect also has not thoroughly gone intoby the Assessing Officer. Therefore, in order to appreciatedisputed facts correctly. Accordingly, the order of theTribunal and authorities below are set aside and the matteris remitted to the Assessing Officer for fresh assessment aftergiving proper opportunity to the assessee. In view of theremand, the question of law is not answered. All contentionsare kept open for both sides to establish their stand. Theappeal is disposed of. NM* od/-|JUDGE od/-.JUDGE