The Commissioner Of Income Tax, Chennai v. M/S. Pentasoft Technologies Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM : THE HONOURABLE MR. JUSTICE R. MAHADEVANandTHE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ The Commissioner of Income Tax, Chennai. ...Appellant/Appellant Versus M/s. Pentasoft Technologies Ltd., 25, I Main Road, United India Colony, Chennai - 600 024. PAN ...Respondent/Respondent Appeal preferred under Section 260A of the Income TaxAct, 1961, against the order of the Income Tax AppellateTribunal, “B” Bench, Chennai, dated 14.03.2008 inI.TA.No.690/Mds/2007, against the order of the Commissioner ofIncome Tax (Appeals)-VI, Chennai-600 034, dated 30.11.2006made in ITA No.330/2004-2005 and against the order of theDeputy Commissioner of Income Tax, Central Circle-III (4),Chennai-34 made in PAN/GIR No. /34104p for theAssessment year 2001-02. (Judgment of the Court was delivered by R.MAHADEVAN, J.) This tax case appeal has been filed by theappellant/Revenue, challenging the order dated 14.03.2008passed by the Income Tax Appellate Tribunal, 'B' Bench,Chennai, in I.T.A.No.690/Mds/2007, relating to the assessmentyear 2001-02. 2.By order dated 19.07.2010, this court admitted theaforesaid tax case appeal on the following substantialquestions of law:https://hcservices.ecourts.gov.in/hcservices/ “1. Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in law in holding that theexpenditure on Software Technology Park and Non-Software Technology Park, on the basis of grossProfit and not on the basis of turn over is valid inlaw? 2. Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in law in holding thatIntellectual Property rights and Non-Compete fee areintangible assets are entitled to depreciation underSection 32(1)(ii) of the Income Tax Act 1961 isvalid?" 3.Today, when the appeal is taken up for consideration,the learned counsel for the appellant/Revenue as well asrespondent/assessee jointly submitted that the first questionof law raised in this appeal has already been considered anddecided by this Court in favour of the Assessee in the case ofCommissioner of Income Tax Vs. Pentasoft Technologies Ltd.[TCA.Nos.72 & 73 of 2009, dated 22.10.2013], the relevantpassage of which, is usefully extracted hereunder: “14. As far as allocable expenditure isconcerned, the Tribunal found that the Departmenthad not questioned the accounts maintained forthe two units, hence, the question of findingfault with the Commissioner's order directing theallocation of expenditure based on profit couldnot be found fault with. 15. We agree with the Tribunal's view inthis regard. Even though the Revenue has come onappeal as against this aspect, we find that whenadmittedly, the Department had not questioned thecorrectness of the accounts mentioned separatelyfor the STP and Non-STP units showing theallocable expenditure between the 10A Unit andnon-exempt unit, and that only in respect of thefew expenditure, the identification of theexpenditure posed difficulty, the logical way offinding the allocable expenditure would be onlyon the profit earned by the respective units.Even though, learned Standing Counsel appearingfor the Revenue submitted that key to find outallocable expenditure would be only on the basisof the units turnover, we do not accept thiscontention on the simple premise and on theadmitted fact that the department had notquestioned the accounts of the assessee and theonly issue projected by the Revenue is thatworking of the allocable expenditure based onprofit would result in distorted picture. Thereasoning of the officer is that the expenditurehttps://hcservices.ecourts.gov.in/hcservices/in STP Unit normally should have been more than the non-STP unit considering the nature or exportrelated activity that the assessee had toundertake and total expenditure claimed in thenon-STP unit was 97.23% against the receipts,whereas in the STP unit it worked out to 82.42%.Doubting this alone, the officer adopted aformula to be based on the turnover. The view ofthe officer is based on conjectures and surmisesonly and is not based on any materials. Wereject this line of reasoning as a matter of mereopinion and mere surmises not backed up by anyreason or material. 16. We may point out that the revenue doesnot dispute the fact that the major portion ofthe expenditure incurred by both the units aredetectable from the accounts maintained. Only inrespect of such of those issues where theexpenditure could not be deducted thecommissioner upheld the contention of theassessee. Revenue has not placed any material toshow how this working would distort the allocableexpenditure on the STP unit. 17. In these circumstances, the Tribunal hadrightly uphold the order of the Commissioner ofIncome Tax (Appeals) on the reasons given by theCommissioner." 