Ita/792/2006 Of The Commissioner Of Income Tax v. M/S Vesesh Infotechnics Limitedd

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE I][st]DAY OF AUGUST 2012 PRESENT THR HON BLE MR.JUSTICE K.SREKEDHAR RA ANT THR HON'BLE MR. JUSTICK B.MANOHAR ITA NO.792/2006 C/W ITA NO.790/2006& ITA.NO.791/2006 ITA.NO.792/2006 BBRITIWE 1.THR COMMISSIONER OF INCOME TAXCENTRAL CIRCLE,C.R.BUILDING,QUEENS ROAD,BANGALORE. 2.THR DREPUTY COMMISSIONER OF [INCOME TCIRCLE —- 12(3)C.R.BUILDING,QUEENS ROAD,BANGALORE. .. APPBLLAN (BY SRI M.THIRUMALESH, ADVOCATE) ANT) M/S.VESESH INFOTECHNICS LIMITED,FORMERLY VISESH INFOSYSTEMS LIMITED,NO.325, CMH ROAD, INDRANAGAR,BANGALORE. _ RESPONDEN (BY SRI.S.PARTHASARATHI, ADV) ITA FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUTOFORDERDATED|O2-129-2005PASSEDINITA.NO.3787/BANG/2004 FOR THE ASSESSMENT YEAR2001-02, PRAYING TO FORMULATE THE SUBSTANTIALQUESTIONS OF LAW STATED THEREIN AND ALLOW THEAPPKAL SET ASIDEKE THR ORDER PASSHKD BY [BANGALORE IN ITA.NO.3787/BANG/2004 DATED 0O2-122005 AND CONFIRM THR ORDER OF THR APPKRLLATCOMMISSIONBR CONFIRMING THR ORDER PASSBKD BTHE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12 (3), BANGALORE, IN THE INTEREST OF JUSTICE ANDEQUITY. ITA.NO.790/2006 BETWEEN: 1.THR COMMISSIONER OF INCOME TAX CENTRAL CIRCLE,C.R.BUILDING,QUEENS ROAD,BANGALORE. 2.THR DREPUTY COMMISSIONER OF INCOME-TAXI!CIRCLE — 12(3),C.R.BUILDING,QUEENS ROAD,BANGALORE... APPBLLAN (BY SRI.M.THIRUMALESH, ADV) AND: M/S.VESESH INFOTECHNICS LIMITED,(FORMERLY VISESH INFOSYSTEMS LIMITED)NO.325, CMH ROAD,INDRANAGAR,BANGALORE. .. RESPONDE (BY SRI.S.PARTHASARATHI, ADV) ITA FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUTOFORDERDATEHD02-12-2005PASSEDINITA.NO.3785/BANG/2004 FOR THE ASSESSMENT YEAR1999-00, PRAYING TO FORMULATE THE SUBSTANTIALQUESTIONS OF LAW STATED THEREIN AND ALLOW THEAPPEAL SEIT ASIDE THRE ORDER PASSED BY TTBANGALORE IN ITA.NO.3785/BANG/2004 DATED 02-12-2005 AND CONFIRM THR ORDER OF THR APPKELLATCOMMISSIONER CONFIRMING THE ORDER PASSED BYTHE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12 (3), BANGALORE, IN THE INTEREST OF JUSTICE ANDEOUITY. ITA.NO.791/2006 BETWEEN: 1.THR COMMISSIONER OF INCOME TAX CENTRAL CIRCLE,C.R.BUILDING,QUEENS ROAD,BANGALORE. 2.THR DRBPUTY COMMISSIONER OF INCOME TAXCIRCLE — 12(3),C.R.BUILDING,QUEENS ROAD,BANGALORE... APPELLAN (BY SRI.M.THIRUMALESH, ADV) AND: M/S.VESESH INFOTECHNICS LIMITED,(FORMERLY VISESH INFOSYSTEMS LIMITED)NO.325, CMH ROAD,INDRANAGAR,BANGALORE. .. RESPONDE (BY SRI.S.PARTHASARATHI, ADV) ITA FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUTOFORDERDATEHD02-12-2005PASSEDINITA.NO.3786/BANG/2004 FOR THE ASSESSMENT YEAR2000-01, PRAYING TO FORMULATE THE SUBSTANTIALQUESTIONS OF LAW STATED THEREIN AND ALLOW THEAPPEAL SET ASIDE THE ORDER PASSED BY ITIATBANGALORE IN ITA.NO.3786/BANG/2004 DATED 02-12-2005 AND CONFIRM THR ORDER OF THR APPKELLATCOMMISSIONER CONFIRMING THE ORDER PASSED BYTHE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12 (3), BANGALORE, IN THE INTEREST OF JUSTICE ANDEOUITY. THESE ITA'S HAVING BBKEEN HEARD AND RESERVAND COMING ON FOR PRONOUNCEMENT OF JUDGEMENTTHIS DAY, B.MANOHAR J., MADE THE FOLLOWING: JUDGMENT These appeals are filed by the Revenue under Section260-A of the Income Tax Act (‘the Act’ for short), beingagerieved by the order dated 02-12-2005 passed by theIncome Tax Appellate Tribunal allowing the appeals in part and granting the benefit under Section 80-IA and 80-IB ofthe Act and also allowing litigation expenses to the assesseefor the assessment years 1999-2000, 2000-2001, and 2001-A2OO? 2.since the common question of facts and law areinvolved in these three appeals and the Appellate Tribunalhas passed the common order. Hence, all the three appealsare taken up together and disposed off by this order. THESE ITA'S HAVING BBKEEN HEARD AND RESERVAND COMING ON FOR PRONOUNCEMENT OF JUDGEMENTTHIS DAY, B.MANOHAR J., MADE THE FOLLOWING: JUDGMENT These appeals are filed by the Revenue under Section260-A of the Income Tax Act (‘the Act’ for short), beingagerieved by the order dated 02-12-2005 passed by theIncome Tax Appellate Tribunal allowing the appeals in part and granting the benefit under Section 80-IA and 80-IB ofthe Act and also allowing litigation expenses to the assesseefor the assessment years 1999-2000, 2000-2001, and 2001-A2OO? 2.since the common question of facts and law areinvolved in these three appeals and the Appellate Tribunalhas passed the common order. Hence, all the three appealsare taken up together and disposed off by this order. 