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2015 (6) TMI 984 - AT - Income TaxEligibility of deduction u/s.10A - CIT(A) allowed the claim - Held that - There is no dispute that the CIT (A) had followed his own orders for A. Y. 2002-03 to 2004-05 while allowing the claim of the assessee u/s.10A of the Act. The CIT(A) has examined the question of splitting up of an existing business as alleged by the Revenue. As rightly pointed out by him as the activities were finally culminated at the work site of the clients in Sourth Korea there was no need for full fledged infrastructural facilities in India. Such facility is not called for in the line of business carried on by the assessee. Therefore in the facts and circumstances of the case we find that the assessee is entitled for the deduction u/s 10A and the CIT(A) has rightly held so. - Decided in favour of assessee Claim of software expenses - revenue v/s capital expenditure - CIT(A) allowed assessee s claim of revenue exp - Held that - In the classification of the software expenditure claimed as revenue outgo assessee has put it under four categories viz. annual licence fee maintenance and upgradation service charges rental and lease charges and anti virus software having one year shelf-life. Revenue has not questioned this classification nor the contention of the assessee that software which gave rise to enduring benefit were indeed classified by it as an asset. Annual licence fee by the very nomenclature implies that assessee had obtained licence to use the software and but for the fees the facility would not be available to the assessee.Rental and lease charges also come within the very similar meaning. Anti-virus software was having a shelf life of only one year. Maintenance and upgradation service charges would not create a new software. At the best this would go only to improve the profit giving apparatus of the assessee and make it more efficient. We are of the opinion that CIT (A) was justified in relying on the decisions of Hon ble Delhi and Bombay High Courts in the case of Asahi India Safety Glass Ltd (2011 (11) TMI 2 - DELHI HIGH COURT ) and Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court ) respectively. We do not find any reason to interfere with the order of CIT (A). - Decided in favour of assessee Disallowance u/s.14A r.w.rule 8D(2)(ii) - CIT(A) allowed the claim - Held that - There is no dispute that the interest charged by the assessee to its P & L account which was the basis for the disallowance under Rule 8D(2)(ii) made by the AO were entirely on account of term loan and overdraft. Assessee has also shown that the term loan was used in an earlier year when there were no investments in non-tax bearing instruments. In so far as OD raised by the assessee is concerned nothing has been shown by the Revenue to show that any part of such overdraft amount was used for financing the investments. Once assessee state that no expenditure what so ever was incurred by it for earning tax-free income AO has to demonstrate why the claim could not be accepted with cogent reasons. We are therefore of the opinion that the disallowance was rightly deleted by the CIT (A).- Decided in favour of assessee MAT computation - adjustment for leave encashment provision and for bonus provision not allowed by the AO while computing the book profit u/s.115JB - Held that - Actuarial valuation is a scientific method for determining a liability that has crystalised but quantification of which are dependent on future events which are certain to happen. Once an assessee has made provisioning based on actuarial valuation it ceases to be a provision for an unascertained liability. We are therefore of the opinion that CIT (A) was justified in deleting these additions while computing the tax u/s.115JB of the Act - Decided in favour of assessee Disallowance of debit notes raised by parent company for defraying the ESOP charges of employees deputed by it - Held that - Absence of a written contract by itself might not be fatal to the claim of an expenditure especially when such expenditure is based on an understanding between a holding company and a subsidiary company but nevertheless it is the duty of the assessee to show that what has been reimbursed as amortised ESOP cost by its holding company were actually charged by such holding company in its P & L account as expenditure and the reimbursements made by the assessee were shown as a part of its income. Assessee has to demonstrate that the services received by it from such employees were commensurate with the payment. We are therefore of the opinion that the claim of the assessee requires a fresh look by the AO. We therefore set aside the orders of the lower authorities on this issue and remit it back to the AO for fresh consideration.Assessee will be free to produce fresh evidence to justify the incurrence of such expenditure and also show that the expenditure was not claimed twice i.e. both by the assessee as well as by its holding company. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Deduction under Section 10A of the Income-tax Act, 1961. 2. Claim of software expenses as revenue expenditure. 3. Disallowance under Section 14A read with Rule 8D. 4. Adjustment of leave encashment and bonus provisions while computing book profit under Section 115JB. 5. Disallowance of debit notes for ESOP charges of employees deputed by the parent company. 6. Addition of exempt dividend income and diminution in value of investments while computing book profit under Section 115JB. Issue-wise Detailed Analysis: 1. Deduction under Section 10A of the Income-tax Act, 1961: The assessee claimed a deduction under Section 10A for its STPI undertaking. The AO denied the claim, arguing that the STPI was formed by splitting up the existing business and did not fall under the category of Information Technology services as per CBDT Notification No.SO 890 (E), dated 26.09.2000. The CIT (A) allowed the deduction, following the Tribunal's earlier orders for A.Ys. 2002-03 to 2004-05. The Tribunal upheld the CIT (A)'s decision, noting that the assessee's activities were covered under Section 10A as clarified by Circular No.694 dated 22.11.1994, and the claim was on the same unit. Thus, the Tribunal dismissed the Revenue's grounds on this issue. 2. Claim of Software Expenses as Revenue Expenditure: The assessee claimed software expenses as revenue expenditure, which the AO disallowed, treating them as capital expenditure eligible for 60% depreciation. The CIT (A) allowed the claim, relying on the Delhi High Court's decision in CIT v. Asahi India Safety Glass Ltd and the Bombay High Court's decision in CIT v. Raychem RPG Ltd, which held that expenditure on application software did not create a new asset or source of income. The Tribunal upheld the CIT (A)'s decision, agreeing that the expenses were for annual license fees, maintenance, and upgradation services, which did not result in enduring benefits. 3. Disallowance under Section 14A read with Rule 8D: The AO made a disallowance under Section 14A read with Rule 8D for interest and indirect expenditure related to tax-free income. The CIT (A) deleted the disallowance under Rule 8D(2)(ii), noting that the term loan and overdraft were not used for investments in tax-free securities. However, he upheld the disallowance under Rule 8D(2)(iii) for indirect expenditure. The Tribunal upheld the deletion of disallowance under Rule 8D(2)(ii), agreeing that the AO did not demonstrate the use of loans for investments. The Tribunal also deleted the disallowance under Rule 8D(2)(iii), noting that the AO did not record reasons for rejecting the assessee's claim of no expenditure incurred. 4. Adjustment of Leave Encashment and Bonus Provisions while Computing Book Profit under Section 115JB: The AO added provisions for leave encashment and bonus to the book profits, treating them as unascertained liabilities. The CIT (A) deleted these additions, relying on judgments that held provisions based on actuarial valuation as ascertained liabilities. The Tribunal upheld the CIT (A)'s decision, agreeing that actuarial valuation determined liabilities that were certain to happen, thus making them ascertained. 5. Disallowance of Debit Notes for ESOP Charges of Employees Deputed by the Parent Company: The AO disallowed the claim for ESOP charges reimbursed to the parent company, treating it as capital expenditure. The CIT (A) upheld the disallowance, noting the absence of a contractual obligation and details in the debit notes. The Tribunal remitted the issue back to the AO for fresh consideration, directing the assessee to produce evidence showing that the expenditure was incurred for business purposes and not claimed twice. 6. Addition of Exempt Dividend Income and Diminution in Value of Investments while Computing Book Profit under Section 115JB: The AO added exempt dividend income and diminution in value of investments to the book profits. The CIT (A) deleted these additions, but the Tribunal noted that the issue had become academic since the computation of income under normal provisions resulted in a higher figure than the book profit under Section 115JB. Therefore, these grounds were dismissed as infructuous. Summary: The appeals of the Revenue were dismissed, and the appeals of the assessee were allowed to the extent indicated. The Tribunal upheld the CIT (A)'s decisions on the deduction under Section 10A, software expenses, and adjustments for leave encashment and bonus provisions. The Tribunal also deleted the disallowance under Rule 8D(2)(iii) and remitted the issue of ESOP charges back to the AO for fresh consideration. The grounds related to exempt dividend income and diminution in value of investments were dismissed as infructuous.
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