4.In addition, the learned counsel for the appellant /Revenue fairly submitted that the second substantial questionof law raised in this appeal has already been considered anddecided by this Court in favour of the Assessee in the caseof Pentasoft Technologies Ltd. Vs. Deputy Commissioner ofIncome Tax [TCA.No.1195 of 2008, dated 29.10.2013], therelevant passage of which, is usefully extracted hereunder: "19. The only issue is whether non competeagreement/arrangement would fall within theambit of clause (ii) of Section 32(1) of theAct. 20. It is the case of the Revenue that this non-compete fee is in the nature of a negative rightand it cannot be of a commercial right ofsimilar nature and the expression ‘similarnature’ shall be relatable to patents, copyrights and trade mark licence or franchise orany other business. Therefore, it is submittedthat this negative right cannot be construedeither as a licence or as a commercial right tobe eligible for deduction. https://hcservices.ecourts.gov.in/hcservices/ 21. We are unable to agree with the stand takenby the Revenue for the simple reason that theagreement between the parties is a compositeagreement. Under the agreement, the transferorhad transferred all its rights, copy rights,trade marks in respect of the word ‘pentasoft’as well as the training and development divisionexclusively to be exploited by the assessee. Inorder to strengthen those rights transfer underthe said composite agreement, there was a noncompete clause by virtue of which, thetransferor was restrained from using the sametrade mark, copyrights etc., in favour of theassessee. Therefore, the non compete clauseunder the agreement should be read as asupporting clause to the transferor of the copyrights and patents rather to strengthen thecommercial right, which was transferred infavour of the assessee. 22. Learned counsel for the assessee contendedthat the non-compete is in effect an indirectlicence. However, we are not inclined to agreewith the said submission since non compete, atbest could be a commercial right because thatright is relatable to the transfer of trademark, copy rights and patents. Therefore, theview taken by the Commissioner of Income Tax(Appeals) in this regard is acceptable.” “28. In the case of hand, we have analysed theagreement and also in the previous portion ofthis order elaborated upon the various terms andconditions, which bind the parties had observedthat the earlier transfer of the trade mark,patents and other rights in favour of theassessee was undoubtedly the transfer ofintangible assets, which in terms of section 32(1)(ii) of the Act would be a capital assetentitled to depreciation. “28. In the case of hand, we have analysed theagreement and also in the previous portion ofthis order elaborated upon the various terms andconditions, which bind the parties had observedthat the earlier transfer of the trade mark,patents and other rights in favour of theassessee was undoubtedly the transfer ofintangible assets, which in terms of section 32(1)(ii) of the Act would be a capital assetentitled to depreciation. 29. In the light of the above, we have nohesitation in setting aside the order passed bythe Income Tax Appellate Tribunal and answer theissue in favour of the assessee. In suchcircumstances, there is no necessity for us toconsider the alternative submission made by thelearned counsel for the assessee. 30. In the result, the Tax Case(Appeal) isallowed. However, there shall be no order as tocosts." https://hcservices.ecourts.gov.in/hcservices/ 5.Following the aforesaid judgments, which are squarelyapplicable to the facts of the present case, the substantialquestions of law are answered in favour of the Assessee andagainst the Revenue. Accordingly, the Tax Case Appeal standsdismissed. No costs. Consequently, connected miscellaneouspetition is closed. //True Copy// Sd/- Assistant Registrar avTo Sub Assistant Registrar 1.The Income Tax Appellate Tribunal, 'B' Bench Chennai, 2.The Commissioner of Income - Tax, Chennai. 3.The Commissioner of Income Tax (Appeals)-VI, Chennai-34. 4.The Deputy Commissioner of Income Tax, Central Circle-III (4), Chennai-34. +1cc to Mr.T.Ravikumar, Advocate SR. No.2616+1cc to Mr.G.Baskar, Advocate SR. No.2423 T.C.A.No.600 of 2010 NMI (CO)PR (18/02/2022)