Case Law Details
DCIT Vs Axsys Health Tech Limited (ITAT Hyderabad)
Held that there is no concept of deferred revenue expenditure but the assessee is entitled to depreciation on the assets so capitalized and put to use for the software services related to health care.
Facts-
AO noted that the assessee was initially engaged in the business of running a Hospital and was formerly known as Dr Ramayyas Pramila Hospitals Ltd up to the FY 1999-2000. During the FY 1999-2000, the assessee changed its main objects clause to provide for the development and marketing of health-care-related software services. The assessee set up a 100% export-oriented unit at Hyderabad called ‘Axsys Health Tech’ as a new division of the company. During the same year, assessee entered into a technology transfer agreement with Dr Pradeep Ramayya, a Director and shareholder of the assessee company for the transfer of Technology & Technical know-how along with all the rights and licences in relation to the Product.
AO noted from the profit and loss account of the assessee that an amount of Rs.2,19,65,000/- was debited under the head R& D expenditure written off. From schedule ‘D’ of Fixed Assets, he noted that an amount of Rs.10,98,25,000/- is shown as Research & Development Expenditure under the head Intangible Assets. Rejecting the various explanations given by the assessee and relying on the various decisions the AO disallowed the amount of Rs.2,19,65,000/- debited by the assessee under the head R&D expenditure written off. CIT(A) deleted the addition. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
The order of CIT(A) is very cryptic and she has not addressed the various issues raised by the AO. She has not given any finding about the incurring of the expenditure during the FY 1999-2000 to 2000-2001, which are towards preoperative expenses, technical know-how, marketing development, software development, depreciation ect. She has not quantified the rate of depreciation and the WDV of the assets as on 31.03.2003 and has merely approved the practice followed by the assessee. No definite finding has been given by her regarding the year in which the assessee started receiving income from software services related to health care.Held that there is no concept of deferred revenue expenditure but the assessee is entitled to depreciation on the assets so capitalized and put to use for the software services related to health care.
In our opinion, there is no concept of deferred revenue expenditure but the assessee is entitled to depreciation on the assets so capitalized and put to use for the software services related to health care. Further, even if the assessee does not claim depreciation, for the purpose of computation of the WDV such depreciation has to be computed once the asset is put to use and accordingly WDV has to be calculated. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the ld.CIT(A) with a direction to decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee and give a clear finding on the issue. We hold and direct accordingly. The grounds raised by the revenue are accordingly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
The above two appeals filed by the revenue are directed against the common order dated 12.01.2017 of the Learned Commissioner of Income Tax (Appeals)-3, Hyderabad relating to AYs 2003-04 & 2004-05 respectively. Since common issues are involved in both these appeals, therefore, these were heard together and are being disposed-of by this common order.
2. There is a delay of ‘97’ days in filing of these two appeals by the revenue for which a condonation application has been filed by the revenue requesting for condonation of the delay. After considering the contents of the condonation application and after hearing both the sides, the delay in filing of the above two appeals by the revenue is condoned and both the appeals are admitted for adjudication.
ITA NO.1206/HYD/2017 for AY 2003-04
3. Facts of the case, in brief, are that the assessee is a company in which public are substantially interested and is engaged in the business of Software Product Development. It filed its return of income on 01.12.20013 declaring loss of Rs.2,16,69,228/-. The case was selected for scrutiny and statutory notices u/s. 143(2) &142(1) were issued to which the AR of the assessee appeared from to time and filed the requisite details.
4. During the course of assessment proceedings, the AO noted that the assessee was initially engaged in the business of running a Hospital and was formerly known as Dr. Ramayyas Pramila Hospitals Ltd up to the FY 1999-2000. During the FY 1999-2000, the assessee changed its main objects clause to provide for development and marketing of health-care related software services. During the year under consideration, the assessee set up a 100% export oriented unit at Hyderabad called ‘Axsys Health Tech’ as a new division of the company. During the same year, the assessee entered into a technology transfer agreement with Dr. Pradeep Ramayya, a Director and share holder of the assessee company for transfer of Technology & Technical know-how along with all the rights and licences in relation to the Product.
