2012 (7) TMI 589 - HC - Income Tax

High Court affirms software development as revenue expenditure under Section 10B

Commissioner of Income Tax Chennai Versus Shri Renuga Textiles Mills Limited

The High Court affirmed the decisions of the lower authorities regarding the eligibility of the amalgamated company for exemption under Section 10B and ... Eligibility of amalgamated company for exemption u/s 10B - Held that:- As in the case the subsidiary company amalgamated with the holding company with effect from 1.1.93 and as a result of the merger, the business of the amalgamating company became the business of the assessee company. Given the fact that the assessee is a holding company of the subsidiary company, when the assets stood transferred to the amalgamated company, evidently, the export business done by the assessee is not a business formed by splitting up or reconstruction of a business already in existence. As far as sub clause (iii) of Section 10B(2) is concerned, the criteria for grant of the relief is that the undertaking is not formed by transfer to a new business of machinery or plant previously used for any purpose - Extending the said decision to sub clause (iii) of Section 10B(2) it is clear that as a result of the merger of the subsidiary company with the holding company, there is no new business formed by transfer of machinery or plant previously used for any business - the assessee's status as 100% EOU and after the deletion of Section 84 and insertion of 80J and thereafter benefit under Section 10B being attached to the undertaking no point of not extending the claim of exemption u/s 10B Development of software - a revenue expenditure or capital expenditure ? - Held that:- As decided in ALEMBIC CHEMICAL WORKS CO., LTD, [1989 (3) TMI 5 - SUPREME COURT] that upgradation of computers by changing certain parts, thereby enhancing the configuration of the computers for improving their efficiency, was only a revenue expenditure - in favour of assessee. Issues:1. Eligibility of amalgamated company for exemption under Section 10B2. Classification of development of software as revenue or capital expenditureIssue 1: Eligibility of amalgamated company for exemption under Section 10BAnalysis:The case involved a dispute regarding the eligibility of the amalgamated company for exemption under Section 10B of the Income Tax Act. The amalgamated company, a holding company, merged with a subsidiary company, which was a 100% Export Oriented Unit (EOU). The subsidiary had received recognition as a 100% EOU from the Government of India. The Revenue contended that the amalgamated company was not entitled to the exemption as the subsidiary had opted out of the benefit in a previous assessment year. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld the claim of the assessee, stating that the benefit was attached to the undertaking and not to the ownership. The Tribunal also referred to a CBDT circular supporting this view. The High Court agreed with the assessee, emphasizing that the benefit under Section 10B is linked to the undertaking, and the amalgamation did not result in the formation of a new business. The Court also considered the recognition of the amalgamated company as a 100% EOU by the Government of India, further supporting the assessee's claim.Issue 2: Classification of development of software as revenue or capital expenditureAnalysis:Regarding the classification of development of software as revenue or capital expenditure, the High Court referred to previous decisions where it was held that certain enhancements to computers for improving efficiency constituted revenue expenditure. In this case, the Court confirmed the Tribunal's order that development of software was a revenue expenditure based on previous judicial precedents. The Court cited relevant case laws to support this conclusion, emphasizing that the upgradation of computers by changing certain parts was considered a revenue expenditure. Therefore, the Court upheld the Tribunal's decision on this aspect of the case.In conclusion, the High Court dismissed the appeal, affirming the decisions of the lower authorities regarding the eligibility of the amalgamated company for exemption under Section 10B and the classification of development of software as a revenue expenditure. The judgment provided a detailed analysis of the legal provisions, case laws, and factual circumstances to support its conclusions on both issues raised in the appeal.