Section 10AA deduction and software expenditure classification were applied by distinguishing eligible-unit loss set-off and capital versus revenue outlay.
Section 10AA deduction is to be computed at the level of the eligible undertaking before Chapter VI set-off is applied, so the unit's loss is determined independently and not first adjusted against income from other units; the explanatory amendment was treated as declaratory, and the Revenue's view was rejected. Software expenditure is classified by nature: items conferring enduring benefit or acquired rights of use are capital in nature and qualify only for depreciation, while routine software, antivirus, upgrading and control software are revenue expenditure. The appellate treatment on this issue was upheld, and the Revenue's challenge failed on both points.
Issues: (i) Whether loss of the eligible unit under section 10AA could be set off against income from other units while computing total income. (ii) Whether the software-related expenditure was to be treated as capital expenditure or revenue expenditure.
Issue (i): Whether loss of the eligible unit under section 10AA could be set off against income from other units while computing total income.
Analysis: The deduction under section 10AA was held to operate at the stage of computing the gross total income of the eligible undertaking. The income or loss of the eligible unit was to be determined independently, and the set-off provisions under Chapter VI were not to be applied before that stage. The statutory circular and the later explanatory amendment supported the view that section 10AA is a deduction provision and not an exemption provision, and the amendment was treated as declaratory.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Issue (ii): Whether the software-related expenditure was to be treated as capital expenditure or revenue expenditure.
Analysis: The software items giving enduring benefit and acquired rights of use were treated as capital in nature, while routine software, antivirus, upgrading and control software were treated as revenue in nature. Depreciation at the prescribed rate was allowed on the capitalised portion, and no infirmity was found in the appellate order.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Final Conclusion: The Revenue's appeal failed in entirety, and the additions deleted or restricted by the appellate authority were sustained.
Ratio Decidendi: Section 10AA relief is to be worked out at the level of the eligible undertaking before Chapter VI set-off, and software expenditure must be classified according to whether it creates an enduring capital asset or is merely routine revenue outlay.
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