2004 (7) TMI 287 - AT - Income Tax

Disallowance of software expenses written off in the books as capital expenditure - Recomputation of deduction u/s 80HHE - Depreciation on certain old assets - repairs and maintenance expenses - HELD THAT - Upon hearing the parties and on perusal of the material available on record, we are in agreement with the findings of the learned CIT(A) that a software does not have any degree of endurability and permanence due to change of system and change of technology. The case law relied upon by the CIT(A) are squarely applicable to the case of the assessee. With regard to the reference by the AO to cl. (xi) in s. 36 by Finance Act, 1999, we agree with the assessee that it refers to computer system and not to software programme and, therefore, the same is misplaced. Thus, we uphold the order of the CIT(A) on this issue. This ground of the Revenue fails. Deduction under s. 80HHE - The CIT(A) agreeing with the contention of the assessee that the exchange gain does not represent surplus arising out of sales realisation held that it should not form part of total turnover while computing deduction u/s 80HHE of the Act. He further found that the assessee on its own has included in the total turnover exchange gain towards difference in exchange actually realised. This factual finding of the learned CIT(A) was not specifically challenged before us, hence we do not see any merit in the ground of the Revenue. This ground also fails. Depreciation on certain old assets written off in the books - The learned CIT(A) observed that the assessee had not received any money in wake of the discarding of the assets, therefore, the assets continue to form a part of the block. Therefore, the assessee was justified in claiming depreciation on the same. While arriving at this conclusion he placed reliance on the decision of the Tribunal, Ahmedabad Bench, in the case of Inductotherm (India) Ltd. vs. Dy. CIT 1999 (6) TMI 45 - ITAT AHMEDABAD-C , wherein it was held that the claim regarding depreciation is in accordance with law. We have considered the arguments from both sides and perused the material available on record. We do not find any infirmity in the order of the CIT(A). We uphold the same. Repairs and maintenance to software items - The CIT(A) decided the issue on the basis of decision arrived at thereon in ground No. 1 discussed above, relying on the decision of Supreme Court in Alembic Chemicals Works Co. Ltd. 1989 (3) TMI 5 - SUPREME COURT and Tribunal, Jaipur Bench, decision in the case of Business Information Processing Services 1999 (4) TMI 124 - ITAT JAIPUR for the proposition that with speedy advances in technology, it would be wrong to attribute a degree of durability to software items in this fast changing era of information technology. We do not find any infirmity in the order of the CIT(A) so as to call for our interference. We uphold the order of the CIT(A). This ground of the Revenue fails. In the result, appeal filed by the Revenue is dismissed.

Summary

Issues involved:
The judgment involves issues related to the deletion of disallowance of software expenses, recomputation of deduction under section 80HHE, acceptance of depreciation claim, and cancellation of disallowance of repairs and maintenance expenses.

Deletion of Disallowance of Software Expenses:
The Revenue appealed against the deletion of disallowance of Rs. 41,20,000 for software expenses, arguing that software does not have enduring permanence due to technological changes. The assessee contended that software technology evolves rapidly, becoming obsolete quickly, and should be treated as revenue expenditure. The CIT(A) allowed the claim, citing relevant case law and emphasizing the changing nature of software technology. The ITAT upheld the CIT(A)'s decision, stating that software lacks enduring permanence and siding with the assessee's arguments.

Recomputation of Deduction under Section 80HHE:
The second issue pertained to the deduction under section 80HHE, where the AO made an addition towards exchange gain, which the CIT(A) ruled should not be part of total turnover for the deduction calculation. The ITAT agreed with the CIT(A)'s findings, noting that the exchange gain did not represent surplus from sales realisation, thus dismissing the Revenue's ground.

Acceptance of Depreciation Claim:
Regarding the depreciation claim of Rs. 15,32,824 on old assets, the assessee justified the claim based on the assets still forming part of the block of fixed assets. The CIT(A) supported the claim, referencing relevant provisions and a Tribunal decision. The ITAT upheld the CIT(A)'s decision, finding no fault in the assessment.

Cancellation of Disallowance of Repairs and Maintenance Expenses:
The final issue involved the disallowance of repairs and maintenance expenses for software items amounting to Rs. 3,41,000. The CIT(A) based the decision on the earlier discussion on software expenses, emphasizing the rapid changes in technology. The ITAT upheld the CIT(A)'s decision, stating no need for interference. Consequently, the appeal filed by the Revenue was dismissed.