5. The AO noted from the profit and loss account of the assessee that an amount of Rs.2,19,65,000/- was debited under the head R& D expenditure written off. From the schedule ‘D’ of Fixed Assets, he noted that an amount of Rs.10,98,25,000/- is shown as Research & Development Expenditure under the head Intangible Assets. From the details furnished by the assessee he observed that this entire R&D expenditure of Rs.10,98,25,000/-was incurred by the assessee during the FY 1999-2000 to 200102 and the same was capitalized for the first time during the FY 2001-02 by regrouping and classifying the expenditure from some of the heads of expenditure relating to those earlier years. During the current year assessee has debited an amount of Rs.2,19,65,0000 being 1/5th of the said expenditure of Rs.10,98,25,000/- as R&D expenditure written off. He, therefore confronted the same to the assessee and asked the assessee to explain as to why the said expenditure claimed by it should not be disallowed. Rejecting the various explanations given by the assessee and relying on the various decisions the AO disallowed the amount of Rs.2,19,65,000/- debited by the assessee under the head R&D expenditure written off.
5.1 In appeal, the ld.CIT(A) deleted the addition by observing as under:-
“ I have carefully considered the information on record. The appellant was originally engaged in running a Nursing Home namely Dr. Ramayya pramila Hospitals Limited providing medical services in the field of urology and nephrology. During the year 99-2000 it desired to change its activities from medical services to software services related to health care. The company’s name was also changed to Axis Health Tech Ltd on 22-11-2011. The appellant I spent huge a mounts of Rs.10,98,25,000/-to develop software related to health care called “Exceilicare” which Is used in hospitals to maintain the data & records of the patients. The appellant company was of the opinion that the benefits of such software would accrue to it over a period of 5 years. ‘Therefore 1/5th of such expenditure was claimed as deferred revenue expenditure. It is also a fact that such expenditure was not claimed in respective years as revenue expenditure. The A.O did not doubt the incurring of expenditure. As evident from the table given at para-7 the appellant does not have any receipt from hospital services from F.Y. 2001-02. That is, the entire receipts since A.Y. 2002-03 are from software services only. Thereby it is a clear case were the entire business is changed from that of a company providing medical services to the company providing software services (related to health care). Therefore by spending an amount of RS. More than 10 crores the appellant brought a capital asset into existence namely “Excellicare”. This software is multiplied, modified, to suit the requirement of client and is sold. Therefore the expenditure incurred is capital in nature and depreciation @ 60 % is to be allowed. Since the appellant claimed only 1/5th of the expenditure t 1 consider that there is no need to interfere with the practice followed by the appellant.”
6. Aggrieved with such order of the ld.CIT(A), the revenue is in appeal before the Tribunal by raising the following grounds:-
(i) The Learned CIT(Appeals) erred in deleting the addition made by the Assessing Officer on account of disallowance of R&D expenditure of Rs. 2,19,65,000/- being 1/5th of total expenditure of Rs. 10,98,25,000/-debited to P & L account of the year.
(ii) The Learned CIT (Appeals) ought to have considered that said expenditure was incurred during the financial years 1999-2000 to 200102 towards preoperative expenses, technical know-how, Marketing development, software development, depreciation etc. and the same cannot be allowed as deduction in this year on deferred basis as the assessee has been following mercantile system of accounting.
(iii) The Learned CIT(Appeals) ought to have appreciated that in the fifth year i.e. A Y 2007-08, similar claim of one-fifth of the expenditure was disallowed by the Assessing Officer on the ground that the expenditure pertains to earlier years and the same was endorsed by DRP and the assessee has not included this ground in the appeal filed before the Hon’ble ITAT for that year (ITA No. 2076/Hyd/2011).
(iv) The appellant craves leave to add, delete substitute and amend any ground of appeal before and/or at the time of hearing of the appeal.
