2011 (11) TMI 443 - HC - Income Tax

Expenditure incurred on Corporate Membership, ISO Certification, Repair & Maintenance of leased Premises - Capital or Revenue expenditure - Held That - Such expenditure is of revenue nature - Decided in favor of assessee. Fluctuation in foreign exchange receipts - Income from other sources or Business Income - assessee contended that exchange rate fluctuation should be taken into consideration for computing Section 80HHE deduction - Held That - Fluctuation in the valuation of currency which has to be converted to foreign currency has direct nexus to the export of software and can never be included as income from other sources - Decided in favor of assessee.

Summary

Issues:
1. Treatment of corporate membership fee as revenue or capital expense.
2. Classification of ISO certification expenses as revenue or capital expenditure.
3. Categorization of repair and maintenance expenses as revenue or capital expenditure.
4. Consideration of exchange rate fluctuation for Section 80HHE deduction.

Analysis:
1. The appellant, a software exporter, filed a return of income showing Rs. 3,33,94,389/-. The Assessing Officer treated certain expenses as capital expenditure, which the appellant claimed as revenue expenditure. The Appellate authority allowed the appeal, considering the expenses as revenue expenditure. The High Court upheld this decision based on previous judgments in favor of the assessee, concluding that corporate membership fee, ISO certification expenses, and repair costs should be treated as revenue expenditure, not capital.

2. The Assessing Officer contended that ISO certification expenses should be capital expenditure. However, the Appellate authority disagreed, ruling in favor of the assessee. The High Court, following previous judgments, upheld this decision, stating that ISO certification expenses are revenue expenditure beneficial for international business over several years.

3. The Assessing Officer categorized repair and maintenance expenses as capital expenditure, which the appellant claimed as revenue expenditure. The Appellate authority sided with the assessee, considering them as revenue expenditure. The High Court, in line with previous judgments, upheld this decision, allowing depreciation under Section 32(1) Explanation 1 for the repair and maintenance expenses.

4. The dispute regarding exchange rate fluctuation for Section 80HHE deduction was raised. The revenue argued against considering fluctuation in the valuation of rupee for the deduction. However, the High Court, after analyzing the direct nexus between currency valuation and software export, upheld the decision of the authorities in favor of the assessee. The Court ruled that fluctuation in currency valuation directly related to software export cannot be treated as income from other sources, dismissing the appeal.

In conclusion, the High Court dismissed the appeal, affirming the decisions of the lower authorities in favor of the assessee regarding the treatment of expenses and exchange rate fluctuation for deductions, based on established legal precedents and the direct nexus between the expenses and software export transactions.