Software Licence Treatment: limited-term licences are revenue expenses; intangible depreciation and weighted R&D deduction upheld with verification required for foreign taxes.

Payments for limited-term application software licences that confer only a restricted right to use without ownership or source code are revenue expenditure and allowable as business expense; the Assessing Officer's disallowance is deleted. Intangible assets acquired under business transfer agreements (technology, contracts, trademarks, goodwill) qualify as intangible assets under depreciation law and are eligible for depreciation; the sixth proviso to the depreciation provision and succession provision do not apply where there is no transfer of the business as a whole and no aggregate claim by predecessor and successor. Foreign taxes not creditable under treaty are remitted to the AO for factual verification. In house R&D qualifies for weighted deduction; unquantified amounts alternatively allowed under general provision subject to verification.

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Issues: (i) Whether payment for application software licences (limited term licences without ownership/source code) is allowable as revenue expenditure or is capital in nature; (ii) Whether depreciation under section 32(1)(ii) is allowable on intangible assets (technology, business contracts, trademarks, goodwill) acquired under Business Transfer Agreements and whether the sixth proviso to section 32(1) read with section 170 applies to restrict depreciation; (iii) Whether foreign taxes paid abroad that are not eligible for credit under section 90 can be allowed as business expenditure under section 37(1); (iv) Whether weighted deduction under section 35(2AB) is allowable for in house R&D expenditure where DSIR quantification in Form 3CL is delayed or partially quantified, and whether unquantified portion can be allowed under section 35(1)(i) or section 37(1).

Issue (i): Whether software licence payments claimed as revenue expenditure are revenue in nature or capital.

Analysis: The assessee procured application software licences for limited periods (mostly up to two years), did not acquire ownership, source code or rights to modify/transfer, and documentary evidence (purchase orders, invoices, licence periods) was on record. The Assessing Officer relied on depreciation schedules and accounting standards without examining the nature, utility and duration of licences. Jurisprudence treating short lived application software used in day to day business as revenue expenditure was considered.

Conclusion: The payments for application software licences as described are revenue expenditure and are allowable as business expense; the Assessing Officer's disallowance is deleted.

Issue (ii): Whether intangible assets acquired under BTAs (technology, business contracts, trademarks, goodwill) qualify for depreciation under section 32(1)(ii) and whether the sixth proviso to section 32(1) read with section 170 restricts the claim.

Analysis: The Commissioner (Appeals) accepted on merits that the identified assets are intangible assets within section 32(1)(ii). The Tribunal examined the nature of succession under section 170 and the scope of the sixth proviso to section 32(1). Succession requires transfer of the business as a whole with continuity; here only specific divisions were transferred in piecemeal fashion over different years and the transferor continued carrying on business. Further, the proviso operates to prevent aggregate depreciation where both predecessor and successor claim depreciation in the same year; no depreciation was allowable or claimed by the predecessor on these self generated assets. Valuation doubts were not resolved by invoking Explanation 3 to section 43(1) and no finding of inflated cost under section 43 was recorded. Precedents on year of succession application and aggregate deduction were applied.

Conclusion: The acquired intangible assets are eligible for depreciation under section 32(1)(ii); section 170 does not apply (no succession of the whole business) and the sixth proviso to section 32(1) is not attracted; the Assessing Officer is directed to allow depreciation claimed.

Issue (iii): Whether foreign taxes paid abroad that are not creditable under section 90 are allowable as business expenditure under section 37(1).

Analysis: The claim was raised first at Tribunal and the factual matrix (nature of foreign income, computation of FTC, characterization of foreign taxes and applicability of section 40(a)(ii)) requires verification. Authorities and precedents exist on both sides and the Revenue did not oppose remand for factual examination.

Conclusion: The issue is restored to the Assessing Officer for fact based verification; the additional ground is allowed for statistical purposes and the AO is directed to examine and decide the claim in accordance with law.

Issue (iv): Whether weighted deduction under section 35(2AB) is allowable for the full R&D expenditure when DSIR quantification in Form 3CL was not furnished at assessment or partially quantified later; and whether unquantified portion can be allowed under section 35(1)(i) or section 37(1).

Analysis: Section 35(2AB) requires approval of the in house R&D facility; Rule 6(7A) (amended w.e.f. 01.07.2016) introduces DSIR quantification by Form 3CL but the section itself does not expressly limit the deduction to expenditure quantified by DSIR. The assessee satisfied substantive conditions, Form 3CL was subsequently placed on record and only a small portion remained unquantified. Appellate proceedings are a continuation of assessment and legitimate claims supported by evidence can be considered; denying relief for administrative delay by DSIR would defeat the legislative purpose of incentivising R&D.

Conclusion: The assessee is entitled to weighted deduction under section 35(2AB) on the entire eligible expenditure; alternatively the unquantified portion is directed to be allowed under section 35(1)(i) subject to verification by the AO. The Assessing Officer is directed to grant relief in accordance with law.

Final Conclusion: The Tribunal allows the assessee's substantive claims on (i) software licence expenditure (revenue allowed) and (ii) depreciation on identified intangible assets (allowed), sets aside the lower orders which disallowed those claims, restores the additional foreign tax issue to the Assessing Officer for verification (allowed for statistical purposes), and allows weighted deduction under section 35(2AB) (with alternative relief under section 35(1)(i)); overall the appeals are partly allowed for statistical purposes.

Ratio Decidendi: Application software licences of limited duration that confer only a restricted right to use without ownership or source code are revenue expenditure; the sixth proviso to section 32(1) operates only where there is succession to a business as a whole and where aggregate depreciation is claimable in the same year by predecessor and successor; subordinate rules (Rule 6(7A)) cannot be interpreted to curtail an express statutory entitlement under section 35(2AB) when substantive conditions under the Act are satisfied.

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