2015 (10) TMI 994 - AT - Income Tax

Application computer software - revenue v/s capital expenditure - Held that - As could be seen from the observation of the High Court in the case of CIT v. Southern Roadways Ltd. 2006 (10) TMI 82 - MADRAS HIGH COURT that the expenditure incurred on upgradation of software is revenue expenditure. Respectfully following the said decision, we allow the ground of appeal of the assessee on this issue - Decided in favour of assessee. Disallowance of loss of transaction of foreign currency loan - Held that - The Assessing Officer though stated in the assessment order that if borrowing is for capital asset, the exchange loss already suffered would require to be capitalised in the context of the present law after the substitution of section 43A with effect from the assessment year 2003-04, he has not dealt with the issue on those lines. The Assessing Officer also did not examine as to whether the assessee has repaid the loan, etc. or it is still outstanding. In the circumstances, we are of the view that this issue has to be examined afresh in accordance with law with reference to the provisions of section 43A of the Act after ascertaining the facts from the assessee as to whether the entire loan was repaid or outstanding or partly repaid or outstanding, as the submission of the assessee was that loan was repaid and the losses incurred by the assessee on foreign exchange fluctuation of FCNR, the loan is not a contingent liability. Therefore, in the light of the submissions of the assessee and also since the lower authorities have not examined this issue, we remit this issue back to the Assessing Officer with a direction to apply provisions of section 43A of Act and decide this issue in accordance with law after providing adequate opportunity to the assessee. - Decided in favour of assessee for statistical purposes. Exclude exchange fluctuation on sales both from export turnover and total turnover for the purpose of computing deduction under section 10AA - Held that - As the Commissioner of Income-tax (Appeals) by following the decision of the Special Bench in the case of ITO v. Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D and directed to exclude foreign exchange fluctuation from both export turnover and total turnover for the purpose of computing deduction under section 10AA of the Act, we do not find any infirmity in the impugned order and uphold the same.- Decided against revenue.

Summary

Issues:
1. Treatment of application computer software expenses as capital expenditure.
2. Disallowance of loss on foreign currency loan transaction.
3. Exclusion of exchange fluctuation on sales from export turnover for deduction under section 10AA.

Analysis:

Issue 1: Treatment of application computer software expenses as capital expenditure
The first issue pertains to the treatment of application computer software expenses as capital expenditure. The Assessing Officer considered the software expenses as capital expenditure due to their enduring nature and benefits provided for years. The Commissioner of Income-tax (Appeals) upheld this treatment. However, the assessee contended that the software expenses were for upgradation and should be considered revenue expenditure. Citing a decision of the Madras High Court, the ITAT Chennai held that expenses on upgradation of software are revenue expenditure. Consequently, the ground of appeal of the assessee on this issue was allowed.

Issue 2: Disallowance of loss on foreign currency loan transaction
The second issue revolves around the disallowance of loss on a foreign currency loan transaction claimed by the assessee as a business loss. The Assessing Officer disallowed the loss, citing it as contingent and notional. The Commissioner of Income-tax (Appeals) upheld this disallowance, rejecting the assessee's argument that the loss was a business loss. The ITAT Chennai observed that the Assessing Officer did not adequately examine whether the loan was repaid or outstanding. Therefore, the issue was remitted back to the Assessing Officer for a fresh examination in accordance with the provisions of section 43A of the Act.

Issue 3: Exclusion of exchange fluctuation on sales from export turnover
The final issue concerns the exclusion of exchange fluctuation on sales from export turnover for the purpose of computing deduction under section 10AA. The Assessing Officer excluded exchange gain on export sales, which was later challenged by the assessee. The Commissioner of Income-tax (Appeals) directed the exclusion of exchange fluctuation on export sales from both export turnover and total turnover, following a decision of the Special Bench. The ITAT Chennai upheld this decision, stating that the issue was squarely covered by the decision of the Special Bench and rejected the appeal raised by the Revenue on this issue.

In conclusion, the ITAT Chennai partly allowed the appeal of the assessee for statistical purposes and dismissed the appeal of the Revenue, thereby concluding the judgment delivered on June 27, 2014, in Chennai.