Are expenses incurred on purchase of software components in the nature of capital expenditure or revenue expenditure?

Are expenses incurred on purchase of software components in the nature of capital expenditure or revenue expenditure?

Case : CIT v. Sundaram Clayton Ltd. (2010) 321 ITR 69 (Mad.)

Facts :

Section 37(1) of the Income-Tax Act

The High Court observed that this issue is covered by its decision in the case of CIT v. Southern Roadways Ltd. (2007) 288 ITR 15. In that case, it was held that the upgradation of computers by changing certain parts thereby enhancing the configuration of the computers for improving their efficiency, but without making any structural alterations is not a change of an enduring nature.

Therefore, applying the ratio of the above decision in this case, the Madras High Court held that the expenditure incurred on purchase of software components has to be treated as a revenue expenditure.

Can additional depreciation under section 32(1)(iia) of the Income-Tax Act on setting up of a windmill by an assessee manufacturing textile goods ?

Can additional depreciation under section 32(1)(iia) of the Income-Tax Act  on setting up of a windmill  by an assessee manufacturing textile goods ?

Case: CIT v. VTM Limited (2009) 319 ITR 336 (Mad.)

The assessee is a company engaged in the business of manufacture of textile goods. It claimed additional depreciation on the setting up of wind mills for generation of power. The Revenue contended that the setting up of a windmill for generation of power had absolutely no connection with the business of the company i.e. for the manufacture of textile goods, and, therefore, the company was not entitled to claim the additional depreciation under section 32(1)(iia).

The High Court held that in order to claim the benefit of section 32(1)(iia), what is required to be satisfied is that the new machinery or plant should have been acquired and installed after March 31, 2002 (March, 31, 2005, as per the amended provisions), by an assessee, who was already engaged in the business of manufacture or production of any article or thing.

 

 The provision does not state that the setting up of a new machinery or plant should have any operational connectivity to the article or thing that is already being manufactured by the assessee. Hence, it was held that the assessee is entitled to additional depreciation on setting up of a wind mill.

Whether subsidy received from government for establishing a hotel is a capital receipt or not ?

Whether subsidy received from government for establishing a hotel is a capital receipt or not ?

Case : CIT v. Udupi Builders P. Ltd. (2009) 319 ITR 440 (Kar.)

Facts

AO held it as revenue receipt. The Commissioner (Appeals) held that the subsidy had been granted to the assessee by the State Government as per the package of incentives and concessions and that it was towards investment and not a revenue receipt. The Tribunal confirmed the order passed by the Commissioner (Appeals).

 

An appeal to High Court by the revenue , it was argued by the Revenue that since the subsidy is received by the assessee after completion of the hotel project and commencing of the business, such receipt has to be taken as a revenue receipt and not a capital investment.

The High Court held that the hotel industry was established based on the subsidy announced by the State Government to encourage tourism and the State Government was in the habit of releasing the subsidy amount depending upon the budgetary allocation in each year. In several cases, the State Government had released the subsidy amount even after ten years of the commencement of the project. Therefore, the subsidy received has to be treated as a capital receipt and would not be liable to tax.

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Whether liquidated damages received by a company from the supplier of plant for failure to supply machinery to the company within the stipulated time – a capital receipt or a revenue receipt?

Case: CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)

Facts

 

 The assessee, a cement manufacturing company, entered into an agreement with a supplier for purchase of additional cement plant. One of the conditions in the agreement was that if the supplier failed to supply the machinery within the stipulated time, the assessee would be compensated at 5% of the price of the respective portion of the machinery without proof of actual loss. The assessee received Rs.8.50 lakhs from the supplier by way of liquidated damages on account of his failure to supply the machinery within the stipulated time. The Department assessed the amount of liquidated damages to income-tax. However, the Appellate Tribunal held that the amount was a capital receipt and the High Court concurred with this view.

The Apex Court affirmed the decision of the High Court holding that the damages were directly and intimately linked with the procurement of a capital asset i.e., the cement plant, which lead to delay in coming into existence of the profit-making apparatus. It was not a receipt in the course of profit earning process. Therefore, the amount received by the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of business, is a capital receipt in the hands of the assessee.

