Law:

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JUDGMENT B. Manohar, J. - The Revenue has preferred this appeal under Section 260A of the Income Tax Act, 1961 (for short the Act), being aggrieved by the order dated 4-5-2007 made in ITA Nos.1286-1287/Bang/2005 passed by the Income Tax Appellate Tribunal, Bangalore Bench 'B' (hereinafter referred to as the Tribunal' for short) whereby the Tribunal allowed the appeal in part while setting aside the order passed by the Commissioner of Income Tax (Appeals)-I ( for short the First Appellate Authority) dated 15-6-2005 and the assessment order dated 30th March 2001 passed by the Assessing Officer for the assessment years 1998-99 and 1999-2000. 2. The respondent-assessee is a Private Limited Company incorporated under the Companies Act, 1956 during the financial year 1997-98. Originally, there was a company jointly promoted by TATAs and IBM which were known as TATA IBM. During the financial year 1997-98, it was mutually agreed between the two promoters to bifurcate the software development activities and the hardware business into two separate entities namely M/s. IBM Global Service India (P) Limited and TATA IBM where hardware business is taken care. As per the agreement entered into between the two promoters, various assets of /the erstwhile TATA IBM were transferred to the newly established assessee-company for a certain consideration. The assessee-Company filed the return of income on 30-11-1998 declaring loss of Rs.21,51,30,926/- on various heads. The returns was processed under Section 143(1)(a) of the Act. Subsequently, it was selected for scrutiny. Accordingly, a notice under Section 143(2) of the Act was issued. 3. In pursuance of the notice, the authorized representatives of the assessee-company appeared before the Assessing Authority and furnished the details called for. Among other things, the Assessing Officer noticed that the assessee-company has claimed revenue expenditure of Rs.5,30,00,000/- towards domestic customer database, and Rs.9,38,57,925/- towards transfer of certain skilled and trained employees who were originally recruited by TATA IBM to the assessee-company. Though the assessee-company actually paid a sum of Rs.18.4 crores towards transfer…

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