2012 (11) TMI 1129 - AT - Income Tax

Disallowance of expenditure on software by treating the same as capital in nature - addition due to valuation of closing stock on account of Modvat - disallowance u/s 40(a)(i)- TDS u/s 195 - payments are in the nature of fee for technical services or managerial services as per the provisions of Article 12 of Indo Switzerland DTAA - disallowance of interest capitalised in the books of account - exemption u/s 10B - addition u/s 14A - exclusion of excise duty from the total turnover for the purpose of computing the deduction u/s 80HHC - Foreign exchange gains - valuation of closing stock on account of Modvat - reducing of 100% profits eligible for deduction u/s 80HHE while computing the eligible profits u/s 80HHC.

Issues Involved:
1. Disallowance of software expenditure as capital expenditure.
2. Addition to closing stock value on account of MODVAT.
3. Disallowance of advertisement expenditure in foreign currency under section 40(a)(i).
4. Disallowance of marketing fees paid in foreign currency under section 40(a)(i).
5. Levy of interest under section 234D.
6. Allowability of interest capitalized in books as revenue expenditure.
7. Allowability of loss incurred by Turbhe unit under section 10B.
8. Exclusion of excise duty from total turnover for deduction under section 80HHC.
9. Exclusion of 90% of certain incomes under Explanation (baa) to section 80HHC.
10. Amortization of leasehold land premium as revenue expenditure.

Detailed Analysis:

1. Disallowance of Software Expenditure as Capital Expenditure:
The assessee claimed software expenditure as revenue, arguing it was for administrative functions with a limited life. The Assessing Officer (AO) treated it as capital expenditure, allowing 25% depreciation. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision. The Tribunal noted that neither the AO nor the CIT(A) examined whether the software provided an enduring benefit. The issue was remitted to the AO to re-examine in light of the Special Bench decision in Amway Enterprises.

2. Addition to Closing Stock Value on Account of MODVAT:
The AO added un-availed MODVAT credit to the closing stock value under section 145A. The CIT(A) upheld this but directed the AO to adjust the opening stock of the subsequent year accordingly. The Tribunal followed its earlier decision in the assessee's case, directing the AO to adjust the opening stock for the next year by the unutilized MODVAT credit amount.

3. Disallowance of Advertisement Expenditure in Foreign Currency under Section 40(a)(i):
The AO disallowed advertisement expenditure in foreign currency due to non-deduction of tax at source, following a similar disallowance in an earlier year. The CIT(A) upheld this disallowance. The Tribunal noted that in the absence of a Permanent Establishment (PE) in India, the payment was not taxable in India, and thus section 40(a)(i) did not apply. However, the Tribunal remitted the issue to the AO to verify if the expenditure was incurred wholly and exclusively for the business.

4. Disallowance of Marketing Fees Paid in Foreign Currency under Section 40(a)(i):
The AO disallowed marketing fees paid to a Swiss company, treating the payment as fees for technical services or royalty. The CIT(A) upheld this. The Tribunal, citing the Indo-Switzerland DTAA, held that pre-amendment section 40(a)(i) provisions were discriminatory and thus not applicable. The Tribunal did not address whether the payments were for technical services or managerial services, given the decision on the applicability of section 40(a)(i).

5. Levy of Interest under Section 234D:
The Tribunal noted that this issue was settled against the assessee by the jurisdictional High Court in CIT vs. Indian Oil Corporation Ltd., deciding in favor of the revenue.

6. Allowability of Interest Capitalized in Books as Revenue Expenditure:
The AO disallowed interest capitalized in books but claimed as revenue expenditure. The CIT(A) allowed the claim, following the decision in Core Healthcare Ltd. The Tribunal upheld this, citing the Supreme Court decision in Core Healthcare Ltd.

7. Allowability of Loss Incurred by Turbhe Unit under Section 10B:
The AO disallowed the loss incurred by the Turbhe unit, considering section 10B as an exemption. The CIT(A) allowed the loss. The Tribunal, following jurisdictional High Court decisions, held that section 10B provides for a deduction, not an exemption, and allowed the loss to be set off against other business income.

8. Exclusion of Excise Duty from Total Turnover for Deduction under Section 80HHC:
The CIT(A) directed the AO to exclude excise duty from the total turnover for computing deduction under section 80HHC. The Tribunal upheld this, following Supreme Court decisions in Lakshmi Machine Works and Catapharma (India) P. Ltd.

9. Exclusion of 90% of Certain Incomes under Explanation (baa) to Section 80HHC:
The AO excluded 90% of exchange gain and other incomes under Explanation (baa) to section 80HHC. The CIT(A) directed the AO not to exclude 90% of these items. The Tribunal remitted the issue to the AO to compute the deduction in light of the Supreme Court decision in ACG Associated Capsules Pvt Ltd.

10. Amortization of Leasehold Land Premium as Revenue Expenditure:
The assessee claimed amortization of leasehold land premium as revenue expenditure. The AO disallowed this, treating it as capital expenditure. The CIT(A) upheld the disallowance. The Tribunal remitted the issue to the AO for examination of relevant facts and records, directing the assessee to produce the lease deed and other details.

Separate Judgments:
The Tribunal delivered a unified judgment without separate judgments from different judges.

← Previous Next →