2010 (3) TMI 888 - AT - Income Tax

Summary

Issues Involved:
1. Denial of claim of exemption u/s 80-IA for income from telecommunication services.
2. Interpretation of provisions of section 80-IA(4C) and its applicability.
3. Quantum of deduction and apportionment of income for new and old exchanges.

Summary:

1. Denial of Claim of Exemption u/s 80-IA:
The common grievance of the assessee for the assessment years 1998-99, 1999-00, 2000-01, 2002-03 & 2005-06 pertains to the denial of exemption u/s 80-IA for income earned from telecommunication services. The CIT(A) upheld the Assessing Officer's (AO) decision to deny the deduction, which was based on the interpretation that the assessee was not eligible for such a claim.

2. Interpretation of Section 80-IA(4C):
The ITAT noted that the AO, in the second round of assessment, accepted the eligibility of the assessee for deduction u/s 80-IA but restricted the claim to new exchanges only. The assessee argued that sub-section (4C) of section 80-IA, which applies to telecommunication services, does not impose conditions such as the undertaking being new or not formed by reconstruction. The ITAT agreed with the assessee's contention that the conditions for telecommunication services are distinct and do not include restrictions applicable to industrial undertakings.

3. Quantum of Deduction and Apportionment:
The AO allowed partial deduction based on the proportion of new exchanges to total exchanges, which was confirmed by the CIT(A). The ITAT found this approach incorrect, emphasizing that the deduction should be based on the profits of the eligible business, not merely the number of new exchanges. The ITAT recognized the significant technological advancements and new services introduced post-1995, which contributed to the income. Consequently, the ITAT directed the AO to attribute 75% of the income to new exchanges and 25% to old exchanges for computing the deduction u/s 80-IA.

Conclusion:
The ITAT concluded that the assessee is eligible for deduction u/s 80-IA for income derived from telecommunication services. The AO is directed to recompute the deduction attributing 75% of the income to new exchanges and 25% to old exchanges. The appeal is allowed in part, with specific directions for recomputation in line with the amended provisions for the assessment year 2005-06.