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2012 (11) TMI 619 - AT - Income TaxRevenue or capital expenditure software development expenditure Assessee had treated the expenditure as a deferred revenue expenditure in the books of account And claimed it as a revenue expenditure in the computation of income - Held that - As the expenditure on development of new product in the line of business being carried out by the assessee is an expenditure related to such business and benefit to the assessee is in the revenue field, inasmuch as it seeks to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The entries in the books of account cannot be demonstrative of the true nature of a transaction. The true nature of a transaction is to be assessed not on the basis of the entries in the books of account alone, but having regard to the realities of the transaction. - Therefore, the expenditure incurred on development of various software packages, for being sold in the assessee s business of software development and selling, is to be regarded as in the nature of revenue expenditure. - Decision in Empire Jute Co Ltd (1980 (5) TMI 1 - SUPREME COURT) followed - Decided in favour of assessee Carry forward of loss/ depreciation u/s 10A Whether carry forward of loss/ depreciation can be set off against other normal business income - Assessee was eligible to claim benefit of Sec. 10A AO argued that Sec 10A was contained in Chapter III which dealt with incomes which do not form part of total income , therefore, assessee was not eligible to carry forward unabsorbed loss/depreciation Held that - As the provisions of Sec. 10A as it stood w.e.f. 1.4.2001 continued to be a provision for exemption. Sec. 10A(6)(ii) provides that no loss which relates to the business of the undertaking shall be carried forward or set off where such loss relates to any of the relevant assessment years ending before 1.4.2001. - Therefore, losses which are sought to be carried forward by the assessee are for the assessment year ending after 1.4.2001 and, therefore, do not fall in the restriction contained in section 10A(6)(ii). - Decided in favour of assessee Deduction u/s 10A- Foreign exchange fluctuation gain - Whether Foreign exchange fluctuation gain is eligible for deduction u/s 10A AO argued such income could not be said to be profits and gains derived by an undertaking from the export of computer software Held that - As long as gain on foreign exchange fluctuation is on account of collection of export proceeds, it has a direct nexus with the exports undertaken by the assessee and, to that extent, it will also form part of an income eligible for claim of deduction u/s 10A. - Decided in favour of assessee
Issues Involved:
1. Nature of expenditure on product development (capital vs. revenue). 2. Eligibility to carry forward losses for undertakings under Section 10A. 3. Eligibility of foreign exchange fluctuation gains for deduction under Section 10A. Detailed Analysis: 1. Nature of Expenditure on Product Development (Capital vs. Revenue): Summary: The primary issue in the assessee's appeal was whether the expenditure of Rs. 2,77,07,736/- incurred towards product development should be treated as revenue expenditure or capital expenditure. The assessee argued that the expenditure was for developing software products intended for sale and thus should be classified as revenue expenditure. The income-tax authorities, however, treated it as capital expenditure, arguing that the expenditure resulted in an enduring benefit and acquisition of intangible assets. Key Points: - The assessee, engaged in software development, claimed the expenditure as revenue, explaining it was mainly for employee salaries and direct expenses related to software development. - The Department's objections were three-fold: the treatment of expenditure as deferred revenue in the books, the enduring nature of the benefit, and the registration of products as intangible assets. - The Tribunal held that the expenditure did not result in the acquisition of a new asset but facilitated the assessee's trading operations, thus classifying it as revenue expenditure. It emphasized that the nature of the advantage in a commercial sense should be considered, aligning with the Supreme Court's decision in Empire Jute Co Ltd v. CIT. Conclusion: The Tribunal allowed the assessee's appeal, treating the expenditure as revenue in nature. 2. Eligibility to Carry Forward Losses for Undertakings under Section 10A: Summary: The Revenue's appeal contested the Commissioner of Income-tax (Appeals)'s decision allowing the assessee to carry forward losses incurred by an undertaking eligible for Section 10A benefits. The Assessing Officer had denied this claim, arguing that Section 10A provided an exemption, not a deduction, thus disallowing the carry forward of losses. Key Points: - The Tribunal noted the amendment to Section 10A effective from 1.4.2001, which changed the provision from an exemption to a deduction. - The Tribunal referred to the jurisdictional High Court's decision in Hindustan Unilever Ltd. v. DCIT, which supported the view that post-amendment, Section 10A allowed deductions, thus permitting the carry forward of losses. - Section 10A(6)(ii) restricts carry forward of losses related to assessment years before 1.4.2001, which was not applicable in this case as the losses were from assessment years 2001-02 onwards. Conclusion: The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, allowing the carry forward of unabsorbed losses and depreciation. 3. Eligibility of Foreign Exchange Fluctuation Gains for Deduction under Section 10A: Summary: The Revenue challenged the inclusion of Rs. 77,288/- representing foreign exchange fluctuation gains in the assessee's deduction claim under Section 10A. The Assessing Officer had excluded this amount, while the Commissioner of Income-tax (Appeals) included it. Key Points: - The Tribunal held that gains from foreign exchange fluctuations directly related to the collection of export proceeds should be considered as derived from the export of software, thus eligible for Section 10A deduction. - The Tribunal dismissed the Revenue's reliance on the Supreme Court decision in Pandian Chemicals Ltd., differentiating the nature of income in this context. Conclusion: The Tribunal affirmed the Commissioner of Income-tax (Appeals)'s decision, allowing the inclusion of foreign exchange fluctuation gains in the Section 10A deduction. Final Decisions: - Assessee's Appeal (ITA No 1179/PN/09 for AY 2003-04): Allowed. - Revenue's Appeal (ITA No 1205/PN/09 for AY 2003-04): Dismissed. - Revenue's Appeal (ITA No 1206/PN/09 for AY 2004-05): Dismissed. - Revenue's Appeal (ITA No 466/PN/11 for AY 2007-08): Dismissed.
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