2007 (1) TMI 494 - AT - Income Tax

Summary

Issues Involved:
1. Valuation of closing stock.
2. Treatment of license fees for computer software as capital or revenue expenditure.
3. Classification of EMD gross receipts.
4. Treatment of interest on overdue accounts.

Issue-wise Detailed Analysis:

1. Valuation of Closing Stock:
The assessee contested the method of valuation of closing stock, arguing that the change to the average inventory method was bona fide and consistent with accounting standards. The previous method valued stock based on the lowest price in the last quarter, which was not accepted by the Department. The Tribunal referenced its own prior decision, which required the valuation of both opening and closing stock using the average cost method. The matter was restored to the Assessing Officer for fresh adjudication, following the precedent set in the assessee's own case for the assessment year 1990-91.

2. Treatment of License Fees for Computer Software:
The assessee argued that the license fees paid for SAP R/3 software should be treated as revenue expenditure, emphasizing the operational benefits and lack of ownership over the software. The Assessing Officer and the Commissioner of Income-tax (Appeals) treated it as capital expenditure, eligible for depreciation under section 32(1)(ii) of the Act. The Tribunal upheld this view, citing the Rajasthan High Court's decision in CIT v. Arawali Constructions Co. P. Ltd., which classified software acquisition as acquisition of know-how, thus qualifying as an intangible asset. The Tribunal rejected the alternative plea for higher depreciation at 60%, noting that the applicable rate was 25% for the relevant assessment year.

3. Classification of EMD Gross Receipts:
The assessee claimed that gross receipts from the Environment Management Division (EMD) should be considered as business income and not subject to the provisions of Explanation (baa) of section 80HHC(4B). The Tribunal referred to its earlier decision for the assessment year 1996-97, which held that such receipts were part of the total turnover and includible in the term "profit of the business." The Tribunal followed this precedent and allowed the ground in favor of the assessee.

4. Treatment of Interest on Overdue Accounts:
The assessee argued that interest on overdue accounts should be treated as business income, outside the purview of Explanation (baa) of section 80HHC(4B). The Tribunal cited the Gujarat High Court's decision in Nirma Industries Ltd. v. Deputy CIT, which held that interest received from trade debtors for late payment of sale consideration is part of the business profits. A similar view was taken by the Madras High Court in CIT v. Indo Matsushita Carbon Co. Ltd. The Tribunal followed these precedents and allowed the ground.

Conclusion:
The appeal was partly allowed, with the Tribunal restoring the valuation of closing stock issue to the Assessing Officer for fresh adjudication, upholding the treatment of license fees as capital expenditure, and allowing the grounds related to EMD gross receipts and interest on overdue accounts.