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TMI Blog2010 (2) TMI 744X X X X Extracts X X X X X X X X Extracts X X X X ..... s and other advances as 'income from Other sources'; In not including the said interest in profits derived from Export Oriented Undertakings [EOU] for computing the deduction u/s 10-A of the Act; (ii) in disallowing the amounts paid to LIC towards contribution for Employees' Gratuity Fund as the provisions of s.40A(7) and 40A(9) of the Act have no application; (iii) in treating the expenses on application of software as capital expenditure; (iv) the CIT(A) erred in directing the AO to restrict the allow ability of depreciation at 25% instead of 60% allowed by the AO; and (v) For the AY 2001-02 - the CIT (A) erred in disallowing Rs.1.66 lakhs, a purported liability due to Cochin SEZ which was neither claimed by the assessee as an expenditure nor disallowed by the AO. II. A.Ys 2001-02, 02-03 and 03-04 - ITA NOS: 174 and 175/06 and 563/COCH/07: For the AYs 01-02 and 02-03: 3. (i) The Revenue has raised five identical issues in the grounds of appeal. Ground Nos: 1 and 5 being general and no specific issues involved, they are treated as non-consequential. In the remaining grounds, the crux of the issue is confined to- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r such fund had been obtained from the appropriate authority and, hence, he had resorted to the said disallowances. (iii) for the reasons set-out in the impugned orders, the AO had treated the software expenses as capital expenditure and disallowed the same. As these were treated as computers for the depreciation purposes, he had allowed depreciation at 60%. 6. Aggrieved, the assessee took up the issues before the Ld.CIT(A) for redressal. After giving due weight-age to the emphatic contentions of the assessee, the Ld. CIT (A) had observed thus - (i) In treating the interest on deposits as income from "Other sources" - "3.................The appellant has admitted that interest is essentially earned on deposits of surplus funds available with the company or on deposits made under contractual and legal obligations during the course of business. There can be no doubt that interest received on deposits of surplus funds is to be assessed under the head income from other sources. The Kerala High court in the case of CIT vs. G. Sathish Nair (264 ITR 377) held that even in a case where margin money was deposited with a bank for opening letter of credit for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of depreciation, the finding of the CIT(A) was that- "6.2.:...............As per the depreciation table, as applicable to the asst. year 2002-03 no mention is made about software, though higher rate of 60% is provided in the table for computers. However, the Depreciation Table for the asst. years 2003-04 to 2005-06 provides that computer including computer software is to be given depreciation @ 60%. In the depreciation table effective for the asst. years 2006-07 onwards also computer including computer software is to be allowed depreciation @ 60%. Thus, till the asst. year 2003-04, the computers software were not specifically treated as an asset on which higher rate of depreciation is to be allowed. Further, in the depreciation table applicable for asst. years 2003-04 onwards computer software is defined as 'any computer programme recorded on any disk tape, perforated media or other storage device'. In view of the fact that in the depreciation table computer software is recognized as an asset eligible for normal rate of depreciation for the asst. years upto the asst. year 2002-03. it would mean, in the absence of specific provision granting higher rate of depreciation, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectively. The amounts pertain to interest earned on surplus funds invested with banks and on deposits made under contractual and statutory obligations and the income so earned was treated as 'business income '; (ii) temporary surplus funds were deposits with banks or as short term deposits but these remained as business funds and not as investment in bank deposits and, thus, the interest income arising out of surplus funds had arisen during the course of the business; (iii) the assessee had also advanced a loan to a group company for whom the assessee undertakes substantial tool manufacture. The assessee had advanced funds to the group company to provide financial support for their capital expansion programme in setting up a new connector line which in turn would have enabled the assessee to obtain additional tooling orders. Further, the rate of interest charged was also higher than comparable bank rates which establishes the business relation between the assessee and the borrower company and, therefore, the interest received on the loan from the borrower company can only be treated as income in the course of business; (iv) reliance is placed on the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butions on receipt of approval of the CIT; Expenses on application software: (x) The assessee had debited certain expenses incurred towards purchase of application software to P and L account. Such software was in the nature of application software and does not result in an enduring benefit for the company, and, accordingly, debited to P and L a/c and claimed as deduction u/s 37(1) of the Act; Reliance is placed on the following