2013 (2) TMI 404 - HC - Income Tax

Tax Treatment of Software Expenses and Sales Tax Subsidy Excluded from Business Income

The High Court dismissed the appeals, ruling in favor of treating software expenses as revenue expenditure, excluding sales tax subsidy from business ... Software expenses - revenue v/s capital expenditure - Held that:- In favour of assessee as decided in COMMISSIONER OF INCOME-TAX Versus VARINDER AGRO CHEMICALS LIMITED [2008 (10) TMI 100 - PUNJAB AND HARYANA HIGH COURT] Since technology is fast changing and day-by-day systems are being developed in a new way, software may be needed like raw material - view taken by the Tribunal that computer software expenses were revenue in nature, is correct - against revenue. Sales tax subsidy & discounts received from customer - ITAT treated it as “business income” & directed the A.O not to exclude 90% of the amount of sales tax subsidy from “profits of business” for the purpose of computing deduction u/s 80HHC - Held that:- Neither the sales tax subsidy nor the profits from discounts on early payments is of similar nature to brokerage, commission, interest, rent or charges, which may allow the revenue to deduct profit to the extent of the 90% of such sum for the purposes of Section 80HHC. The judgment in Ravindranathan Nair's case (2007 (11) TMI 10 - SUPREME COURT OF INDIA), relates to processing charges, which will fall within the expression “charges” which are to be reduced by 90% for the purposes of calculating the export income. Therefore, the aforesaid judgment has no applicability to the issue raised in the present case - no substantial question of law arises for consideration . Issues Involved:1. Software expenses treated as revenue or capital expenditure.2. Treatment of sales tax subsidy as business income and its exclusion from profits.3. Exclusion of discounts received from customers from profits for deduction u/s 80HHC.4. Restoration of prior period expenses by the Income Tax Appellate Tribunal.Analysis:Issue 1: Software ExpensesThe High Court addressed whether Software expenses should be considered as revenue or capital expenditure. The Revenue contended that the expenses should be treated as capital expenditure, citing a decision of the Gujrat High Court. However, the Court held in favor of treating the expenses as revenue expenditure. It emphasized that the software was used for overall improvement and functioning, not for developing and selling computer software. The Court rejected the Revenue's argument based on the Gujrat High Court decision and upheld the Tribunal's decision.Issue 2: Treatment of Sales Tax SubsidyRegarding the treatment of sales tax subsidy as business income, the Court examined whether 90% of such subsidy should be excluded from the profits of the business. The Court analyzed Section 80HHC (4C)(baa) of the Act, which deals with deductions from export business profits. It differentiated between receipts like brokerage, commission, and charges, which are eligible for the 90% deduction, and held that sales tax subsidy does not fall under these categories. The Court clarified that the subsidy is not of a similar nature to the specified receipts and, therefore, should not be subject to the 90% deduction. The Court distinguished a previous Supreme Court judgment involving processing charges, which were considered similar to the specified receipts, unlike the sales tax subsidy in the current case.Issue 3: Exclusion of DiscountsThe Court also considered the exclusion of discounts received from customers for the purpose of deduction u/s 80HHC. It analyzed whether such discounts should be reduced by 90% from the profits of the business. Referring to the explanation in Section 80HHC, the Court determined that discounts do not fall under the category of receipts eligible for the 90% deduction. The Court emphasized that discounts are not similar to brokerage, commission, or charges, as specified in the provision. Therefore, the Court upheld the Tribunal's decision regarding the treatment of discounts received.Issue 4: Restoration of Prior Period ExpensesIn the case of restoration of prior period expenses, the Tribunal had remanded the matter to the Assessing Officer for fresh consideration based on previous guidelines. The Court noted that since the matter had been remanded, there was no finding to raise a substantial question of law. Therefore, the Court dismissed the appeal related to this issue.In conclusion, the High Court dismissed the appeals as it did not find any substantial question of law arising from the issues raised by the Revenue. The Court provided detailed reasoning for each issue, emphasizing the interpretation of relevant provisions and distinguishing previous judgments to support its decisions.