3.The respondent-assessee is a Company incorporatedunder the Companies Act doing business in development ofSoftware. It has established a new Industrial Unit atsilvassa, Union Territory of Dadra and Nagar Haveli. Thenew industry has been established on 13-3-1999 and filedits returns for the assessment year 1999-2000 declaring thetotal income of Rs.72,32,/744/-. In the returns, the assesseeclaimed deduction under Section SO-IA of the Act to theextent of Rs.60,43,212/- in respect of new industrialundertaking at Silvassa, Union Territory of Dadra and NagarHaveli. The Assessing Authority accepted the same, however, it was subsequently reopened under Section 147 ofthe Act. In the Profit and Loss account, it is shown that theassessee has achieved turnover of Rs.63,75,Q000/- in respecof Computer Software sales. After deducting the expenses ofRs.3,31,/788/- arrived at the profit of Rs.60,43,212/- frothis Unit. On reassessment, deduction under Section 80-IAwas disallowed. 4 For the assessment year 2000-2001, the assessee filedthe Income Tax returns on 30-11-2000 declaring the totalincome of Rs.1,11,76,800/- and claiming deduction ofRs.1,90,56,903/- under Section 80-IB and Rs.19,00,000/-towards the litigation expenditures. In the Profit and Lossaccount, it is shown that the assessee has achieved turnoverof Rs.2,15,41,550/-. After claiming the expenses ofRs.64,84,047 /-, the assessee had achieved profit ofRs.1,90,56,903/- and claimed deduction under Section 80OIB of the Act. The case was selected for scrutiny. Noticewas issued under Section 143(2) of the Act calling upon theassessee to furnish necessary particulars. The Assessing Authority after considering the case pleaded by the assesseedenied the benefit under Section 80-IB for Rs.1,50,56,903 /and also litigation expenses of Rs.19,00,000/-. 5.For the assessment year 2001-02, the assessee filedincome tax returns on 30-10-2001 declaring total income ofRs.1,606,15,943/- claiming deduction of Rs.1,25,57,60/2under Section 80-IB. The case was selected for scrutinyunder Section 143(3) of the Act and notice under Section143(2) was issued. The Assessing Authority disallowed theclaim under Section 80-IB holding that no document hasbeen produced to show that they have manufactured anymaterials or things. Being aggrieved by disallowing thededuction under Section 8O-IA for the assessment year1999-2000 and also disallowing the deduction under Section80-IB tor the assessment year 2OOO-2001 and 2001-2002and also litigation expenditure of Rs.19,00,000/-, theassessee preferred an appeal before the Commissioner ofIncome Tax (Appeals)-III, Bangalore contending that theorder passed by the Assessing Authority and also reopening the assessment for the assessment year 1999-2000 iscontrary to law. 6,The Appellate Authority after considering the matter indetail, by its order dated 8-11-2004 dismissed the appealsholding that no document has been produced by theassessee regarding the sales and purchase of the software.Being aggrieved by the order passed by the AppellateAuthority, the assessee preferred three appeals before theIncome Tax Appellate Tribunal, Bangalore Bench ‘A’, the assessment for the assessment year 1999-2000 iscontrary to law. 6,The Appellate Authority after considering the matter indetail, by its order dated 8-11-2004 dismissed the appealsholding that no document has been produced by theassessee regarding the sales and purchase of the software.Being aggrieved by the order passed by the AppellateAuthority, the assessee preferred three appeals before theIncome Tax Appellate Tribunal, Bangalore Bench ‘A’, T TheAppellateTribunalaiterconsideringthearguments addressed by the parties by its order dated 2-12-2005 allowed the appeals in part and dismissed the appealinsofar as it relates to the reopening of the assessment forthe assessment year 1999-2000. The Tribunal has clearlyheld that the assessee has proved that he has beenconducting business at Silvassa and earned income and heis entitled for deduction under Section SO-IA and S8O-IB