2011 (12) TMI 680 - AT - Income Tax

Summary

Issues Involved:
The judgment involves the disallowance of software expenditure and the set off of loss from a non-STP unit against profits of the STP unit before arriving at the deduction u/s 10A of the Act.

Disallowance of Software Expenditure:
The assessee, engaged in designing automobile parts, claimed software expenditure as revenue, but the AO treated part of it as capital expenditure. The CIT(A) upheld this decision, considering the software as a tangible asset bringing organizational changes. The assessee contended that software had no enduring benefit and cited relevant case laws. The ITAT, Bangalore, following a decision by the Madras High Court, held that software expenditure for application software is revenue in nature, as it enhances productivity without acquiring a capital asset.

Set Off of Loss Against Profits of STP Unit:
The AO observed the inclusion of income exempt u/s 10A from the STP unit in the loss computation, which was disallowed. The CIT(A) affirmed this decision. However, the assessee relied on a High Court decision, supported by the DR, stating the loss of the non-10A unit cannot be set off against the income of the 10A unit u/s 72. The ITAT, Bangalore, following the High Court ruling, allowed the appeal, stating that the profits u/s 10A should be excluded before setting off losses, contrary to the AO's approach.