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)