othe Act for the assessment years 2000-2001 and 2001-2002.so far aS assessment year 1999-2000 is concerned, the Assessing Authority was directed to adopt the profit shownat 55% instead of 94.8%. Further held that the assessee isentitled tor the deduction of amount towards litigationexpenditure of Rs.19,00,000/- for the assessment year 2000-2001. The Revenue being aggrieved by the order dated 2-12-20095 passed by the Tribunal has filed these appeals 8.While admitting the appeals, the following substantialquestions of law have been framed: IT A 790/2006:; “Whether the Tribunal was correct in holding thatthe assessee would be entitled to claim deductionunder section SO-IA of the Act despite theassessee’s SIVASA unit having operated from 13-03-1999 to 30-03-1999 did not produce ormanufacture articles or thing as contemplatedunder Section 8O-IA(twv) of the Act as held by thAssessing Officer. ITA 791/2006:; “Whether the Tribunal was correct in holding thatthe payment made for acquiring the name of‘VESESH’ and intellectual properties, copy right,trade mark, brand names etc., would not amountto a capital receipt but would be a revenueexpenditure?’ IT A 792 /2006:; “Whether the Tribunal was correct in holding gthat the assessee would be entitled to claimdeduction under Section 80-IB of the Act despitethe assessee’s not producing any evidence toShow that its production unit “Silvassa” hadproduced any software?” QOori.M.Thirumalesh, learned counsel appearing for theappellants contended that the order passed by the AppellateTribunal is contrary to law and the materials available onrecord. Admittedly, the new industrial Unit was started atsilvassa on 13-3-1999 hiring a premises measuring 829oq.Ft., with a very meager investment of Rs.2.06 lakhs onthe computers. Within a span of 18 days, the assessee hasachieved the turnover of Rs.63,/75,000/- and net profit oRs.60,43,212/- in development of software and sold to itscustomers. For the Assessment year 2000-2001, theturnover was shown as Rs.2,19,41,590/- and for theassessment year 2001-2002 turnover was shown atRs.1,82,82,043/- and claimed deduction under Sections 80-IA and 80-IB. Though the assessee contended that theyhave employed 20 engineers, no documents have been QOori.M.Thirumalesh, learned counsel appearing for theappellants contended that the order passed by the AppellateTribunal is contrary to law and the materials available onrecord. Admittedly, the new industrial Unit was started atsilvassa on 13-3-1999 hiring a premises measuring 829oq.Ft., with a very meager investment of Rs.2.06 lakhs onthe computers. Within a span of 18 days, the assessee hasachieved the turnover of Rs.63,/75,000/- and net profit oRs.60,43,212/- in development of software and sold to itscustomers. For the Assessment year 2000-2001, theturnover was shown as Rs.2,19,41,590/- and for theassessment year 2001-2002 turnover was shown atRs.1,82,82,043/- and claimed deduction under Sections 80-IA and 80-IB. Though the assessee contended that theyhave employed 20 engineers, no documents have been produced to show that they have engaged 20 employees andthe space is not sufficient to keep 20 tables and computers.Further, the electricity meter was installed on 7-9-1999 and3 phase connection has been given on 14-8-2000. Theelectricity bill discloses that for a period of 8 months, theyhave paid only Rs.2,340/-. Further, the assessee does nothave regular telephone connection and telephone bill is alsovery very meager. Inspite of directions to the assessee-|company, it has failed to furnish the local addresses of theemployees, appointment letters issued to them, attendanceregister and HR files. It is impossible to get the profit marginof 94.8% for the assessment year 1999-2000, 70% for theassessment year 2000-2001 and 58.87% for the assessmentyear 2001-2002. Usually, software industries would earnthe profit margin of 30%. The assessee-company having itsHead Office at Bangalore, has obviously diverted the saleprofits of the other units to Silvassa Unit to avail 100%exemption under Section 80-IA and 80-IB. 10,Learned counsel has further contended that thebenefit of deduction towards litigation expenditure ofRs.19,00,000/- given by the Tribunal is also contrary to law.Rs.19,00,000/- has been paid for acquiring