2011 (6) TMI 214 - AT - Income Tax

Tribunal decision: Deduction denied for windmill profits, trademark expenses treated as capital, software expenses remanded.

The Tribunal partly allowed the appeal, upholding the denial of deduction under section 80-IA for windmill profits and the treatment of trademark-related ... Disallowed - Deduction u/s 80-IA - Profits of windmills - Since, the assessee claimed deduction in respect of windmills set up at Upleta, Gujarat and Sangli & Satara, Maharashtra - The assessee claimed that the above referred undertakings had brought forward losses - As per the Special Bench order in the case of Asstt. CIT v. Goldmine Shares & Finance (P.) Ltd. [2008 (4) TMI 405 - ITAT AHMEDABAD], decided against of assessee.Software expenses - As per the Special Bench of the Tribunal in the case of Amway India Enterprises v. Dy. CIT [2008 (2) TMI 454 - ITAT DELHI-C], has decided similar issue restoring the matter to the file of Assessing Officer with the direction to decide about the deductibility or otherwise of software expenses on certain parameters laid down in that case.Trademark related services out of legal and professional fees - Payment was made by the assessee to M/s. DePenning & DePenning which is not a legal firm but engaged in providing services relating to patent, trademark, design and copyright - Copies of bills issued by M/s. DePenning & DePenning are available at pages 32 to 34 of the paper book from which it can be seen that the payment was made by the assessee towards filing patent application including translation fee/amendment fee in Canada, Russia and Taiwan - It is noticed that firstly there is nothing like legal charges involved in such payments - Secondly, this payment has been made for obtaining trademark - As trademark have been included u/s 32(1)(ii) in the category of 'Intangible asset' after 1-4-1998, the costs incurred by the assessee in the instant case are nothing but cost of trademarks - Such amount would be capitalized and qualify for depreciation as per law - Hence, the assessee accepted the addition made in assessment year 2005-2006 and did not agitate it further - Decided against of assessee. Issues Involved:1. Denial of deduction under section 80-IA in respect of profits of windmills.2. Treatment of software expenses as capital expenditure.3. Treatment of trademark-related services expenses as capital expenditure.Issue-wise Detailed Analysis:1. Denial of Deduction under Section 80-IA in Respect of Profits of Windmills:The assessee claimed deduction under section 80-IA for profits from windmills set up in Gujarat and Maharashtra. The units incurred initial losses, which were set off against other non-eligible business income. The Assessing Officer (AO) denied the deduction, citing section 80-IA(5) and relying on the Special Bench order in the case of Goldmine Shares & Finance (P.) Ltd., which mandates that profits for deduction purposes should be computed after deducting notional brought forward losses and depreciation, even if these were set off against other income in earlier years.The Tribunal upheld the AO's decision, emphasizing that section 80-IA(5) creates a standalone provision where the eligible business is treated as the only source of income. Thus, brought forward losses must be set off against the current year's profits before any deduction is allowed. The assessee's reliance on the Madras High Court judgment in Velayudhaswamy Spinning Mills (P.) Ltd. was rejected because the factual scenario differed, and the judgment applied to cases where the eligible business was the only source of income.2. Treatment of Software Expenses as Capital Expenditure:The assessee claimed software expenses of Rs. 19,12,451 as business expenses. The AO treated these as capital expenditure, a decision upheld in the first appeal. The Tribunal referred to the Special Bench decision in Amway India Enterprises, which provided parameters for determining the deductibility of software expenses. Both parties agreed to follow this precedent. Consequently, the Tribunal set aside the impugned order and remanded the matter to the AO for a fresh decision based on the guidelines from the Amway India Enterprises case.3. Treatment of Trademark-Related Services Expenses as Capital Expenditure:The assessee claimed Rs. 10,69,500 paid for trademark-related services as legal and professional charges. The AO treated this as capital expenditure, allowing depreciation applicable to intangible assets, a decision upheld in the first appeal. The Tribunal noted that the payments were made to M/s. DePenning & DePenning for services related to patents, trademarks, and copyrights, and not legal charges. Since trademarks are included as intangible assets under section 32(1)(ii), the expenses were capitalized and qualified for depreciation. The Tribunal dismissed the assessee's reliance on the Supreme Court judgment in Finlay Mills Ltd., noting that the case predated the inclusion of trademarks as intangible assets in section 32(1)(ii).Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal upholding the denial of deduction under section 80-IA and the treatment of trademark-related expenses as capital expenditure. The issue of software expenses was remanded to the AO for a fresh decision.