w w w . L a w y e r S e r v i c e s . i n



Deputy Commissioner of Income-tax v/s Madras Engineering Industries (P.) Ltd.


Company & Directors' Information:- MADRAS ENGINEERING INDUSTRIES PRIVATE LIMITED [Active] CIN = U35999TN1976PTC007223

Company & Directors' Information:- D P ENGINEERING INDUSTRIES LIMITED [Active] CIN = U27310DL2008PLC176856

Company & Directors' Information:- A K ENGINEERING INDUSTRIES (INDIA) PRIVATE LIMITED [Active] CIN = U25206DL1997PTC085204

Company & Directors' Information:- G L ENGINEERING INDUSTRIES PRIVATE LIMITED [Active] CIN = U28920MH1981PTC023662

Company & Directors' Information:- B V M ENGINEERING INDUSTRIES LIMITED [Active] CIN = U28111DL1972PLC005983

Company & Directors' Information:- R R R ENGINEERING INDUSTRIES PRIVATE LIMITED [Strike Off] CIN = U74899DL1993PTC055069

Company & Directors' Information:- A. V. ENGINEERING INDUSTRIES PRIVATE LIMITED [Strike Off] CIN = U99999DL1974PTC007360

Company & Directors' Information:- G D R ENGINEERING INDUSTRIES PVT LTD [Strike Off] CIN = U27109UP1971PTC003388

Company & Directors' Information:- L S ENGINEERING INDUSTRIES PRIVATE LIMITED [Strike Off] CIN = U74899DL1977PTC008484

Company & Directors' Information:- I B I ENGINEERING INDUSTRIES PRIVATE LIMITED [Strike Off] CIN = U45202PB1974PTC003422

Company & Directors' Information:- A H B ENGINEERING INDUSTRIES PVT LTD [Strike Off] CIN = U35999WB1988PTC044786

Company & Directors' Information:- O K ENGINEERING INDUSTRIES PRIVATE LTD [Active] CIN = U74899DL1987PTC027660

Company & Directors' Information:- R P ENGINEERING INDUSTRIES PRIVATE LIMITED [Strike Off] CIN = U99999DL1973PTC006781

Company & Directors' Information:- S V ENGINEERING INDUSTRIES PVT LTD [Under Liquidation] CIN = U74210TG1981PTC003174

    IT Appeal Nos. 438 & 552 of 2013

    Decided On, 27 June 2014

    At, Income Tax Appellate Tribunal Chennai

    By, THE HONOURABLE MR. A. MOHAN ALANKAMONY
    By, ACCOUNTANT MEMBER & THE HONOURABLE MR. CHALLA NAGENDRA PRASAD
    By, JUDICIAL MEMBER

    For the Appellant: Guru Bhashyam, Jt. CIT. For the Respondent: G. Seetharaman, C.A.



Judgment Text

Income Tax Appellate Tribunal, Chennai Bench ‘C’

Challa Nagendra Prasad, Judicial Member

1. Both these appeals are filed by the assessee and the Revenue against the order passed by the Commissioner of Income-tax (Appeals)-V, Chennai dated December 31, 2012 for the assessment year 2009-10.

2. The first issue in the appeal of the assessee is that the Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in treating application computer software of Rs. 23,41,614 as capital expenditure. The Assessing Officer while completing the assessment noticed that the assessee has purchased various softwares worth Rs. 23,41,614. The Assessing Officer was of the view that entire expenses were for the purchase of softwares Oracle, Autocad, PRO E, NI-DAQ, MX software, etc., therefore he was of the view that these softwares have enduring nature and provided benefits for years together and therefore treated as capital expenditure. On appeal, the Commissioner of Income-tax (Appeals) sustained the action of the Assessing Officer in treating cost of software as capital expenditure.

3. Counsel for the assessee submits that all the software expenses incurred for the purchase is only application software and it is mostly for upgradation software as detailed by the Commissioner of Income-tax (Appeals) in paragraph 5.1 of his order. Counsel placing reliance on the decision of the hon'ble Madras High Court in the case of CIT v. Southern Roadways Ltd. [2007] 288 ITR 15/158 Taxman 1 (Mad) submits that upgradation of software is revenue expenditure.

4. The Departmental representative vehemently supports the order of the lower authorities in treating software expenses as capital expenditure and allowing depreciation thereon.

5. Heard both sides. Perused orders of the lower authorities and the decision relied on by the assessee. The hon'ble Madras High Court in the case of Southern Roadways Ltd. (supra) while deciding the issue whether expenditure incurred on the upgradation of software is revenue or not held has under (page 17) :

"With regard to the second question, viz., whether the expenditure incurred on the upgradation of software is revenue expenditure, the assessee did not claim any expenditure for installation of new computers, but claimed the expenditure for upgradation of existing computers. Further, the expenditure was incurred for improving the efficiency of the existing system with a view to keep pace with improvement of technology and no machinery was brought into existence. Such expenses incurred by the assessee for enhancement of efficiency, in our considered opinion, is nothing but an upgradation of computers for achieving the desired result and, therefore, the same has to be treated as revenue expenditure."

6. As could be seen from the above observation of the High Court that the expenditure incurred on upgradation of software is revenue expenditure. Respectfully following the said decision, we allow the ground of appeal of the assessee on this issue.

7. The next issue in the appeal of the assessee is that the Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in disallowing loss of transaction of foreign currency loan.

