THE COMMISSIONER OF INCOME TAX V. ROBERT BOSCH INDIA LTD

ITA/456/2008

AI Insights

This case involves an appeal by the Commissioner of Income-Tax and the Assistant Commissioner of Income-Tax against Robert Bosch India Ltd. concerning the interpretation of deductions under Section 80HHE of the Income Tax Act, 1961, and the classification of software expenditure. The primary legal issues were whether the Tribunal was correct in holding that net interest income, rather than gross interest income, should be considered for deductions, and whether the expenditure on software, which provided enduring benefits, should be classified as revenue or capital expenditure. The High Court of Karnataka examined precedents and statutory provisions, ultimately affirming the Tribunal's decisions.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 729020 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 23-06-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax and Another .vs. Krone Communication Limited (2011) 333 ITR 497(Karn), Commissioner of Income-Tax and another .vs. IBM India Limited (2013) 357 ITR 88(Karn)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: T
• Assessee Lawyers: K V ARAVIND
• Keywords: Capital expenditure; Income Tax; Net interest income; Revenue expenditure; Software purchase
• Section: 80HHE; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 23rd DAY OF JUNE 2014 PRESENT THE HON'BLE MR. JUSTICE N. KUMAR AND THE HON’BLE MR. JUSTICE B MANOHAR ITA No.456 OF 2008 BETWEEN; 1.The Commissioner of Income-Tax, C.R.Building, Queens Road, Bangalore. 2.The Asst. Commissioner of Income-Tax, Central circle-12(2), C R Building, Queens Road, Bangalore. ...APPELLANTS (By Sri K V Aravind, Advocate) AND: Robert Bosch India Ltd., No.123, Industrial Layout Hosur Road, Koramangala Bangalore. ...RESPONDENT (By Sri T Suryanarayana for M/s.King & Partridge Adv.) -0-0-0-0-0- This ITA is filed under Section 260-A of I.T. Act, 1961 arising out of Order dated 26.10.2007 passed in 2 ITA No.49/Bang/2006 for the Assessment year 2002-03 to formulate the substantial questions of law stated therein and to allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA No.49/Bang/2006 dated 26.10.2007 and confirm the order of the Appellate Commissioner confirming the order passed by the Assistant Commissioner of Income Tax, Central Circle- 12(2), Bangalore. This appeal coming on for orders this day, N. KUMAR, J. delivered the following:- JUDGMENT This appeal is by the revenue challenging the order passed by the Tribunal granting relief to the assessee. 2. The appeal was admitted to consider the following substantial questions of law:- “(i)Whether the Tribunal was correct in holding that when computing deduction under Section 80HHE of the Act 90% of net interest income had to be reduced when computing the profits of business and not the gross interest 3 income as held by the Assessing officer and confirmed by the CIT? ii)Whether the Tribunal was correct in holding that the amount paid for purchase of software was a revenue expenditure even when the same was used in the course of business of the assessee not only during the current assessment year but also during subsequent year resulting in an enduring benefit and consequently a capital expenditure?” This Court had an occasion to consider the first substantial question of law in the case of Commissioner of Income Tax and Another .vs. Krone Communication Limited (2011) 333 ITR 497(Karn) where after noticing the statutory provisions and after review of the entire case laws this Court has held at Paragraph 20 as under:- “20. Therefore, the law on the point is fairly well-settled. Tax under the Act is upon income, profits and gains. It 4 is not a tax on gross receipts. Under section 2(24) the word \"income\" includes profits and gains. The charge is not on gross receipts but on profits and gains. Gross receipts or sale proceeds, however, include profits. The very basis for computing section 80HHC deduction was \"business profits\" as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. If the assessee has two incomes with \"one common pool of expenses\" and since \"principle of attribution\" has been retained in the scheme of section 80HHC, both in terms of section 80HHC(3). Clause (e) to the Explanation to section 80HHC(3)(a), (b) and (c) and in 5 clause (baa) to the Explanation to section 80HHC, instead of going into lengthy exercise of dividing such common expenses, the Legislature has estimated the reduction of export turnover by 10 per cent. Ultimately, clause (baa) to the Explanation is itself based on the assumption that 10 per cent of the income would be an expense. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the Finance (No.2) Act of 1991. By the Finance (No. 2) Act, 1991 with effect from April 1, 1992, for the first time, the expression \"profits of the business\" stood defined to mean the \"profits of the business\" as computed under the head \"Profits and gains of business\" under sections 28 to 44D. Therefore, before giving deduction under section 80HHC, the gross total income of the assessee being profits from business had to be arrived at in terms of clause (baa) to the Explanation. While calculating \"business profits\" the same had to be done in terms of section 28 to 6 section 44D alone. The idea of section 80HHC is to ensure that the exporter gets the benefit of the profits derived from export and not to depress the profit further. Therefore, it can only be the net commission, interest, rent, etc., which can be included in the profits. If netting were not to be permitted the result would be that the profits of the exporter would be depressed by an item that is expenditure incurred on earning commission, interest, rent, etc., which does not form part of the profit at all. This could not have been the intention of the Legislature. Hence the words \"commission, interest, rent, etc.\", in clause (baa) to the Explanation in section 80HHC is indicative of \"net interest\", i.e., gross amount less the expenditure incurred by the assessee in earning such amount. Where, as a result of the computation of profits and gains of business and profession, the Assessing Officer treats the commission, interest, rent receipt as business income, then deduction should be permissible, in terms of Explanation 7 (baa) of the net commission, interest, rent, etc., i.e., the gross commission, interest, rent, etc., less the expenditure incurred for the purposes of earning such commission, interest, rent, etc. Similarly, the second question of law was also the subject-matter of decision by this Court in the case of Commissioner of Income-Tax and another .vs. IBM India Limited (2013) 357 ITR 88(Karn) wherein this Court has held as under:- “The Tribunal on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the 8 same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company’s working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software. The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The 9 same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. Infact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and therefore, it has to be treated as revenue expenditure. In that view of the matter, the finding recorded by the Tribunal is 10 in accordance with law and do not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue. “ The above decisions equally applies to the facts of this case. Therefore, the substantial questions of law framed by this Court are answered in favour of the assessee and against the revenue. 3. Accordingly, this appeal is dismissed. Sd/- JUDGE. Sd/- JUDGE. *alb/-. "