2015 (1) TMI 53 - AT - Income Tax

Validity of order of CIT u/s 263 nature of purchase of software - deduction u/s 10B - STPI unit - software export - Held that - it could not be understood as to how a software purchase as a raw material in export of software can become capital expenditure - Both CIT and Ld. CIT(A) wrongly considered software purchase on the concept of enduring benefit in the business of assessee - since assessee purchased software as a raw material in its business of exports, it cannot be considered as capital in nature, as this is not asset in its business but as a component in the process of manufacturing/ export software -software purchased by assessee for ultimate export either as embedded software or as part of project undertaken by it cannot be considered as capital expenditure, as assessee is not using the software as an asset of the business but as raw material in its business thus, the order of the CIT setting aside the order of AO is set aside. The profit of assessee arrived at ₹ 21,20,552 is after claim of purchase of software as an expenditure to an extent of ₹ 37,29,850 - any disallowance would automatically increase the profit from software division - There is no doubt that the profits from software division being STP unit are eligible for deduction u/s 10B - the entire amount gets exempted u/s 10B without any tax effect on the other incomes offered by assessee - since the raw material purchased by assessee is disallowed as capital expenditure, the stand taken by CIT in disturbing the order of AO cannot be appreciated - the order u/s 263 by CIT is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of software purchase expenditure as revenue or capital in nature for A.Y. 2005-06 and A.Y. 2006-07.

Analysis:
1. A.Y. 2005-06:
- The assessee, a closely held company, filed a belated return for A.Y. 2005-06, claiming exemption on income from software exports under section 10B.
- The Ld. CIT initiated proceedings under section 263 regarding the treatment of software purchase expenditure as revenue or capital.
- The Ld. CIT directed the A.O. to disallow the software purchase expenditure as capital expenditure, leading to a dispute.
- The ITAT Hyderabad found that the software purchases were used as raw material in the export of software, making them revenue expenditure, not capital.
- The ITAT emphasized that the software purchases were essential components in the manufacturing/export process, not assets, and thus, should be treated as revenue expenditure.
- The ITAT concluded that the Ld. CIT's order under section 263 for A.Y. 2005-06 was unjustified and reinstated the A.O.'s order.

2. A.Y. 2006-07:
- In A.Y. 2006-07, the A.O. treated software purchase expenditure as capital, resulting in a disallowance, which was contested by the Revenue.
- The Ld. CIT(A) provided relief by considering the expenditure as revenue in nature for the manufacturing activity.
- The ITAT upheld the Ld. CIT(A)'s decision, noting that the software purchases were integral to the manufacturing process, warranting treatment as revenue expenditure.
- The ITAT highlighted that the A.O. failed to consider the expenditure for deduction under section 10B, further supporting the assessee's case.
- Consequently, the ITAT dismissed the Revenue's appeal for A.Y. 2006-07, affirming the treatment of software purchase expenditure as revenue.

In summary, the ITAT Hyderabad ruled in favor of the assessee for A.Y. 2005-06, overturning the Ld. CIT's order under section 263. For A.Y. 2006-07, the ITAT upheld the Ld. CIT(A)'s decision, considering software purchase expenditure as revenue, and dismissed the Revenue's appeal. The judgments emphasized that software purchases were essential raw materials for the export business, justifying their treatment as revenue expenditure rather than capital.