2007 (11) TMI 452 - AT - Income Tax

Business expenditure Deductions - Profit and gains from export of computer software Minimum alternate tax

Summary

Issues:
1. Accrual of liability for expatriate costs under mercantile system of accounting.
2. Computation of deduction under section 80HHE and setting off brought forward business losses.
3. Treatment of provision for doubtful debts/advances in computing book profits under section 115JA.

Issue 1: Accrual of liability for expatriate costs under mercantile system of accounting:
The appeal concerned the deletion of an addition of Rs. 4,03,31,726 for expatriate costs by the Assessing Officer. The dispute arose from the timing of liability accrual due to an agreement with EDS Global INC, USA. The Assessing Officer contended that since approval from RBI was obtained after the previous year, no valid liability existed. However, the CIT(A) ruled in favor of the taxpayer, stating that under the mercantile system, liabilities accrue when the agreement is made, regardless of payment timing. The Tribunal upheld this decision, emphasizing that the liability arose from the agreement, not RBI approval, aligning with the Supreme Court's stance in similar cases.

Issue 2: Computation of deduction under section 80HHE and setting off brought forward business losses:
The second issue revolved around the computation of deductions under section 80HHE and setting off brought forward business losses. The Assessing Officer required adjustment of brought forward losses before computing the deduction, citing section 80AB's control over section 80HHE. The CIT(A) disagreed, allowing the taxpayer's claim based on legal interpretations. The Tribunal referred to the Supreme Court's ruling in IPCA Laboratories Ltd., emphasizing section 80AB's overriding effect, requiring set off of losses against current income before calculating deductions under section 80HHE. Consequently, the Tribunal reversed the CIT(A)'s decision and upheld the Assessing Officer's order.

Issue 3: Treatment of provision for doubtful debts/advances in computing book profits under section 115JA:
The final issue concerned the deletion of an addition of Rs. 3,19,978 for provision of doubtful debts/advances in computing book profits under section 115JA. The Assessing Officer treated this provision as an unascertained liability, but the CIT(A) disagreed, citing precedents that such provisions do not constitute unascertained liabilities. The Tribunal concurred with the CIT(A), noting that the provision for bad and doubtful debts did not fall under the Explanation to section 115JA. Following established legal principles, the Tribunal upheld the CIT(A)'s decision, resulting in the partial allowance of the revenue's appeal.

In conclusion, the Tribunal addressed the issues comprehensively, analyzing each aspect of the legal disputes and applying relevant legal precedents to deliver a detailed and well-reasoned judgment.