Case Law Details
Linguanext Technologies Private Limited Vs ITO (ITAT Pune)
Patent drafting and translation expenses are revenue expenditure allowable u/s 37
Income Tax Appellate Tribunal (ITAT) Pune has ruled in favor of Linguanext Technologies Private Limited, allowing expenses related to patent drafting and software translation as revenue expenditure under Section 37 of the Income Tax Act. This decision overturns the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals), who had classified these expenses as capital expenditure. The case pertains to the assessment year 2014-15, where the company, engaged in software development, had claimed deductions for professional fees paid for patent drafting and translation expenses for software localization.
The dispute centered on the nature of the expenditures. The Assessing Officer had disallowed Rs. 15,69,849 for patent drafting and Rs. 5,17,630 for translation expenses, treating them as capital in nature. However, the ITAT, after examining the company’s submissions and relevant documents, concluded that these expenses were incurred in the ordinary course of business and did not result in the creation of any enduring asset. The tribunal noted that the patent for which the drafting expenses were incurred was not registered, and the translation expenses were specific to individual customer sales, with no lasting benefit.
Regarding the disallowance under Section 14A of the Act, which pertains to expenses incurred in relation to exempt income, the ITAT partly allowed the company’s appeal. While the Assessing Officer had disallowed Rs. 1,02,574, the ITAT, relying on the precedent set by the Delhi Tribunal in Joint Investment (P.) Ltd. vs. CIT (2015), limited the disallowance to the actual exempt income earned, which was Rs. 1,210. This judgment established that the disallowance under Section 14A cannot exceed the exempt income earned during the relevant financial year. The ITAT affirmed that there was no satisfaction recorded by the assessing officer, and also that the disallowance could not be more than the exempt income.
In conclusion, the ITAT Pune partly allowed Linguanext Technologies’ appeal, ruling that the patent drafting and translation expenses were revenue expenditures and limiting the Section 14A disallowance to the actual exempt income.
The case was represented by CA Kishor Phadke (Assisted by CA Saurabh Jadhav)
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal filed at the instance of assessee is directed against the order of Ld. Addl/JCIT(A)-6, Chennai [‘Ld. CIT(A)’] dated 19.11.2024 which is arising out of the assessment order u/s 143(3) of the Act for Assessment Year 2014-15 framed on 29.12.2016 by the ITO, Ward-14(3), Pune.
2. Brief facts of the case are that the assessee is a private limited company and engaged in software development business. Return for assessment year 2014-15 furnished on 29.11.2014 declaring income of Rs.8,74,700/-. The case selected for scrutiny through CASS followed by validly serving notices u/s 143(2) and 142(1) of the Act. Information called for by Ld. Assessing Officer was duly supplied and the assessment was completed assessing income of Rs.30,64,753/- after making following additions/disallowances :-
(i) Disallowance of professional fees for patent drafting at Rs.15,69,849/-.
(ii) Disallowance of translation expenses for software development at Rs.5,17,630/-.
(iii) Disallowance u/s 14A of the Act at Rs.1,02,574/-.
3. Aggrieved assessee preferred an appeal before Ld. CIT(A) furnishing details/written submission but failed to succeed. Now the assessee is in appeal before this Tribunal challenging the additions affirmed by Ld. CIT(A).
4. Ld. Counsel for the assessee vehemently argued referring to the written submission filed before Ld. CIT(A) and also referring to the documents filed in the paper book – 1 containing 98 pages along with referring to the decisions in support of the claim that the expenditure incurred towards patent drafting and translation expenses for software development are revenue expenditure. So far as disallowance u/s 14A of the Act is concerned, it is stated that even though Ld. Assessing Officer had failed to record any satisfaction prior to making the alleged disallowance but even otherwise in view of the settled judicial precedent disallowance u/s 14A of the Act cannot exceed exempt income earned during the year.
5. On the other hand, Ld. DR vehemently argued supporting the orders of both the lower authorities.
6. We have heard rival contentions and perused the record records placed before us and carefully gone through the decisions referred and relied by Ld. Counsel for the assessee.
7. Ground no.1 is general in nature which needs no adjudication.
8. Ground no.2 relates to disallowance of professional fees paid for drafting application for patents at Rs.15,69,849/- treated as capital expenditure by both the lower authorities. We observe that during the year assessee incurred Rs.15,69,849/- as legal charges for filing patent application. Ledger Account of patent, copyright and trademark expenses is placed at page no.70 to 71. Ledger Account of expenditure towards professional charges incurred for the professional services mainly includes the amount charged by M/s Evalue Serve against the invoices raised for patent drafting, docketing attorney and USPTO charges. Undisputedly, the patent for which the alleged expenditure was incurred has not been registered till date. It has been stated before us by Ld. Counsel for the assessee that the assessee has followed Accounting Standard 26 and since the patent for which the expenditure was incurred has not been capitalized in the financial statement considering the non-satisfaction of recognition and measurement criteria, the alleged amount has been claimed as ‘revenue expenditure’. We also observe that the alleged expenditure incurred has not created new asset during the year for which it is claimed.
9. We therefore considering the facts of the case and also considering that the genuineness of the expenditure is not in dispute, are of the view that since the expenditure in question before us has been incurred in the regular course of business and no specific intangible asset has been created, therefore, the assessee deserves the deduction of the alleged expenses of Rs.15,69,849/- u/s 37(1) of the Act and it has been rightly claimed as ‘revenue expenditure’. Thus, ground no.2 raised by the assessee is allowed.
10. Ground no.3 relates to the translation expenses for software development. This claim of the assessee has been denied by Ld. Assessing Officer treating it to be a capital expenditure. We observe that the assessee in the business of providing solutions for enterprise application language localization across all industry verticals for which the assessee requires experts who can translate various words into the customers specified language. The translation expenses is specific to each sale as the dictionary prepared for one customer once is hardly of any use in any other sale. We also observe that no new asset came into existence and the expenditure is customer specific and has no enduring benefit. Further, the intention of the expenditure is to facilitate sales and not develop software. Therefore, since the alleged expenditure towards translation expenses for software development has been incurred in the regular course of business for the year under consideration, the same is hereby treated as ‘revenue expenditure’ and the claim made by the assessee deserves to be allowed. Finding of Ld. CIT(A) is reversed and ground no.3 of the assessee is allowed.
11. Ground no.4 relates to disallowance u/s 14A of the Act. Though the assessee has claimed that Ld. Assessing Officer has not made proper satisfaction, we however considering the fact that the assessee had earned dividend income from mutual funds investments only at Rs.1210/- therefore, in light of the decisions of the Co-ordinate Bench of Delhi Tribunal in the case of Joint Investment (P.) Ltd. vs. CIT (2015) 59 taxmann.com 295 (Delhi) wherein it has been held that disallowance u/s 14A of the Act cannot exceed exempt income earned by it, we affirm the disallowance u/s 14A of the Act at Rs.1210/- and delete the remaining amount of disallowance at Rs.1,02,574/-. Thus, ground no.4 raised by the assessee is partly allowed.
12. Ground no.5 being alternate needs no adjudication as we have already dealt with effective ground nos.2, 3 and 4.
13. Ground no.6 is general in nature needs no adjudication.
14. In the result, the appeal of the assessee is partly allowed.
Order pronounced on 20th day of March, 2025.
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