8. The Assessing Officer while completing the assessment noticed that the assessee claimed loss of Rs. 1,31,24,387 as loss on foreign exchange fluctuation. The assessee claimed this loss as business loss. The assessee also contended that section 43A has no application as foreign currency term loan was utilised for acquiring assets within India and the provisions of section 43A is applicable for the assets acquired outside India from the foreign currency term loan. The Assessing Officer rejected the contention of the assessee and disallowed the said loan as it is contingent and notional loss. On appeal, the Commissioner of Income-tax (Appeals) sustained the disallowance made by the Assessing Officer rejecting the contentions of the assessee that foreign exchange fluctuation on account of foreign currency term loan is not a business loss. The Commissioner of Income-tax (Appeals) also rejected the contention of the assessee that the provisions of section 43A have no application in respect of foreign currency term loan utilising for purchasing assets within India.

9. Counsel for the assessee reiterates the submissions made before the lower authorities and submits that foreign exchange fluctuation on account of restatement of the foreign currency term loan is business loss and in the alternative he submits that such foreign exchange fluctuation should be added to the cost of asset under section 43A of the Act which aspect was not considered by the authorities. Counsel referring to page 2 of the assessment order submits that the assessee has in fact filed letter dated November 29, 2011 stating that loan was acquired for the purchase of capital asset along with list of assets purchased. Referring to page 4 of the assessment order, counsel submits that the Assessing Officer had in fact observed that if borrowing is for capital asset, exchange loss actually suffered would require to be capitalised in the context of the present law after substitution of section 43A with effect from the assessment year 2003-04. Counsel for the assessee referring to page 5 of the assessment order submits that the Assessing Officer disallowed the said foreign exchange loss on FCNR, the assessee is entitled for deduction only on actual payment and the loss is until then only a contingent liability. Counsel submits that the provisions of section 43A have not applied in its case. Counsel submits that the assessee has in fact repaid the loan acquired the entire foreign exchange loan and it is not a contingent liability, the Assessing Officer should have applied section 43A and added the cost of foreign exchange fluctuation to the assets as provided under section 43A of the Act.

10. The Departmental representative vehemently supports the orders of the lower authorities in disallowing foreign exchange fluctuation of FCNR loan.

11. Heard both sides. Perused orders of the lower authorities. The Assessing Officer though stated in the assessment order that if borrowing is for capital asset, the exchange loss already suffered would require to be capitalised in the context of the present law after the substitution of section 43A with effect from the assessment year 2003-04, he has not dealt with the issue on those lines. The Assessing Officer also did not examine as to whether the assessee has repaid the loan, etc. or it is still outstanding. In the circumstances, we are of the view that this issue has to be examined afresh in accordance with law with reference to the provisions of section 43A of the Act after ascertaining the facts from the assessee as to whether the entire loan was repaid or outstanding or partly repaid or outstanding, as the submission of the assessee was that loan was repaid and the losses incurred by the assessee on foreign exchange fluctuation of FCNR, the loan is not a contingent liability. Therefore, in the light of the submissions of the assessee and also since the lower authorities have not examined this issue, we remit this issue back to the Assessing Officer with a direction to apply provisions of section 43A of Act and decide this issue in accordance with law after providing adequate opportunity to the assessee.

12. The only ground in the appeal of the Revenue is that the Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to exclude exchange fluctuation on sales both from export turnover and total turnover for the purpose of computing deduction under section 10AA of the Act. The Assessing Officer while completing the assessment reduced exchange gain on account of export sales since the exchange gain is on account of realisation of foreign currency on the date later than the invoice date. The Assessing Officer was of the view that such gain has no relevance to the sale proceeds and therefore excluded from the export turnover. On appeal, the Commissioner of Income-tax (Appeals) considering the submissions of the assessee and the decision of the Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 (Chennai) directed the Assessing Officer to exclude the exchange fluctuation on account of export sales both from export turnover as well as total turnover. Now the Revenue is in appeal before us.

13. The Departmental representative relied on the order of the Assessing Officer.

14. Counsel for the assessee places reliance on the decision of the Special Bench and supports the order of the Commissioner of Income-tax (Appeals).

15. Heard both sides. Perused orders of the lower authorities. On going through the order of the Commissioner of Income-tax (Appeals) and the decision of the Special Bench in the case of Sak Soft Ltd. (supra) we find that the issue has been decided by the Commissioner of Income-tax (Appeals) by following the said decision of the Special Bench of this Tribunal observing as under :

"7.2 I have considered the submission of the appellant and have also gone through the assessment order. I find the issue to be squarely covered by the decision of the Special Bench of the jurisdictional Tribunal in the case

Please Login To View The Full Judgment!

of ITO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353 (Chennai) (SB). Respectfully following the decision of the jurisdictional Income-tax Appellate Tribunal, Special Bench in the case of Sak Soft Ltd. I direct the Assessing Officer to exclude the foreign exchange fluctuation income both from export turnover and from total turnover for the purpose of computing under section 10AA. The grounds of appeal as regards this issue are considered partly allowed for statistical purposes." 16. As the Commissioner of Income-tax (Appeals) by following the decision of the Special Bench of this Tribunal and directed to exclude foreign exchange fluctuation from both export turnover and total turnover for the purpose of computing deduction under section 10AA of the Act, we do not find any infirmity in the impugned order and uphold the same. The grounds of appeal raised by the Revenue on this issue are rejected. 17. In the result, the appeal of the assessee is partly allowed for statistical purposes and that of the Revenue is dismissed.
O R