case laws: (a) Praga Tools Limited vs. CIT (1980) 123 ITR 773 (AP); (b) Empire Jute co. Ltd. vs. CIT (1980) 124 ITR 001 (SC) (c) CIT vs. Kusum Products Ltd. (1984) 149 ITR 250 (Cal); (d) CIT vs. Varinder Agro Chemicals Ltd. (2008) 309 ITR 272 (PandH); (e) GE Capital Services India vs. DCIT (2006) 106 TTJ 65 (Delhi) (f) IBM India Ltd. vs. CIT (2006) 108 TTJ 531 (Bangalore) Given the facts of the case and the judicial precedence in this regard, such expenses incurred towards purchase of application software should be treated as revenue expenditure; With regard to reducing the rate of depreciation on computer software by the CIT(A)which has resulted in an enhancement of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the authorities below in treating such income as 'income from other sources". We draw strength from the latest finding of the Hon'ble I.T.A.T, Delhi 'C Bench in Global Vantedge P. Ltd. vs. DCIT (and vice versa) reported in (2010) 1 ITR (Trib) 326 wherein the Hon'ble Tribunal has held that 'interest earned on fixed deposits and miscellaneous income was not the profit derived by an undertaking from export'. 8.1. Section 10A grants exemption only in respect of such profits and gains as are derived by an undertaking from the export of articles or things or computer software. The highest judiciary of the land in the case of Cambay Electric supply Industrial Co. Ltd. (1978) 113 ITR 84 had in its wisdom held that the words 'derived from' are narrower in scope than the words 'attributable to'. Yet an another verdict in the case of CIT vs. Sterling Foods (1999) 237 ITR 579, the Hon'ble Apex Court was very emphatic that "unless the source of the income is from an industrial undertaking, such income cannot be regarded as 'derived from' an industrial undertaking." While concurring with a similar view, the Hon'ble Madras High Court in the case of CIT vs Menon Impex P. Ltd. reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be resorted to only after issuance of a Notice to the assessee as required under the provisions of s.251(2) of the Act. This fact has not precisely been observed by the Ld. CIT(A). 8.2.2. In taking into account the facts and circumstances of the issue and in the interest of justice, we are of the considered view that this issue should be remitted back on the file of the Ld.CIT(A). In the case of Amway India Enterprises vs. DCIT reported in 114 TTJ (Del) (SB) 476, the Special Bench has considered the allowability of expenditure incurred on acquisition of software. After elaborately considering the precedents on the subject, the Special Bench of the Tribunal has laid down various tests to determine whether the expenditure involved is capital or revenue. We deem it appropriate, in the light of the dictum laid down by the Special Bench of the Tribunal cited supra, to remit the matter back to the file of the CIT(Appeals) to examine the question whether the expenditure on acquisition of computer software is capital or revenue. In the event the CIT(Appeals) holds the same as capital expenditure, the rate of depreciation which the assessee is entitled. It is ordered accordingly. & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. " The provisions of section 80HHC of the Act wherein the term 'total turnover' has been defined to exclude freight or insurance attributable to the transport of the goods of merchandise outside India. The said definition was brought into the section by the Finance Act (No.2) 1991. The Memorandum explaining the provisions of the Finance (No.2)Bill 1991 stated that 'whereas the definition of the term 'export turnover' excludes freight and insurance attributable to transport, in c.i.f. transactions, while the export turnover is taken at f.o.b value, the total turnover includes the sale proceeds of exports at c.i.f value. With a view to removing this anomaly, it was proposed to clarify that 'total turnover' will also not include such freight or insurance". Thus, the Legislature itself had sought to amend the Act to align the definition of the term 'total turnover' with 'export turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 2002-03. It is ordered accordingly. 10. For the AY 2003-04, the other ground agitated by the Revenue is with regard to the action of the Ld. CIT (A) in directing the AO to treat the interest on bank deposits and other advances as income from "business". 10.1. The Ld. CIT (A)'s observations, as culled out from the impugned order under dispute, are that - "2................The AO has relied on the Kerala High Court decision in the case of M/s.Collis Line P.Ltd- 135 ITR 390 - and Cochin Refineries Ltd. - 154 ITR 345. The counsel of the assessee has distinguished these decisions that the first decision is in respect of whether interest shall be taken as business income for the limited scope of computation of deduction u/s 80HHC and the other decision, i.e., in the case of Cochin Refineries, the issue has not been exactly dealt from this point of view. The AO in his letter dated 13.11.2006 has reiterated the same arguments. The appellant, however, relies on the decision of the Calcutta High Court in 193 ITR 253 where the issue has been adjudicated in the proper perspective. The Court has held that it is the assessee's surplus business receipts earned out of c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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