intellectualproperties, trade marks and copy right in the name of theVesesh’. The dispute between the assessee-company andone P.R.Seshadri has been amicably settled under Section73 of Arbitration and Conciliation Act. As per Clause 6, 7and 11 of the Settlement, it was agreed between the partiesthat M/s.Seshadri Group will not conduct or do businesswith the customers of the assessee group. For that, a sum ofRs.19,00,000/- was paid. The said amount cannot beconsidered as revenue expenditure and it is a capitalexpenditure. The deduction given by the Tribunal iscontrary to law and sought for setting aside the order passedby the Tribunal by allowing these appeals. 11)On the other hand, Sri.S.Parthasarathay, learnedcounsel appearing for the respondent-assessee contendedthat the assessee-company established a new industrial Unit at Silvassa, Union Territory of Dadra and Nagar Haveli andstarted operating from 13-3-1999. The new Unit developedthe software catered to multi-user as against the single userin respect of the product developed at Bangalore. Theassessee-company is having more than 99 customerssituated at India and abroad countries and the multi-usersoftware attracted many customers and they have earnedturnover of Rs.63,75,000/-. The employees are working onshift basis and since there was irregular power supply, thegenerator was used. Further, the public telephone has beenused. In view of that, the bills of telephone and electricitywere less. Further, the Sale Tax authorities of Silvassa havegiven sales tax exemption after verifying the records. Hence,the assessee is entitled for exemption under Sections 80-IAand 80Q0-IB. Further, there is no irregularity in givindeduction with regard to the litigation expenditure ofRs.19,00,000/- with a view to settle the dispute between theparties amicably. The settlement was arrived between theparties and in terms of settlement, a sum of Rs.19,00,000/- has been paid. It cannot be treated as capital expenditureand sought for dismissal of the appeals. has been paid. It cannot be treated as capital expenditureand sought for dismissal of the appeals. 12.We have carefully considered the arguments addressedby the learned counsel for the parties and perused the ordersimpugned passed by the authorities below, 13.It is not in dispute that the respondent-assessee hasstarted a new industrial Unit at Silvassa for development oisoftware. The assessee claimed deduction under Sections80-IA and 80-IB of the Act. However, the said deduction wasdenied only on the ground that within 18 days ofestablishment of new industrial Unit, the assessee hasshown the profit of 94.8% for the assessment year 1999-2000 with an investment of Rs.2,06,000/- on the computers.It cannot be disputed that new industrial Unit was set up atIndustrial Estate, Silvassa, Union Territory of Dadra andNagar Haveli in March 1999 and got registration with theDirectorate of Small Scale Industries and also obtainedpermission from the Pollution Control Committee. For the purpose of development of software at Silvassa Unit, differenttechnology i.e. MS access/personal oracle in the back endand in the front end and it was Developer 2000. It wasdifferent from the software developed at Bangalore Unit.Further the Sales Tax Authorities of Dadra and Nagar HaveliUnionTerritoryatter|verifyingtherecordserantedconditional exemption certificate. Some of the conditionsreads as under: )4+The owner of the industry shall issue seriallycash/credit memos, for sales of finished goodswhich will contain name and address ot thepurchasers, descriptions of the goods sold andits value, exemption certificate number anddate, signature of the seller.cash/credit memos, for sales of finished goodswhich will contain name and address ot thepurchasers, descriptions of the goods sold andits value, exemption certificate number anddate, signature of the seller. );+The owner of the industry shall maintain salesand purchase and stock register for the saidmanufactured product;and purchase and stock register for the saidmanufactured product; )@+The dealer shall comply with the any othercondition or conditions they may be imposed bythe Commissioner of Sales Tax, Dadra andNagar Haveli, administration of Dadra and Nagarcondition or conditions they may be imposed bythe