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2009 (5) TMI 601 - AT - Income TaxDisallowance of the foreseeable losses - disallowance on account of expenditure on computer software - reducing unabsorbed depreciation of earlier years while computing profits from the business when granting deduction u/s 80HHE. - Held that - Decision of the ITAT in the case of Metal Box Company Of India Limited Versus Their Workmenand (1968 - TMI - 39936 - SUPREME Court) the contention of the assessee regarding allowability of foreseeable loss is accepted in principle. However the issue is restored to the file of A.O. for the purpose of quantification and calculation of the said loss. Disallowance on account of expenditure on computer software. - Held that - the issue is set aside to the file of the A.O. for fresh adjudication in the light of the Special Bench decision in the case of Amway India Enterprises. Versus Deputy Commissioner Of Income-tax Circle - 1(1) New Delhi. (2008 - TMI - 64346 - ITAT DELHI) after affording proper and reasonable opportunity to the assessee. Reduction of Unabsorbed Depreciation of Earlier Years. - Held that - deduction under Chapter VIA are to be allowed only on net income and not on gross income. The net income is to be computed after giving full effect to the provisions of sections 80AB 32 70 71 & 72 of the Act. decided against Assessee.
Issues Involved:
1. Disallowance of foreseeable losses. 2. Disallowance of expenditure on computer software. 3. Reduction of unabsorbed depreciation while computing profits for deduction under section 80HHE. 4. Treatment of computer software expenditure as revenue expenditure. Issue-wise Detailed Analysis: 1. Disallowance of Foreseeable Losses: The assessee contended that the CIT(A) erred in confirming the disallowance of foreseeable losses amounting to Rs. 18,73,568 for A.Y. 2002-03 and Rs. 5,83,038 for A.Y. 2003-04. The A.O. disallowed these amounts, arguing that under the mercantile system of accounting, only actual liabilities are deductible, not future liabilities. The CIT(A) upheld this view, noting that the contracts were not substantially completed, making it implausible to anticipate losses accurately. The assessee relied on Accounting Standard - 7 (AS-7) and various case laws to argue that foreseeable losses should be allowed. The Tribunal accepted the principle of allowing foreseeable losses but remanded the issue back to the A.O. for proper quantification as per AS-7. 2. Disallowance of Expenditure on Computer Software: For A.Y. 2002-03, the A.O. disallowed Rs. 71,47,404 out of Rs. 1,40,44,387 spent on computer software and maintenance, treating it as capital expenditure. Similarly, for A.Y. 2003-04, Rs. 31,16,486 was disallowed. The CIT(A) partially confirmed these disallowances. The Tribunal noted that the lower authorities did not consider the Special Bench decision in Amway India Enterprises and remanded the issue back to the A.O. for fresh adjudication in light of this decision. 3. Reduction of Unabsorbed Depreciation While Computing Profits for Deduction Under Section 80HHE: The assessee argued against the CIT(A)'s decision to reduce unabsorbed depreciation when computing profits for deduction under section 80HHE. The CIT(A) followed the principle that deductions under Chapter VIA should be allowed on net income after considering brought forward depreciation and losses. The Tribunal upheld this view, stating that the assessee is entitled to deductions under section 80HHE only on net income after accounting for brought forward depreciation and losses. 4. Treatment of Computer Software Expenditure as Revenue Expenditure: The revenue appealed against the CIT(A)'s decision to treat Rs. 27,72,808 and Rs. 1,34,28,461 spent on computer software as revenue expenditure for A.Y. 2002-03 and A.Y. 2003-04, respectively. The Tribunal, having already remanded the issue of computer software expenditure in the assessee's appeals, also remanded the revenue's appeals for fresh adjudication by the A.O. in light of the Special Bench decision in Amway India Enterprises. Summary of Result: 1. Assessee's appeals are partly allowed. 2. Revenue's appeals are allowed for statistical purposes.
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