2013 (12) TMI 309 - HC - Income Tax

Provisions on ascertained liability - Held that - The Tribunal on examining each of the contract entered into between the respondent-assessee and its clients has recorded a finding of fact with regard to the provisions made and determined that some of the provisions are made on the basis of ascertained liabilities, while others are not - The Tribunal on the basis of the results of its examination of the facts allowed the provisions made to the extent they were ascertained in nature and disallowed those which were made on the basis of the estimates - Decided against Revenue. Software development expenses - Held that - The expenses were in the nature of software maintenance expenses - These expenses cannot result in any benefit of enduring nature so as to be called capital expenses - Decided against Revenue.

Summary

Issues:
1. Treatment of provisions made for contracts as ascertained liabilities.
2. Characterization of software development charges as revenue in nature.

Analysis:
1. The first issue pertains to the treatment of provisions made for contracts as ascertained liabilities. The Assessing Officer disallowed the claim of provisions made totaling Rs. 5.61 crores, stating they were not ascertained liabilities. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Tribunal, upon examining each contract between the respondent-assessee and its clients, differentiated between provisions made on the basis of ascertained liabilities and those based on estimates. The Tribunal allowed provisions made to the extent they were ascertained and disallowed those based on estimates. Since this determination is a factual finding, the High Court declined to entertain this question.

2. The second issue concerns the characterization of software development charges as revenue in nature. The Tribunal concluded that expenses related to software development were akin to software maintenance expenses, including annual maintenance contracts, upgradation, and antivirus installation. The Tribunal held that these expenses did not result in any enduring benefit to be classified as capital expenses, contrary to the Revenue's argument. Given that this finding is also based on factual analysis, the High Court found no grounds to consider this question further.

In conclusion, the High Court dismissed the appeal by the Revenue for the assessment year 2004-05, as both issues raised were determined by the Tribunal as factual findings. No costs were awarded in this matter.