2008 (6) TMI 327 - HC - Income Tax

Capital and revenue expenditure Held that Expenditure on upgradation of computers is a revenue expenditure - Expenses incurred in purchase of software components is to be treated as revenue expenditure Held that excise duty and sales tax cannot form part of the total turnover under section 80HHC(3)

Summary

Issues:
1. Treatment of software purchase expenditure as capital or revenue.
2. Classification of interest income for deduction under section 80HHC.
3. Treatment of written back provision and exchange rate difference in business profits.
4. Exclusion of sales tax collections from business profits for deduction under section 80HHC.

Analysis:
1. The appeals related to the assessment year 2001-02 against the common order passed by the Income-tax Appellate Tribunal. The assessee, a manufacturer of automobile components, initially declared total income and later revised it. The Assessing Officer treated software purchase expenditure as capital, while the assessee claimed it as revenue. The Commissioner of Income-tax (Appeals) confirmed the capital nature of the expenditure. However, the Tribunal directed the Assessing Officer to verify the software purchase details before making a final decision, considering the enduring benefit aspect of the expenditure. The court cited precedents emphasizing flexibility in distinguishing capital and revenue expenditure based on economic realities.

2. Regarding interest income from various deposits, the Tribunal allowed a 10% deduction under section 80HHC for certain components. The Commissioner of Income-tax (Appeals) had directed the inclusion of specific sums as business income for the purpose of deduction. The Tribunal's decision was based on the clause (baa) of the Explanation to section 80HHC, allowing the deduction. The court did not find any legal issues arising from this aspect of the case.

3. The Tribunal also ruled on the treatment of written back provision and exchange rate difference in business profits. It held that these should not be excluded from the profit calculation under section 80HHC. The Commissioner of Income-tax (Appeals) had similarly connected these provisions directly to business activities, resulting in a reduced impact on business profits. The court upheld the Tribunal's decision on this matter, finding no legal grounds for challenge.

4. The issue of excluding sales tax collections from business profits for deduction under section 80HHC was raised in one of the appeals. Citing the Supreme Court decision in a similar case, the court agreed with the interpretation that certain receipts like excise duty and sales tax should not be part of 'total turnover' for the deduction calculation. This decision was based on the need to ensure the workability of the formula in section 80HHC and to maintain the nexus with export activities. Consequently, the court dismissed the appeals as the questions of law had already been addressed in previous judgments.