7. The ld. DR strongly challenged the order of the ld.CIT(A) in deleting the disallowance made by the AO. He submitted that the expenditure incurred by the assessee is for mere customization and upgrading of the product which is a continuous process. Therefore, this expenditure was in nature of revenue expenditure and should have been claimed as deduction in the year in which it was incurred. Referring to the annual report for FY 2000-01, he submitted that the product “Excelli Care” has been in commercial use since 2000-01 and therefore, the above expenditure could not have been capitalized. In his second plank of argument, he submitted that the expenditure is also not deferred revenue expenditure as it is not spent in the year under consideration, but has been spent in earlier years treating as CWIP. The deduction if it being revenue in nature, would be allowable only in the year in which it is spent. For the above proposition, he relied on the decision of the co-ordinate Bench of the Tribunal in the case of Amar Raja Batteries Ltd. vs ACIT (2004 91 ITD 280) where it has been held that there is no concept of deferred revenue expenditure. He submitted that the assessee did not claim the expenditure u/s. 35 but claimed it under section 37 of the I.T.Act. Referring to provisions of section 37, he submitted that as per the said section the expenditure not being in the nature of capital expenditure, laid out or expanded wholly and exclusively for the purpose of business shall be allowed as deduction. Therefore, when the expenditure has been capitalized and capital asset has been brought into existence, no claim of deduction lies u/s. 35 being revenue expenditure and least being deferred. He submitted that the concept of deferred revenue expenditure would come into operation, when the entire expenditure is made in the year under consideration and not to such expenditures which have earlier been capitalized.
8. The ld. DR submitted that the assessee has taken two contradictory stand. First, the said expenditure is a claim of 1/5th capital asset created out of the expenditure relating to earlier years capitalized based on the enduring nature of such expenditure. Secondly, the said claim is a claim of 1/5th portion of “deferred revenue expenditure” again the deferment of the claim being based on the enduring nature of expenditure involved. He submitted that in the fifth year i.e AY 2007-08, the AO disallowed the 1/5th of the expenditure which was upheld by the DRP and no appeal was preferred by the assessee. Referring to the various bills and invoices relating to software development placed in the paper book, he submitted that all these expenditures are regular and continuous process, which is revenue in nature. Referring to the order of the ld.CIT(A), he submitted that ld.CIT(A) at para 7 of order has observed that income from software services started from FY 2001-02 relevant to AY 2002-03 and the gross receipts were 117.53 lakhs. Thus, the revenue expenditure ought to have claimed from AY 2002-03 itself and not from the year under consideration i.e AY 2003-04. Further, the assessee has not established the period of enduring benefit. It is an assumption that the benefit would accrued for five years, which is not a scientific method but has been done as decided by the management. He submitted that the observation of the ld.CIT(A) that the assessee brought into existence the software Excelli Care is a new finding by the ld.CIT(A), which is not emanating from the assessment order. He, accordingly, submitted that the order of the ld.CIT(A) being not in accordance with law should be set aside and that of the order of the AO be restored.
9. The ld. Counsel for the assessee on other hand while supporting the order of the ld.CIT(A) submitted that the company has commenced development of software related activities as its main business activity in place of Hospital business. The company made it a practice to account for the expenses incurred including the amount of depreciation on fixed assets utilized on development of software packages, systems and products as R&D expenditure as intangible assets under Fixed assets in order to conform to the Accounting Policies followed by the Subsidiary in U.K, Axsys Technology Limited. Referring to the assessment order, he submitted that the genuineness of the expenditure is not in dispute. Further, there are no receipts from hospital services from FY 2001-02 and entire turnover is from software division only. He submitted that even if AY 2002-03 is considered as first year of software receipt, the assessee is entitle to get deduction of 1/5th of the expenditure in AY 2003-04 being the second year. He submitted that the contention of the revenue that the assessee did not agitate before the DRP in AY 2006-07 has no bearing on the issue, since the assessee considering the financial cost did not feel it necessary to agitate the issue in AY 2006-07. Referring to various decisions cited before the ld.CIT(A), he submitted that the order of the ld.CIT(A) being in accordance with law should be upheld and the grounds raised by the revenue should be dismissed.
