2011 (7) TMI 953 - HC - Income Tax

Capital or revenue expenditure - Software expenditure - Deduction u/s 80HHC - Tribunal relying upon its order in the assessee s own case relating to asst. yr. 2001-02 held that the software expenditure was a revenue expenditure. The appeal filed by the Revenue for the asst. yr. 2001-02 has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for the asst. yr. 2001-02 has attained finality - Held that software expenditure was allowable as revenue expenditure - Decided in favor of the assessee

Summary

Issues:
1. Whether software expenditure should be considered capital or revenue expenditure.
2. Whether scrap sales should be included in the total turnover for computing eligible deduction under section 80HHC of the Act.

Analysis:

Issue 1:
The first issue pertains to the classification of software expenditure as capital or revenue expenditure. The Tribunal, based on its previous order for the assessee's case for the assessment year 2001-02, determined that the software expenditure should be treated as revenue expenditure. The Tribunal emphasized that the software did not form part of the profit-making apparatus of the assessee but rather facilitated trading operations and management efficiency. The Tribunal's decision was supported by a functional test and a Special Bench judgment. The High Court concurred with the Tribunal's reasoning, upholding the allowance of software expenditure as revenue expenditure.

Issue 2:
The second issue involves the treatment of scrap sales for computing the eligible deduction under section 80HHC of the Act. Both parties agreed to refer to the judgment in CIT vs. Dresser Rand India (P) Ltd. for fresh consideration. Following this agreement, the High Court ordered the restoration of the second question to the Tribunal for reevaluation in light of the Dresser Rand India (P) Ltd. judgment. Consequently, the High Court disposed of the appeal accordingly, allowing for a fresh assessment of the scrap sales issue by the Tribunal based on the referenced judgment.

In conclusion, the High Court upheld the Tribunal's decision regarding the software expenditure as revenue expenditure and directed a reconsideration of the scrap sales issue in line with the Dresser Rand India (P) Ltd. judgment.