2011 (9) TMI 985 - AT - Income Tax

Deduction in respect of 90% of DEPB and DFRC benefits are not allowable u/s 80HHC - Held that - The amount of sales tax subsidy is to be excluded for the purpose of computing profits of business u/s 80HHC of the Act. We, therefore, do not find any merit in this ground of appeal and dismiss the same. The amount of ₹ 31.42 lacs has been received on early payment made by the assessee for the goods purchased which is directly linked to the export turn over of the assessee. The amount in question is not covered by the provisions of clause (baa) below Explanation to section 80HHC (4C). In that view of the matter, the CIT(A) has correctly directed the Assessing Officer not to exclude 90% of discount received i.e. ₹ 31.92 lacs from profits of the business for the purpose of computing deduction u/s 80HHC of the Act.

Issues Involved:
1. Disallowance of prior period expenditure.
2. Denial of deduction under Section 80G.
3. Computation of deduction under Section 80IA.
4. Calculation of deduction under Section 80HHC.
5. Classification of software expenditure as revenue or capital.
6. Treatment of sales tax subsidy.
7. Reduction of discount received from customers for deduction computation under Section 80HHC.

Detailed Analysis:

1. Disallowance of Prior Period Expenditure:
The assessee's appeal challenged the disallowance of prior period expenditure amounting to Rs. 45,44,691/-. The Assessing Officer (AO) disallowed the expenditure due to lack of evidence that the liability arose in the relevant year. The CIT(A) upheld the AO's decision, citing the absence of supporting evidence from the assessee. The Tribunal restored the issue to the AO for re-examination, directing the assessee to furnish evidence supporting the claim that the liabilities arose during the relevant year.

2. Denial of Deduction under Section 80G:
The assessee did not press this ground regarding the denial of deduction under Section 80G for a donation of Rs. 1,25,000/-. Consequently, the Tribunal dismissed this ground as not pressed.

3. Computation of Deduction under Section 80IA:
The assessee's appeal involved the exclusion of Rs. 2,69,96,242/- (miscellaneous income, interest income, and insurance claim) from the computation of deduction under Section 80IA. The Tribunal held that:
- Miscellaneous income is not derived from the industrial undertaking, as per the Supreme Court's ruling in Liberty India vs. CIT.
- Interest income is not allowable under Section 80IA, following the Supreme Court's decision in Pandian Chemicals Ltd. v CIT.
- Insurance claim received for loss of profit policy is not derived from the industrial undertaking, following the jurisdictional High Court's decision in CIT v Khemka Container (P) Ltd. Despite a contrary decision by the Delhi High Court in CIT v Sportking India Ltd, the Tribunal followed the jurisdictional High Court's ruling.

4. Calculation of Deduction under Section 80HHC:
The assessee raised multiple issues under this ground:
- Scrap Sale: The assessee did not press this issue, and it was dismissed as not pressed.
- Sales Tax Subsidy: The Tribunal held that sales tax subsidy should be treated as revenue income and directed the AO not to exclude 90% of the subsidy from profits of the business for Section 80HHC computation.
- Miscellaneous Income: The assessee did not press this issue, and it was dismissed.
- Insurance Claim: The Tribunal held that the insurance claim is not derived from the industrial undertaking and should be excluded from profits of the business.
- DEPB Entitlement: Following the Bombay High Court's decision in CIT v Kalapataru Colours and Chemicals, the Tribunal held that 90% of DEPB benefits are not allowable under Section 80HHC.
- Interest Receipt: The assessee did not press this issue, and it was dismissed.

5. Classification of Software Expenditure as Revenue or Capital:
The Revenue's appeal challenged the CIT(A)'s decision to treat software expenditure as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, following the jurisdictional High Court's ruling in CIT v Varinder Agro Chemicals Ltd, which held that software expenses are revenue in nature due to the fast-changing technology.

6. Treatment of Sales Tax Subsidy:
The Tribunal upheld the CIT(A)'s decision to treat sales tax subsidy as revenue income, following the jurisdictional High Court's decision in Abhishek Industries Ltd. The Tribunal also directed that the subsidy should not be excluded for Section 80HHC computation.

7. Reduction of Discount Received from Customers for Deduction Computation under Section 80HHC:
The Revenue's appeal challenged the CIT(A)'s direction to reduce only 90% of the discount received from profits of the business for Section 80HHC computation. The Tribunal upheld the CIT(A)'s decision, stating that the discount received on early payment for goods purchased is linked to the export turnover and is not covered by clause (baa) of Section 80HHC(4C).

Conclusion:
The Tribunal allowed the assessee's appeal partly and for statistical purposes, while dismissing the Revenue's appeal. The key findings included the restoration of prior period expenditure issue to the AO, denial of Section 80IA deduction for miscellaneous income, interest income, and insurance claim, and the treatment of software expenditure as revenue. The Tribunal also upheld the treatment of sales tax subsidy as revenue income and directed its inclusion in profits for Section 80HHC computation.

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