Commissioner of Sales Tax, Dadra andNagar Haveli, administration of Dadra and Nagar Haveli or Central Government, as the case maybe from time to time. 14)The Sales Tax Authorities of Dadra and Nagar Haveliverified the books of accounts and after fulfilling all theconditions imposed, sales tax exemption was given. Thesales Tax Authorities are primarily interested in collectingthe sales tax. In the instant case, being fully satisfied bythemselves that the assessee has fulfilled all the conditions,the exemption has been given. Hence the contention of therevenue that the assessee has not conducted any businessat Silvassa and the assessee has diverted the sales and profitfrom the other Units cannot be accepted. Further, thesoftware products are different from other commercialproducts. Development of the software can be undertaken ina short span of time. The specific case of the assessee isthat the employees were working on shift basis. The productoft the assessee is multi-user and it has attracted thcustomers and they have huge turnover of more thanRs.63,00,000/- within a short period. Once the software isdeveloped, any number of copies can be made within a short span of time and sold to the different customers. Apart fromthat the assessee is in the software business and they haveUnit at Bangalore and they have good customers all overIndia as well as in abroad countries. For the assessmentyears 2000-2001 and 2001-2002 also they have shown theturnover of Rs.2,15,41,550/- and Rs.1,82,82,043/-. Hence,it is very difficult to doubt the genuineness of the businessactivities of the software carried on by the assessee atSilvassa. The Sales Tax authorities after verifying the entirerecords have given exemptions. Hence it is clear that therespondent-assessee has done the business in software atSilvassa and entitled for exemptions under Sections 80-IAand S8O-IB 15.Though the revenue has not challenged the orderpassed by the Tribunal for the assessment year 2OOO-2001insofar as granting deducting under Section 80-IB, duringthe course of arguments, learned counsel appearing for therevenue sought permission to raise a ground insofar as deduction under Section S8O-IB ot the Act. The assessee hasno objection for the same. Accordingly, the followingadditional question of law has been raised for theassessment year 2000-2001 as 1(b): l(b) “Whether the Tribunal was correct inholding that the assessee would be entitled toclaim deduction under Section 8O-IB for theassessment year 2000-2001 also.” since the above issue has already been considered for theassessment year 2001-2002 and held against the revenue,the said reasoning is applicable for the assessment yearAQOQO-ZJOOalso”insotarasgrantingdeduction|A8Rs.19,00,000/- towards litigationexpenditurefortheassessment year 2000-2001. #£=The settlement/agreemententeredinto.betweenthe|respondent-assessee4>:P.R.Seshadr1underSection13|OT Arbitration4>:Conciliation Act, 1996 clearly discloses that M/s.SeshadriGroup will not conduct or do business with the customers ofrespondent-assessee as per the agreement, the assessee-company will become the owner of intellectual properties including the copy right, trade marks, brand names of all theproducts produced by the assessee. For that purpose, anamount of Rs.19,00,000/- has been paid by the respondent-assessee company to M/s.Seshadri Group. At any stretch ofimagination that amount cannot be treated as revenueexpenditure only to get the brand name and restrainM/s.Seshadri Group from doing business with respondent’scustomers, Rs.19,00,000/- has been paid. The said amounthas to be treated as capital expenditure. Hence, therespondent is not entitled for deduction in the litigationexpenditure. The order passed by the Appellate Tribunalallowing deduction of Rs.19,00,000/- as revenue expenditureis contrary to law. The substantial question of law framed inITA No.790/2006 and 792/2006 are answered against theRevenue. Insofar as the substantial question of law No.1,framed in ITA No.791/2006 is answered in favour of theRevenue and substantial question of law No.1(b) is heldagainst the revenue. 17. Accordingly, we pass the following ORDER ITA Nos.790/2006 and 7792/2006 filed by the revenu are dismissed. ITA No.791/2006 is allowed in part. Sd/- JUDGE od/- JUDGE B5I /N