2006 (12) TMI 265 - AT - Income Tax

Free trade zone Expenditure incurred in relation to income not includible in total income Losses - In speculation business

Issues Involved:
1. Deletion of addition for expenses related to exempt dividend income under section 14A.
2. Deletion of disallowance of common expenses incurred at the Head Office for the software technical park unit (STP).
3. Deletion of disallowance of notice pay as income derived from industrial undertakings.
4. Non-allowance of interest as income derived from industrial undertakings under section 10A.
5. Treatment of loss on valuation of shares held as stock-in-trade as speculation loss.

Issue-wise Detailed Analysis:

1. Deletion of Addition for Expenses Related to Exempt Dividend Income under Section 14A:
The Assessing Officer (AO) disallowed Rs. 50,000 as administrative and managerial expenses attributable to earning dividend income, invoking section 14A. The CIT (Appeals) deleted this disallowance, reasoning that no specific expenses were incurred for earning the dividend. The Tribunal considered the facts and submissions, noting that the effort required to earn dividend income was minimal and speculative in monetary terms. Consequently, the Tribunal reduced the disallowance to Rs. 5,000, partially allowing the department's ground.

2. Deletion of Disallowance of Common Expenses Incurred at the Head Office for the Software Technical Park Unit (STP):
The AO disallowed Rs. 7,50,000 on account of common expenses at the Head Office attributed to the STP unit. The CIT (Appeals) deleted this disallowance, which was upheld by the Tribunal based on its earlier order for the assessment year 1997-98. The Tribunal noted that the software unit was a separate and independent entity, and the Head Office did not provide funds to the STP unit. Thus, the Tribunal confirmed the CIT (Appeals)' decision, dismissing the department's ground.

3. Deletion of Disallowance of Notice Pay as Income Derived from Industrial Undertakings:
The AO disallowed Rs. 1,95,861 as notice pay, arguing it was not derived from industrial undertakings, referencing the Supreme Court judgment in CIT v. Sterling Foods. The CIT (Appeals) deleted this disallowance, and the Tribunal upheld this decision based on its earlier order for the assessment year 1997-98. The Tribunal noted that the recovery of notice pay should be considered as income derived from the industrial undertaking, dismissing the department's ground.

4. Non-allowance of Interest as Income Derived from Industrial Undertakings under Section 10A:
The AO and CIT (Appeals) held that interest income of Rs. 1,67,822 from fixed deposits could not be treated as profits derived from the export of articles or computer software, referencing the judgment in Sterling Foods. The Tribunal agreed, noting that the fixed deposits were made from surplus funds and not out of business compulsions or exigencies. Therefore, the interest income could not be considered derived from the industrial undertaking. The Tribunal dismissed the assessee's ground.

5. Treatment of Loss on Valuation of Shares Held as Stock-in-trade as Speculation Loss:
The AO treated the loss of Rs. 16,77,065 on valuation of shares held as stock-in-trade as speculation loss under section 73. The CIT (Appeals) upheld this view. The Tribunal considered the arguments and previous judgments, concluding that the loss on account of valuation of closing stock should be treated as speculation loss. The Tribunal dismissed the assessee's ground.

Conclusion:
The department's appeal was partly allowed, reducing the disallowance under section 14A to Rs. 5,000, while the other grounds were dismissed. The assessee's appeal was entirely dismissed, upholding the treatment of interest income and loss on valuation of shares as per the AO's assessment.

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