2019 (7) TMI 371 - HC - Income Tax

Nature of expenditure - expenses incurred by the assessee for the purchase of software - Revenue or capital expenditure - HELD THAT - Tribunal was fully justified in treating the expenditure as revenue expenditure, as there is no enduring benefit accruing to the assessee. Admittedly, every software has a shelf life and this has been clearly brought out in the order passed by the Tribunal. Therefore, we affirm the common order passed by the Tribunal and the substantial question of law with regard to the expenses incurred by the assessee for the purchase of software is answered against the Revenue. Addition u/s 14A - whether the provisions of Rule 8D of the Income Tax Rules cannot be invoked for computing the expenditure towards earning exempt income for the purpose of disallowance under Section 14A of the Act and as to whether the Tribunal was right in holding that only 2% of the exempt income earned is to be treated as an expenditure for disallowance under Section 14A ? - HELD THAT - The Revenue cannot dispute that this issue has been decided against the Revenue in several cases and admittedly, the assessments in question are prior to 2008-09. Therefore, these questions have to be necessarily decided against the Revenue and accordingly, they are answered against the Revenue. Claim for additional depreciation - whether the Tribunal was right in holding that additional depreciation can be allowed in an assessment year other than the assessment year, in which, the new plant and machinery were acquired and installed - HELD THAT - Revenue does not dispute the position that those issues were considered and decided against the Revenue in the decision in the case of CIT Vs. M/s.Hi Tech Arai Limited 2009 (9) TMI 60 - MADRAS HIGH COURT . Applying the said decision, the other substantial questions of law involved for the assessment year 2008-09 are decided against the Revenue.

Summary

Issues:
1. Treatment of software expenses as revenue or capital expenditure.
2. Applicability of Rule 8D for computing expenditure towards earning exempt income under Section 14A.
3. Allowance of additional depreciation in an assessment year other than the one in which new plant and machinery were acquired.
4. Discrepancy between Tribunal's decision and binding precedents.

Analysis:
1. Treatment of Software Expenses: The High Court considered whether software expenses should be classified as revenue or capital expenditure. The Tribunal justified treating the expenditure as revenue, emphasizing the absence of enduring benefit to the assessee due to the finite shelf life of software. The Court affirmed the Tribunal's decision, ruling against the Revenue.

2. Applicability of Rule 8D: The Court deliberated on whether Rule 8D of the Income Tax Rules could be used to compute expenditure for earning exempt income under Section 14A. The Tribunal's decision to consider only 2% of exempt income as expenditure for disallowance under Section 14A was upheld. The Court also affirmed that Rule 8D was not applicable to pending proceedings, based on previous rulings against the Revenue.

3. Allowance of Additional Depreciation: Regarding the allowance of additional depreciation in an assessment year different from the one in which new plant and machinery were installed, the Court referenced a previous decision against the Revenue in CIT Vs. M/s.Hi Tech Arai Limited. Following this precedent, the Court ruled against the Revenue on this issue for the assessment year 2008-09.

4. Discrepancy with Binding Precedents: The Court addressed discrepancies between the Tribunal's decisions and binding precedents. Notably, the Tribunal's decision contradicted previous rulings, including the case of Brakes India Ltd. The Court found the Tribunal's decision to be in line with past judgments and dismissed the tax case appeals, along with connected CMPs, without costs.

In conclusion, the High Court's judgment covered various issues related to income tax assessments, including the treatment of software expenses, applicability of Rule 8D, allowance of additional depreciation, and adherence to binding precedents. The decisions rendered were based on legal interpretations, past rulings, and the specific facts of each case, ultimately resulting in the dismissal of the tax case appeals.