10. The ld. Counsel for the assessee also referred to the following decisions:
1. J. K. Industries Ltd. vs UOI reported in 297 ITR 0176 (SC)
2. Hi-Tech Gears Ltd. vs. DCIT reported in 002 Taxcorp(A.T) 17922(Delhi)
3. ITO vs. Shreyas Shipping Ltd. reported in 76 ITJ 11(Mum.Trib)
4. CIT vs. Harig Crank Shafts Ltd. reported in (2008) 173 taxman 0152(Delhi): (2008) 207 taxation 0737(delhi)
11. We have heard the rival arguments made by both the sides, perused the orders of the AO and ld.CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case disallowed an amount of Rs.2,19,65,000/- being 1/5th of the R&D expenditure of Rs.10,98,25,000/- shown under the head intangible assets, on the ground that there is no provision of deferred revenue expenditure in the Income tax Act. We find the ld.CIT(A) deleted the addition, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the ld. DR that as per the annual report for FY 2000-01, the product Excelli Care has been in commercial use since 2000-01 and therefore, the above expenditure could not have been capitalized. Further, there is no concept of deferred revenue expenditure in the Income tax Act. It is also his submission that this amount has not been spent in the year under consideration but was spent in earlier years. Further, the assessee did not claim the expenditure u/s. 35, but claimed the same u/s. 37 of the I.T.Act. It is the submission of the ld. counsel for the assessee that the expenditure incurred is an enduring benefit and the deduction can be claimed at 1/5th for five years. It is also his submission that there are no receipts from the hospital services from FY 2001-02 and the entire turnover is from software division only. Further, even if the AY 2002-03 is considered as first year of software receipt, the assessee is entitled to get deduction of 1/5th of the expenditure in AY 2003-04 being the second year.
12. In our opinion, the order of ld.CIT(A) is very cryptic and she has not addressed the various issues raised by the AO. She has not given any finding about the incurring of the expenditure during the FY 1999-2000 to 2000-2001, which are towards preoperative expenses, technical know-how, marketing development, software development, depreciation ect. She has not quantified the rate of depreciation and the WDV of the assets as on 31.03.2003 and has merely approved the practice followed by the assessee. No definite finding has been given by her regarding the year in which the assessee started receiving income from software services related to health care. In our opinion, there is no concept of deferred revenue expenditure but the assessee is entitled to depreciation on the assets so capitalized and put to use for the software services related to health care. Further, even if the assessee does not claim depreciation, for the purpose of computation of the WDV such depreciation has to be computed once the asset is put to use and accordingly WDV has to be calculated. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the ld.CIT(A) with a direction to decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee and give a clear finding on the issue. We hold and direct accordingly. The grounds raised by the revenue are accordingly allowed for statistical purposes.
13. In the result, the appeal filed by the revenue is allowed for statistical purposes.
ITA No.1207/Hyd/2017 for AY 2004-05
14. The grounds raised by the revenue are as under: –
(i) The Learned CIT(Appeals) erred in deleting the addition made by the Assessing Officer on account of disallowance of R&D expenditure of Rs. 2,19,65,000/- being 1/5th of total expenditure of Rs. 10,98,25,000/-debited to P & L account of the year.
(ii) The Learned CIT (Appeals) ought to have considered that said expenditure was incurred during the financial years 1999-2000 to 200102 towards preoperative expenses, technical know-how, Marketing development, software development, depreciation etc. and the same cannot be allowed as deduction in this year on deferred basis as the assessee has been following mercantile system of accounting.
(iii) The Learned CIT(Appeals) ought to have appreciated that in the fifth year i.e. A Y 2007-08, similar claim of one-fifth of the expenditure was disallowed by the Assessing Officer on the ground that the expenditure pertains to earlier years and the same was endorsed by DRP and the assessee has not included this ground in the appeal filed before the Hon’ble ITAT for that year (ITA No. 2076/Hyd/2011).
(iv) The appellant craves leave to add, delete substitute and amend any ground of appeal before and/or at the time of hearing of the appeal.
15. After hearing both the sides, we find the grounds raised by the revenue in the above appeal is identical to the grounds raised in ITA No.1206/Hyd/2017 for AY 2003-04. We have already decided the issue and the matter has been restored to the file of the ld.CIT(A) for fresh adjudication. Following similar reasonings, the grounds raised by the revenue are allowed for statistical purposes.
16. In the result, both the appeals filed by the revenue are allowed for statistical purposes.
Order pronounced in the Open Court on 26th October, 2022.
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