Edgeverve Systems Limited Vs ACIT (ITAT Bangalore)
Depreciation on Intangible Assets Allowed Because No Succession of Entire Business Took Place; Sixth Proviso to Section 32 Not Applicable Because Predecessor Claimed No Depreciation; Weighted R&D Deduction Allowed Because Rules Cannot Override Section 35(2AB); Foreign Tax Deduction Remanded Because Nature of Tax Requires Verification; Remand by Commissioner (Appeals) Held Invalid Because Post-2001 Powers Are Limited; Goodwill, Technology and Business Contracts Held Eligible Because They Are Commercial Rights
The Income Tax Appellate Tribunal, Bangalore Bench, decided five appeals for assessment years 2017-18 to 2021-22 involving multiple issues.
Admission of Additional Ground
The assessee raised an additional ground seeking deduction under section 37 for foreign taxes paid abroad that were not eligible for credit under sections 90/91. Relying on the Supreme Court decision in National Thermal Power Co. Ltd., the Tribunal admitted the additional ground, holding that it could consider questions of law necessary to determine correct tax liability.
1. Software Licence Expenditure
The assessee incurred expenditure on application software licences used in business. The licences were for limited periods, mostly up to two years, without ownership or rights over source code. The Assessing Officer (AO) treated the expenditure as capital, allowed depreciation at 25%, and made additions.
The Commissioner (Appeals) held that the nature of software expenditure depends on facts, observed that the AO had not properly examined agreements and utility, and remanded the matter for fresh adjudication, directing that licences exceeding two years be treated as capital. Alternatively, depreciation at 60% was directed if treated as capital.
The Tribunal held that the software licences were for limited use without enduring benefit and were supported by documentation. It found that the AO relied mainly on depreciation rates without examining functional nature. Referring to jurisdictional High Court decisions, the Tribunal held the expenditure to be revenue in nature. It further held that post-2001, the Commissioner (Appeals) lacks general power to remand assessments except in limited circumstances. Since all material was on record, remand was unjustified. The disallowance was deleted and the expenditure allowed as revenue. The alternative depreciation claim became academic.
2. Depreciation on Intangible Assets
The assessee acquired business divisions under Business Transfer Agreements (BTAs) and allocated consideration to intangible assets including technology, trademarks, business contracts and goodwill, based on independent valuation. Depreciation was claimed under section 32(1)(ii).
The AO disallowed depreciation, holding that such assets were not eligible intangible assets, that valuation was inflated, and that the sixth proviso to section 32 applied due to succession under section 170.
The Commissioner (Appeals) held on merits that business contracts, technology, trademarks and goodwill qualified as intangible assets eligible for depreciation under section 32(1)(ii). However, he confirmed disallowance by invoking the sixth proviso to section 32, treating the transaction as succession and holding that depreciation in the hands of the successor could not exceed what was allowable to the predecessor, which was nil.
Before the Tribunal, the assessee argued that there was no succession of business as a whole, as only certain divisions were transferred while the transferor continued business. It was also contended that the proviso applies only where aggregate depreciation is claimed in the year of succession.
The Tribunal held that section 170 applies only where there is succession to a business as a whole. In this case, only specific divisions were transferred in phases, and the transferor continued business. Therefore, there was no succession under section 170. It further held that the sixth proviso restricts aggregate depreciation in the year of succession and applies only where both predecessor and successor claim depreciation. Since the predecessor had not claimed depreciation on such self-generated intangibles, the proviso was not attracted. It also observed that valuation had not been disturbed under section 43(1). Accordingly, depreciation was allowed.
3. Foreign Taxes as Business Expenditure
The assessee claimed deduction under section 37 for foreign taxes paid abroad but not eligible for foreign tax credit. As this claim was raised for the first time before the Tribunal, and required factual verification regarding nature of taxes and applicability of section 40(a)(ii), the Tribunal restored the issue to the AO for fresh examination, directing opportunity of hearing and consideration of judicial precedents. The ground was allowed for statistical purposes.
4. Weighted Deduction under Section 35(2AB)
The assessee claimed weighted deduction at 150% on approved in-house R&D expenditure. The AO disallowed the weighted portion due to non-furnishing of Form 3CL issued by DSIR. The Commissioner (Appeals) held that post-amendment to Rule 6(7A), quantification by DSIR in Form 3CL is mandatory, and restricted deduction to the amount approved by DSIR.
The Tribunal noted that the R&D facility was approved and genuineness of expenditure was not disputed. It held that section 35(2AB) requires approval of the facility but does not expressly restrict deduction to expenditure quantified by DSIR. The requirement of quantification arises from the Rules, and rules cannot override the Act. It also observed that Form 3CL was produced during appellate proceedings and that appellate proceedings are a continuation of assessment.
The Tribunal held that weighted deduction is allowable on the entire eligible expenditure. Alternatively, the portion not quantified by DSIR was directed to be allowed under section 35(1)(i), subject to verification. The disallowance was set aside.
Other Issues
Levy of interest under sections 234A to 234D was treated as consequential. Findings for assessment year 2017-18 were applied to subsequent years where issues were identical.
All five appeals were partly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