Without questioning the business purpose of the trip,  ad hoc disallowance of foreign tour expenditure not maintainable

Case: Amit Jain Vs ITO (ITAT Kolkata)

FACTS

Assessee made a foreign trip to Kathmandu Dubai and Rome and claimed certain expenses as his foreign travel expenses.  However, the Assessing Officer required the assessee to present the evidence and also business connection for such trip. Assessee argued that foreign tour was for inspection interiors of foreign hotels and resorts.

Assessing Officer, since the appellant did not offer any evidence, he treated twenty percent of foreign trip expenses as personal in nature and disallowed a sum of Rs.29, 003/-.

However, ITAT find that none of the authorities below have refused that this is not for the purpose of business. Once it is not refused, the foreign trip expenses cannot be disallowed on ad-hoc basis.

Any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed

Any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed.

Case: Desiccant Rotors International Pvt. Ltd. vs. CIT, Delhi (Delhi HC)

Facts:

Section 37(1) of the Income-Tax Act-Payment made by the assessee on settlement of dispute with a company of USA being neither a fine or a penalty for a proved offence nor an amount of Compensation of an offence but is merely a sum in settlement of an action charging the assessee was denied and not proved the same cannot be rendered to be inadmissible deduction while determining the assessee’s income from business.

Section 37 of the Income-Tax Act, which is a residuary provision, allows the expenditure as deductable while computing the income on the satisfaction of the following conditions:

“(a) Expenditure must not be governed by the provisions of sections 30 to 36 of the Act;

(b) The expenditure must have been laid out wholly and exclusively for the purposes of the business of the assessee:

(c) The expenditure must not be personal in nature; and

(d) The expenditure must not be capital in nature.”

The appellant relied on the in the case of Prakash Cotton Mills (P.) Ltd  where the Supreme Court held that any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed as per the law settled.

In this case , Delhi High Court was of the view that it was an expenditure which was motivated purely by commercial purpose and would be allowable under Section 37(1) of the Income-Tax Act.

Whether the non-competition fee received by the assessee is permissible as revenue expenditure?

Whether the non-competition fee received by the assessee is permissible as revenue expenditure?

CASE : Procter & Gamble Distribution Co Ltd Vs JCIT (ITAT Mumbai)

Issue : Whether the non-competition fee received by the assessee is permissible as revenue expenditure?

Facts:

In the case of Tecumseh, USA, a leading Global compressor manufacturer, the assessee had purchased the compressor related operations of Whirlpool India, a leading refrigerator manufacturer in India, for Indian compressor market. The assessee had paid the price of Rs.52.5 crores which included a sum of Rs.2.65 crores to be paid as non-compete fees. The issue was whether non compete fees which was in force for 5 years, could be allowed as revenue expenditure.

The Special Bench  in the above case after detailed examination held that the expenditure was capital in nature.

In arriving at its decision , the special bench cited the Supreme Court in CIT Vs Coal Shipment Pvt. Ltd. (82 ITR 902) in which it was held that payment to ward off completion in business to a rival dealer would constitute capital expenditure if the object of making that payment was to derive an advantage by eliminating competition over some length of time.

In Assam Bengal Cement Co. Ltd. (27 ITR 34), it was held that the assessee who was a manufacturer of Cement had paid protection fees to the lessor of quarries for lime stone, on annual payment of Rs.5000/- for the whole period of lease and another sum of Rs.35000/- p.a. as a further protection fees for five years for similar undertaking in respect of the whole district. The issue was whether the payment could be allowed as revenue expenditure. Supreme Court observed that the fact that the payment was recurring was immaterial. It was the nature of asset acquired which was material. The asset required was the right to carry on the business unfettered by any competition which was not a part of working of the business but went on to appreciate the whole of the capital asset and make it more profit yielding. The expenditure was thus hold as capital in nature by the Supreme Court.

Having considered the facts of the case , Commissioner of Income Tax (A) has allowed the claim of the assessee that it is a revenue expenditure on the ground that the said amount has been subjected to disallowance in the relevant assessment years and taxing the same in the year under consideration will be subjected to double addition.