2008 (3) TMI 326 - HC - Income Tax

High Court affirms Tribunal's decision on expense deduction, emphasizes prior judgment, calls for clarity on software services

COMMISSIONER OF INCOM-TAX Versus ARTHUR ADERSEN AND CO.

COMMISSIONER OF INCOM-TAX Versus ARTHUR ADERSEN AND CO. - [2009] 318 ITR 229 (Bom) Issues:1. Disallowance of expenses and deduction under section 80HHE.2. Judicial justifiability of Tribunal's decision based on previous year's judgment.3. Proof required for software services rendered by third parties.4. Legal definition of technical services in software development.Analysis:Issue 1: Disallowance of expenses and deduction under section 80HHEThe Revenue challenged the Tribunal's decision to delete the disallowance of expenses and deduction under section 80HHE for the assessment year 1998-99. The Tribunal relied on its decision for the assessment year 1997-98, where the Revenue did not appeal. The Tribunal held that the concept of token disallowance is legally unsustainable. The Tribunal's decision was based on the Assessing Officer's allowance of the expenditure for the previous year. As the Revenue did not appeal for the previous year, the Tribunal upheld the decision for the current year, concluding that the Revenue was bound by the previous judgment.Issue 2: Judicial justifiability of Tribunal's decision based on previous year's judgmentThe Tribunal's decision to follow the judgment for the assessment year 1997-98 was challenged by the Revenue. However, the High Court held that since the Revenue did not appeal the previous year's decision, they were bound by it unless a valid cause for reconsideration was shown. The High Court cited the principle established in previous judgments that the Revenue cannot challenge a law laid down by a High Court without just cause if they previously accepted it in another case. Therefore, the Tribunal's reliance on the previous year's judgment was deemed legally justifiable.Issue 3: Proof required for software services rendered by third partiesThe Tribunal reversed the findings of the Commissioner (Appeals) regarding the assessee providing technical services outside India for software development. The High Court admitted the appeal based on the contentions raised by the Revenue. The question reframed by the High Court was whether the respondent-assessee was engaged in providing technical services outside India for software development. This issue required further examination based on the facts and circumstances of the case.Issue 4: Legal definition of technical services in software developmentThe High Court did not find questions E and F to be arising from the Tribunal's order as they were not raised before the Tribunal. The High Court admitted the appeal based on the reframed question regarding the respondent-assessee's engagement in providing technical services outside India for software development. This issue was considered consequential to the analysis of the previous issues raised in the appeal.In conclusion, the High Court's judgment addressed the various issues raised by the Revenue, emphasizing the legal principles governing the Tribunal's decisions based on previous judgments, the disallowance of expenses and deductions, and the definition of technical services in software development. The detailed analysis provided clarity on each issue, ensuring a comprehensive review of the legal aspects involved in the case.