ITAT Chennai: Appeal success on software expenses, forex loan under review. Exclusion of exchange fluctuation upheld.

The ITAT Chennai allowed the appeal of the assessee regarding the treatment of application computer software expenses as revenue expenditure for upgradation, overturning the decision of the Commissioner of Income-tax (Appeals). The issue of disallowance of loss on a foreign currency loan transaction was remitted back to the Assessing Officer for further examination. Additionally, the exclusion of exchange fluctuation on sales from export turnover for deduction under section 10AA was upheld, following a decision of the Special Bench. The ITAT Chennai partly allowed the assessee's appeal and dismissed the Revenue's appeal in the judgment delivered on June 27, 2014.

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Issues:
1. Treatment of application computer software expenses as capital expenditure.
2. Disallowance of loss on foreign currency loan transaction.
3. Exclusion of exchange fluctuation on sales from export turnover for deduction under section 10AA.

Analysis:

Issue 1: Treatment of application computer software expenses as capital expenditure
The first issue pertains to the treatment of application computer software expenses as capital expenditure. The Assessing Officer considered the software expenses as capital expenditure due to their enduring nature and benefits provided for years. The Commissioner of Income-tax (Appeals) upheld this treatment. However, the assessee contended that the software expenses were for upgradation and should be considered revenue expenditure. Citing a decision of the Madras High Court, the ITAT Chennai held that expenses on upgradation of software are revenue expenditure. Consequently, the ground of appeal of the assessee on this issue was allowed.

Issue 2: Disallowance of loss on foreign currency loan transaction
The second issue revolves around the disallowance of loss on a foreign currency loan transaction claimed by the assessee as a business loss. The Assessing Officer disallowed the loss, citing it as contingent and notional. The Commissioner of Income-tax (Appeals) upheld this disallowance, rejecting the assessee's argument that the loss was a business loss. The ITAT Chennai observed that the Assessing Officer did not adequately examine whether the loan was repaid or outstanding. Therefore, the issue was remitted back to the Assessing Officer for a fresh examination in accordance with the provisions of section 43A of the Act.

Issue 3: Exclusion of exchange fluctuation on sales from export turnover
The final issue concerns the exclusion of exchange fluctuation on sales from export turnover for the purpose of computing deduction under section 10AA. The Assessing Officer excluded exchange gain on export sales, which was later challenged by the assessee. The Commissioner of Income-tax (Appeals) directed the exclusion of exchange fluctuation on export sales from both export turnover and total turnover, following a decision of the Special Bench. The ITAT Chennai upheld this decision, stating that the issue was squarely covered by the decision of the Special Bench and rejected the appeal raised by the Revenue on this issue.

In conclusion, the ITAT Chennai partly allowed the appeal of the assessee for statistical purposes and dismissed the appeal of the Revenue, thereby concluding the judgment delivered on June 27, 2014, in Chennai.

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