Final decision treats software costs as revenue expenditure for AY 2001-02, allowing s.80HHC deduction for taxpayer

HC affirmed that software expenditure constituted revenue, not capital, for assessment year 2001-02. Relying on the Tribunal's earlier final order in the taxpayer's own case (the Revenue's appeal for that year having been dismissed for failure to remove objections), the software costs were allowed as revenue expenditure, affecting total turnover and deduction under s. 80HHC. Decision rendered in favor of the taxpayer.

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Issues:
1. Whether software expenditure should be considered capital or revenue expenditure.
2. Whether scrap sales should be included in the total turnover for computing eligible deduction under section 80HHC of the Act.

Analysis:

Issue 1:
The first issue pertains to the classification of software expenditure as capital or revenue expenditure. The Tribunal, based on its previous order for the assessee's case for the assessment year 2001-02, determined that the software expenditure should be treated as revenue expenditure. The Tribunal emphasized that the software did not form part of the profit-making apparatus of the assessee but rather facilitated trading operations and management efficiency. The Tribunal's decision was supported by a functional test and a Special Bench judgment. The High Court concurred with the Tribunal's reasoning, upholding the allowance of software expenditure as revenue expenditure.

Issue 2:
The second issue involves the treatment of scrap sales for computing the eligible deduction under section 80HHC of the Act. Both parties agreed to refer to the judgment in CIT vs. Dresser Rand India (P) Ltd. for fresh consideration. Following this agreement, the High Court ordered the restoration of the second question to the Tribunal for reevaluation in light of the Dresser Rand India (P) Ltd. judgment. Consequently, the High Court disposed of the appeal accordingly, allowing for a fresh assessment of the scrap sales issue by the Tribunal based on the referenced judgment.

In conclusion, the High Court upheld the Tribunal's decision regarding the software expenditure as revenue expenditure and directed a reconsideration of the scrap sales issue in line with the Dresser Rand India (P) Ltd. judgment.

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