The High Court of Calcutta, on 18th March, delivered a landmark judgment by allowing deduction u/s 36(1)(iii)to the assessee, the Indian Aluminum Company Ltd for the expenses incurred by them in developing application software.
The assessee M/s. Indian Aluminum Co. Ltd. is engaged in the manufacture and production of aluminum and related products. During the relevant previous year, the assessee incurred an expenditure of Rs.41,08,556/- on software development. The assessee treated this expenditure as deferred revenue expenditure in its books of accounts and amortized Rs.2,40,000/- by debiting the same to the Profit and Loss Account of the relevant previous year. By the order dated 13th March 2000, the assessing officer completed the scrutiny assessment under Section 143(3) for the assessment year 1997-98. By the aforesaid order, the assessing officer inter alia disallowed the expenditure on account of software development by holding that it was a capital expenditure.
Aggrieved by the order of the assessing officer the assessee appealed before the Commissioner of Income Tax (Appeals). The CIT(Appeals) held in favor of the assessee and deleted the disallowance of the expenditure incurred on software development. The revenue appealed against the order of the CIT(A) before the Tribunal. The Tribunal by an order dated 15th December 2002 reversing the order of the CIT(A) held that the expenditure on software development was capital in nature and should be disallowed.
The assessee approached the High Court against the order of the Tribunal. The main contention of the assessee was that the software developed by them is the application software which is different from software meant for the use as an operating system and hence, this should have been allowed as revenue expenditure.
While deciding the case in favor of the assessee, the High Court nullified the order of the Tribunal in which the expenditure incurred for software development was disallowed on the ground that it was capital expenditure. By invalidating the said order, it was affirmed by the High Court that a true and proper interpretation of Explanation-8 to Section 43(1) of the Act interest paid on borrowed funds used for acquisition of capital assets by a running concern can be allowed as deduction under Section 36(1)(iii) of the Act.
Read the Judgment below.
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