Year-wise deduction and software licence expenditure can qualify, while finance-lease TDS disallowance under section 194C fails.

Section 80JJAA is applied year-wise over the statutory three-year period, so failure to satisfy the 300-day condition in the first year does not defeat eligibility in later years if those years meet the statutory requirements. Expenditure on an abandoned expansion project, including capital work in progress write-off and related damages, remains capital in character because it is connected with bringing a capital asset into existence, subject only to verification to avoid double disallowance. Additional depreciation depends on the nature and use of the disputed assets and may require fresh factual examination. Finance-lease rentals were not shown to be payments for carrying out work under section 194C, and software used under a licence without proprietary rights was treated as revenue expenditure.

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Issues: (i) whether deduction under section 80JJAA was allowable for the second and third years of the statutory three-year period where the first year's claim had failed on the 300-day condition; (ii) whether the write-off of capital work in progress and related damages was allowable as revenue expenditure; (iii) whether the claim for additional depreciation on the disputed assets was sustainable; (iv) whether lease rentals under a finance lease attracted deduction of tax at source under section 194C; and (v) whether expenditure on data automation software was revenue or capital in nature.

Issue (i): whether deduction under section 80JJAA was allowable for the second and third years of the statutory three-year period where the first year's claim had failed on the 300-day condition.

Analysis: The deduction under section 80JJAA is available for three assessment years including the year of recruitment, and the entitlement has to be examined year-wise. Failure to satisfy the 300-day condition in the first year does not extinguish the claim for the succeeding years if the statutory conditions are met in those years. The later curative amendment was also treated as clarificatory of the intended position.

Conclusion: The deduction under section 80JJAA was allowable in favour of the assessee for the relevant year.

Issue (ii): whether the write-off of capital work in progress and related damages was allowable as revenue expenditure.

Analysis: The expenditure related to an abandoned expansion project and was directly connected with bringing a capital asset into existence. An identical claim had earlier been treated as capital in nature, and the same character attached to the damages paid under the development arrangement because they had nexus with the abandoned capital project. Only the overlapping component that had already been disallowed on another footing required verification to avoid double addition.

Conclusion: The claim was not allowable as revenue expenditure except to the limited extent requiring verification for possible double disallowance, which was left to the assessing authority.

Issue (iii): whether the claim for additional depreciation on the disputed assets was sustainable.

Analysis: Additional depreciation under section 32(1)(iia) requires acquisition and installation of new machinery or plant by an assessee engaged in manufacture or production of an article or thing; it is not necessary that the new plant itself must directly participate in manufacture. The record was insufficient to decide whether the disputed items were plant or merely office equipment, so the matter required fresh examination on facts.

Conclusion: The disallowance was set aside for fresh consideration, and the assessee obtained relief to the extent of remand.

Issue (iv): whether lease rentals under a finance lease attracted deduction of tax at source under section 194C.

Analysis: Payment under a finance lease was not shown to be a payment for carrying out any work within the meaning of section 194C. The disallowance under section 40(a)(ia) based on section 194C could not therefore be sustained on the reasoning adopted by the assessing authority.

Conclusion: The disallowance was deleted in favour of the assessee.

Issue (v): whether expenditure on data automation software was revenue or capital in nature.

Analysis: The assessee had only a right to use the software under a group licensing arrangement and did not acquire ownership or any enduring proprietary interest in it. The software functioned as an operational tool in the business, and the expenditure was therefore revenue in character.

Conclusion: The expenditure was allowable as revenue expenditure in favour of the assessee.

Final Conclusion: The assessee succeeded on the statutory deduction for employment of new workmen, the finance-lease TDS issue, and the treatment of software expenditure, while the capital work in progress and additional depreciation issues were rejected or sent back for limited factual reconsideration.

Ratio Decidendi: A deduction provision granting a benefit for a specified multi-year period must be applied year-wise according to the conditions existing in each year, and where an assessee acquires only a licence to use software without proprietary rights, the expenditure is ordinarily revenue in nature.

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