2015 (5) TMI 951 - AT - Income Tax

Depreciation at 100 per cent. on the leasehold improvements - Held that - Expenditure incurred by the assessee for design, layout and material construction, fabrication works in leased premises are deductible as revenue expenditure. High Court in the case of Thiru Arooran Sugars Ltd. v. Deputy CIT in Tax Case (2013 (2) TMI 450 - Madras High Court ) held that Explanation 1 to section 32(1) of the Income-tax Act, 1961, which was inserted with effect from April 1, 1988, is an exceptional one which permits depreciation in cases where the assessee does not own a building in respect of which, the assessee incurs capital expenditure on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to the building. Further, it was held that the temporary structure by means of false ceiling and office renovation had not resulted in any capital expenditure. The benefit of the above decision, applies to the facts of the present case - Decided against revenue Disallowance under section 14A - CIT(A) restricted addition to 2 per cent. instead of 5 per cent. added by the Assessing Officer - Held that - After considering the totality of facts and circumstances of the case and placing reliance on the co-ordinate Bench in the case of Celebrity Fashions Ltd. 2012 (4) TMI 602 - ITAT CHENNAI , wherein it was held that disallowance of 5 per cent. of the dividend/exempted income is reasonable expenditure. Accordingly, we reverse the order of the Commissioner of Income-tax (Appeals) and restore the order of the Assessing Officer. - Decided against assessee Exclusion of telecommunication charges from the total turnover for the purpose of computation of deduction under section 10A - Held that - Tribunal in the case of ITO v. Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D wherein it was held that for the purpose of applying formula under sub- section (4) of section 10B, the freight, telecom charges and insurance attributable to the delivery of articles or things, or computer software outside India or the expenses, if any, incurred in foreign exchange in providing technical services outside India are to be excluded, both from the export turnover and from the total turnover, which are the numerator and the denominator, respectively, in the formula. Respectfully following the aforesaid decision of the Tribunal, we are inclined to direct the Assessing Officer to exclude the telecommunication charges both from the export turnover as well as from the total turnover while computing the deduction under section 10B of the Act. Gain on account of delay in realisation of export proceeds or on account of EEFC account - Held that - We direct the Assessing Officer to verify the exchange gain, as to whether the fluctuation is on account of delayed realization of export proceeds or not, and if it is on account of delayed realization of export proceeds, it is to be considered as business income eligible for deduction under section 10A of the Act. Depreciation on software expenses - 60% OR 25% - Held that - Appendix I, Rule 5 as entry No. (5) from the assessment year 2006-07 onwards, suggests that computers including computer software is entitled for depreciation at 60 per cent. and being so, we do not find any infirmity in granting depreciation at 60 per cent. on software expenses Set off of the brought forward unabsorbed depreciation of earlier years against the profits of the undertaking before allowing the deduction under section 10A - Held that - While computing deduction under section 10A, brought forward unabsorbed depreciation of earlier years to be set off against the profits of the undertaking. See case of Himatsingka Seide Ltd. v. CIT 2013 (10) TMI 823 - SUPREME COURT Set off the unabsorbed depreciation against the short term capital gains disallowed while computing the income chargeable under head Capital gains - Held that - It is seen that the entire unabsorbed depreciation was set off against the business income of the assessee. Therefore, no unabsorbed depreciation was available for the purpose of set off against the income from any other head. Hence, we do not find any merit in the plea of the assessee to set off the unabsorbed depreciation against the short term capital gain

Summary

Issues Involved:
1. Allowance of depreciation at 100% on leasehold improvements.
2. Restricting the disallowance under section 14A to 2% instead of 5%.
3. Exclusion of telecommunication charges from the total turnover for the purpose of computing deduction under section 10A.
4. Verification of exchange gain on account of delayed realization of export proceeds or EEFC account.
5. Allowing depreciation at 60% on software expenses instead of 25%.
6. Set off of brought forward unabsorbed depreciation against the profits of the undertaking before allowing deduction under section 10A.
7. Set off of unabsorbed depreciation against short-term capital gains.
8. Estimating 2% of dividend income as expenditure attributable to exempt income under section 14A.

Detailed Analysis:

1. Allowance of Depreciation at 100% on Leasehold Improvements:
The assessee incurred expenditure for improving leasehold premises and claimed it as revenue expenditure. The Assessing Officer treated it as capital expenditure, allowing only 10% depreciation. The Commissioner of Income-tax (Appeals) allowed 100% depreciation, treating the improvements as temporary structures. The Tribunal upheld this decision, citing various judgments that such expenditures for beautifying leased premises do not create new capital assets and should be considered as revenue expenditure.

2. Restricting the Disallowance under Section 14A to 2% Instead of 5%:
The assessee credited dividend income and the Assessing Officer disallowed 5% of the total dividend claimed as exempt. The Commissioner of Income-tax (Appeals) reduced this disallowance to 2%. The Tribunal reversed this decision, restoring the Assessing Officer's disallowance of 5%, citing precedent that 5% is a reasonable expenditure.

3. Exclusion of Telecommunication Charges from Total Turnover for Section 10A Deduction:
The Tribunal followed the Special Bench decision in ITO v. Sak Soft Ltd., holding that telecommunication charges should be excluded from both export turnover and total turnover for computing deductions under section 10A. This ensures the formula's numerator and denominator are consistent.

4. Verification of Exchange Gain on Account of Delayed Realization or EEFC Account:
The Commissioner (Appeals) directed the Assessing Officer to verify if the exchange gain was due to delayed realization of export proceeds or EEFC account. The Tribunal upheld this direction, referencing the Bombay High Court's decision in CIT v. Shah Originals, which distinguished between gains from export activities and those from EEFC accounts.

5. Allowing Depreciation at 60% on Software Expenses Instead of 25%:
The assessee claimed software expenses as revenue expenditure. The Assessing Officer treated it as capital expenditure, allowing 25% depreciation. The Commissioner (Appeals) directed a 60% depreciation rate, aligning with the provisions from the assessment year 2006-07 onwards. The Tribunal confirmed this, finding no error in the higher depreciation rate.

6. Set Off of Brought Forward Unabsorbed Depreciation Against Profits Before Section 10A Deduction:
The Tribunal followed the Supreme Court's judgment in Himatsingka Seide Ltd. v. CIT, confirming that unabsorbed depreciation must be set off before computing the exemption under section 10A. This decision was consistent with precedent, ensuring proper computation of deductions.

7. Set Off of Unabsorbed Depreciation Against Short-Term Capital Gains:
The assessee sought to set off unabsorbed depreciation against short-term capital gains. The Tribunal found no merit in this argument, noting that the entire unabsorbed depreciation had already been set off against business income, leaving none available for other heads.

8. Estimating 2% of Dividend Income as Expenditure Under Section 14A:
The Tribunal dismissed this issue as infructuous, aligning with its earlier decision to uphold a 5% disallowance under section 14A, making the 2% estimation irrelevant.

Conclusion:
The Tribunal's decisions were based on established legal precedents and statutory provisions, ensuring consistent and fair application of tax laws. The appeals were partly allowed or dismissed based on the merits of each issue, with clear directions for the Assessing Officer to follow established guidelines.