2011 (9) TMI 920 - AT - Income Tax

Exemption under section 10A - disallowance of managerial remuneration of 1 percent made on work in progress - levy of interest under section 234D - goodwill taxable under section 28(iv) - disallowance of interest on account of diversion of interest-bearing advances -

Issues Involved:
1. Recompute exemption under section 10A.
2. Disallowance of managerial remuneration.
3. Levy of interest under section 234D.
4. Addition of goodwill as income under section 28(iv).
5. Disallowance of interest on account of diversion of interest-bearing advances.
6. Disallowance of Provident Fund (PF) contributions.
7. Deduction of bad debts.
8. Deduction under section 10A for various assessment years.
9. Disallowance of expenses booked on work not completed.
10. Legality of reassessment under section 143 read with section 147.

Detailed Analysis:

1. Recompute exemption under section 10A:
The Tribunal upheld the Commissioner of Income-tax (Appeals) [CIT(A)]'s direction to recompute the exemption under section 10A by excluding certain expenses from both the numerator and denominator, following the Special Bench decision in the case of Sak Soft Ltd., 121 TTJ 865. This adjustment was necessary to maintain parity of variables in the computation of the exemption.

2. Disallowance of managerial remuneration:
The CIT(A) directed the Assessing Officer (AO) to delete the disallowance of 1% managerial remuneration on work-in-progress, reasoning that the assessee should be credited for disallowances in subsequent years to avoid double jeopardy. The Tribunal found this direction reasonable and upheld it across multiple assessment years.

3. Levy of interest under section 234D:
The CIT(A) deleted the levy of interest under section 234D, citing the Special Bench decision in Ekta Promoters Ltd., 113 ITD 719, which held that section 234D applies only from the assessment year 2004-05 onwards. The Tribunal upheld this deletion as legally sustainable.

4. Addition of goodwill as income under section 28(iv):
The AO treated the excess cost of acquisition over the carrying value of net assets during a merger as taxable goodwill under section 28(iv). However, the CIT(A), supported by a remand report from the AO, concluded that this balancing figure on the asset side of the balance sheet, authorized by the High Court, could not be treated as taxable income. The Tribunal agreed, dismissing the Revenue's appeal.

5. Disallowance of interest on account of diversion of interest-bearing advances:
The CIT(A) deleted the disallowance of interest, applying the Supreme Court decision in S.A. Builders, 288 ITR 1, which allows interest deductions if funds are provided to a sister concern for business purposes. The Tribunal upheld this deletion, noting the business exigencies and mutual business interests between the assessee and the sister concern.

6. Disallowance of Provident Fund (PF) contributions:
The CIT(A) allowed the deduction of PF contributions made before the due date of filing the return, following the Delhi High Court decision in Commissioner of Income-tax vs. P.M. Electronics, 313 ITR 161. The Tribunal upheld this decision.

7. Deduction of bad debts:
The CIT(A) deleted the addition of bad debts written off, including government debts, citing the Bombay High Court decision in Director of Income-tax (International Taxation) vs. Oman International Bank, 313 ITR 128, which was upheld by the Supreme Court. The Tribunal agreed, noting no distinction between private and government debts under section 36(1).

8. Deduction under section 10A for various assessment years:
The CIT(A) consistently upheld the assessee's eligibility for deduction under section 10A, referencing the Tribunal's earlier decision in the assessee's own case (when known as Soffia Software Ltd.). The Tribunal dismissed the Revenue's appeals on this issue for multiple assessment years.

9. Disallowance of expenses booked on work not completed:
The CIT(A) deleted the disallowance of expenses booked on work not completed, relying on the balance sheet's scientific valuation of work-in-progress. The Tribunal found no merit in the Revenue's contention and upheld the CIT(A)'s decision.

10. Legality of reassessment under section 143 read with section 147:
The CIT(A) upheld the reassessment, and the Tribunal agreed, finding no substance in the assessee's arguments against the legality of the reopening of the assessment.

Conclusion:
The Tribunal dismissed all the appeals filed by the Revenue and partly allowed the appeals filed by the assessee for statistical purposes, remitting certain issues back to the CIT(A) for fresh consideration. The Tribunal's orders were pronounced in the open court on 21st September 2011 at Chennai.

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