2013 (10) TMI 1225 - HC - Income Tax

Nature of expenditure Capital or revenue expenditure Expenditure is made on acquisition of software Held that - When the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and, therefore, it has to be treated as revenue expenditure Decided against the Revenue. Addition of provision made for doubtful debts while computing book profit u/s 115JA Held that - The Explanation to the section states for the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (2) as increased by the amount mentioned in the Explanation. One such amount is in sub-clause (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities Reliance has been placed on the judgment in the case of COMMISSIONER OF INCOME TAX AND OTHERS VERSUS M/s WEIZMANN HOMES LTD. 2013 (5) TMI 123 - KARNATAKA HIGH COURT - Said amount is to be added to the book profit Decided in favor of Revenue. Interest u/s 234B of the Income tax act Held that - Reliance has been placed upon the judgment of the Hon ble Supreme Court in the case of Rolta India Ltd. reported in 2011 (1) TMI 5 - SUPREME COURT OF INDIA Also, as per Circular No. 13 of 2001, it has been clarified that section 115JB is a self-contained code and thus, all companies were liable for payment of advance tax under section 115JB and, consequently, the provisions of sections 234B and 234C imposing interest on default in payment of advance tax were also applicable Decided in favor of Revenue.

Summary

Issues:
1. Whether provision made for warranty liability should be allowed as a revenue expense?
2. Whether the purchase of software should be treated as revenue expenditure?
3. Whether provision for doubtful debts should be reduced while computing book profit under section 115JA?
4. Whether interest under section 234B is liable when income is computed under section 115JA?

Analysis:

Issue 1: Provision for Warranty Liability
The Tribunal held that the liability to pay for warranty claims arises when sales are made, allowing the provision as a revenue expenditure. The assessee consistently provided for warranty liability based on scientific calculation, justifying the deduction under section 37 of the Income-tax Act. The Tribunal's decision was based on evidence and past experience, affirming that the condition stipulated by the apex court was fulfilled.

Issue 2: Purchase of Software
The Tribunal classified the expenditure on software as revenue expenditure, emphasizing that it enhanced operational efficiency without resulting in the acquisition of a capital asset. The software's nature, purpose, and benefit were considered, leading to the conclusion that it should be treated as revenue expenditure. The Tribunal's decision aligned with previous court rulings and principles of profit earning and capital expenditure.

Issue 3: Provision for Doubtful Debts
The dispute centered on whether the provision for bad and doubtful debts should be added to the book profit under section 115JA. The Tribunal held that such provision did not constitute meeting liabilities other than ascertained liabilities, thus not increasing the book profit. However, the court referred to a previous judgment clarifying that such provisions should be added to the book profit, leading to a ruling in favor of the Revenue and against the assessee.

Issue 4: Interest under Section 234B
The Supreme Court's interpretation clarified that interest under sections 234B and 234C applied to tax payable under section 115JA/115JB, including in cases of failure to pay advance tax. The Tribunal's decision was set aside based on the authoritative pronouncements, ruling in favor of the Revenue and against the assessee.

In conclusion, the High Court partially allowed the appeal, addressing key issues related to warranty liability, software purchase, doubtful debts provision, and interest payment under section 234B. The judgments were based on legal interpretations, past precedents, and the specific provisions of the Income-tax Act, ensuring a comprehensive analysis of each issue involved.