CIT Vs. ENCORE SOFTWARE LTD.

JUDGEMENT

(1.) THE respondent/assessee who is dealing in manufacture of software development and telephone/fax, modems, said 10 have incurred expenditure of Rs. 7,28,14,022 towards development costs up to 31.03.2000 which is said to be towards research and development for the assessment year 2000 -2001. The data/fax/modems sale realization was Rs. 3,84,39,328 and telephony and speech coders sale realization was Rs. 31,01,950. It was contention of the assessee before the Assessing Officer for the assessment year 2001 -2002 that a sum of Rs. 1,85,71,285 is a set off against development cost and the balance is shown in the balance sheet. The assessee described the same as reduction in the value of the semi -finished inventory. It is the contention of the assessee that the reduction of the cost incurred towards research and development could be in three ways. ( -1) Write off of entire amount towards profit in the year of incurrence. (2) claim it as deferred reduction at the rate of 1/5th for each assessment year or proportionate to the estimated sales and (3) claim depreciation of the material value as per its value.

(2.) THE assessee contends that in the present case, he has sought reduction proportionate to the sale realization. Sri Indrakumar, learned Sr. counsel for the revenue, - per contra strenuously submitted that the written and oral submissions made by the assessee could not suggest that the development costs incurred is towards research and development and the same is being set off against profit and loss account towards sale realization for the assessment year in question. The assessee submitted that he seeks proportionate write off against semi -finished goods inventory. That means for future anticipated inventory sales the deduction sought for is impermissible. This Court had framed following substantial law for consideration while admitting the appeal:

(3.) ON thorough consideration of the submissions made at the Bar, we find that the arguments submitted in appeal does not appear to be one correctly projected before the Assessing Officer. Further, it is also not clear that whether Rs. 7,28,14,022 pertains to research and development of the products. It is also not clear the entire semi -finished products are made in the process of research and development or otherwise. The assessee had sought "proportionate write off against the semi finished goods inventory". The said expression used does not clearly suggest whether the assessee was seeking reduction on research and development expenditure proportionately towards the sale made in the year in question.