2013 (2) TMI 305 - HC - Income Tax

Deduction u/s 80HHE assessee had not taken into consideration the expenditure incurred in foreign currency when computing deduction under section 80HHE Held that - It is well settled that expenses incurred in foreign exchange to provide technical services outside India cannot be included for the export turnover Certificate issued by the chartered accountant as required under section 80HHE(4) would clearly show that the amount that is received is towards providing technical services outside India, in connection with production and development of software and not in connection with export of software or its transmission to its place in India Expenditure incurred pertains to technical services outside India, the same has to be excluded from the turnover for the purpose of arriving at the deduction admissible under section 80HHE of the Act In favour of the Revenue. Membership fee of Club revenue or capital expenditure Held that - As decided in assessee s own case 2013 (2) TMI 305 - Karnataka High Court wherein expenditure on membership of the club was treated as revenue expenditure Against the Revenue. Contribution made to traffic police - Held that - It is well settled that in order to claim deduction under section 37 the expenditure should be wholly for the purpose of business of the assessee and it is well settled that it is the duty of the police to regulate the traffic and the amount spent towards regulation of traffic can at the most be considered as donation Further as decided in CIT v. Neelavathi 2010 (2) TMI 176 - KARNATAKA HIGH COURT contribution made to traffic police would not qualify for deduction under section 37 of the Act In favour of revenue. Expenses incurred for repairs and maintenance of the leased premises - premises had been taken on lease for a period of six years - Held that - As building required extensive repairs and renovation and the same has been done in connection with the business of the assessee to improve the ambience of the office and expenditure was revenue in nature Mere fact that it was taken on lease for six years would not itself render the expenditure capital in nature Repairs that are carried out to use the premises as the office, as there was strict competition in the business and the expenditure cannot at all be said to be capital expenditure - Against the Revenue

Summary

Issues Involved:
1. Deduction under section 80HHE of the Income-tax Act.
2. Classification of expenditure on building repairs as capital or revenue.
3. Deduction of contributions made to traffic police under section 37 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deduction under section 80HHE of the Income-tax Act:
The core issue was whether the foreign exchange expenditure incurred by the assessee should be excluded while computing the deduction under section 80HHE of the Act. The Tribunal initially held that the expenses incurred in foreign currency were for the development and export of software, and thus should not be excluded from the export turnover. However, the High Court found this conclusion erroneous. It emphasized that the certificate issued by the chartered accountant under section 80HHE(4) of the Act indicated that the foreign exchange expenditure was for providing technical services outside India, not for the export or transmission of software. Consequently, the High Court ruled that the expenditure incurred for technical services outside India should be excluded from the export turnover for the purpose of deduction under section 80HHE. This substantial question of law was answered in favor of the Revenue and against the assessee.

2. Classification of expenditure on building repairs as capital or revenue:
The Tribunal had held that the expenditure of Rs. 15,89,613 incurred by the assessee on brick works, cement, plastering, painting walls, laying ceramic tiles, M.S. grill, internal sanitary fixtures, sewerage works, and water supply pipes on leased premises was revenue in nature. The High Court upheld this view, stating that the repairs were necessary for the business and to improve the office ambiance. The repairs were not of an enduring nature and were essential for the business operations. The court distinguished this case from the Supreme Court's decision in Ballimal Naval Kishore v. CIT, where extensive repairs to a purchased property were deemed capital expenditure. Here, the premises were leased, and the repairs were required to make the space suitable for business, thus qualifying as revenue expenditure. This question of law was answered against the Revenue and in favor of the assessee.

3. Deduction of contributions made to traffic police under section 37 of the Income-tax Act:
The Tribunal had allowed the deduction of Rs. 6.93 lakhs contributed to the Bangalore traffic police for regulating traffic at Hosur Road under section 37 of the Act, considering it a business compulsion. However, the High Court disagreed, stating that regulating traffic is a duty of the police and any contribution towards it can be considered a donation, not a business expenditure. The court cited the Division Bench decision in CIT v. Neelavathi, which held that such contributions do not qualify for deduction under section 37. Therefore, the High Court ruled that the contribution to the traffic police could not be deducted under section 37, answering this question of law in favor of the Revenue and against the assessee.

Order:
The High Court allowed I.T.A. Nos. 2972 of 2005 and 2974 of 2005, setting aside the Tribunal's order in I.T.A. Nos. 794/Bang/1998 and 795/Bang/1998. In I.T.A. No. 2973 of 2005, the court allowed the appeal, setting aside the Tribunal's order regarding the deduction under section 80HHE and the contribution to the traffic police but confirmed the Tribunal's order on other aspects.