2010 (8) TMI 1053 - HC - Income Tax

Bad and doubtful debts - allowable deduction - Commissioner (Appeals) held as the Assessee did not give paticulars about the provision for bad and doubtful debts and as the credit entry continued, he held, the assessee it not entitled to claim deduction and therefore, he dismissed the appeal - Tribunal held that it is the absolute satisfaction of the Assessee while writing off any bad debt, which has to be seen and Assessee is not required to prove that the debt he become bad in the relevant previous year - HELD THAT - After referring the claim in respect of each year, in the end, the order passed by the Assessing Officer as well as the Appellate Authority was set aside with a direction to the Assessing Officer to allow the claim in the light of the findings they have recorded. Further, the Assessing Officer was directed to grant sufficient opportunity to the Assessee of being heard in the matter and to furnish the details. In fact, a common order came to be passed in respect of 08 assessment years. In that view of the matter, we decline to answer the aforesaid substantial question of law But, affirm the order of remand to the AO to consider the claim for bad debts, in the light of the observations made by the Tribunal and in the light of the judgments in the case of Vijaya Bank Vs CIT and Another 2010 (4) TMI 46 - SUPREME COURT and T.R.F. Ltd. V/s CIT and Another 2010 (2) TMI 211 - SUPREME COURT . Computation of deduction u/s 90HHC - whether excise duty should form part of the total turnover and the computation provided in section 90HHC r.w.s 80AB? - HELD THAT - In the case of CIT Vs Laxmi Machine Tools 2007 (4) TMI 202 - SUPREME COURT held that It is important to bear in mind that excise duty and sales-tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula u/s 90HHC would become unworkable. Accordingly we hold that the excise duty cannot form part of the turnover for computing deduction u/s. 90HHC. Deduction u/s 80HH and 80-I - ITAT allowing notional/hypothetical cost for ascertainment of purchase price of raw material for deduction - assessee set up a unit manufacture of toilet soap in the year 1983-84 at Amalner, and basic raw materials required for the manufacture of toilet soap being fatty acid and glycerin, was not available in and around Amalner - Therefore, assessee was purchasing non-edible oils from up-country suppliers and processed the same at Mumbai, the nearest place to Amalner, thus used to pay octroi at Mumbai for non-edible oils and also at Amalner on fatty acid and glycerin. It used to pay transport charges for transportation of raw materials from Amalner to Mumbai and from Mumbai to Amalner for transportation of finished goods - octroi at Mumbai Municipality, freight from Mumbai to Amalner and Amalneroctroi should be excluded for computing the transfer price of fatty acid from FAGP to toilet soap unit. Accordingly, after working out certain percentage of profits would stand reduced. The same was challenged by the assessee - Tribunal has allowed the appeal and has held in the absence of actual sale for the purpose of 80HH and 80I the assessee was justified in taking the market price prevailing in Bombay HELD THAT - In the appeal preferred against the very same judgment in respect of the assessment for several (other) years, a Division Bench 2008 (12) TMI 681 - KARNATAKA HIGH COURT has already held that the market value would mean that the price of the goods would ordinarily fetch in the open market. It connotes the price at which the seller is willing to sell and the price at which the purchaser is willing to buy. It does not mean only the cost of production. Either way, the cost of the goods at the nearest available market would have to be reckoned and to that the cost of transportation, octroi, local taxes etc. has to be added. The figures so arrived at would in terms of the explanation to Section 80-I(8) would constitute the market value. In the light of the aforesaid judgment rendered between the very same parties for the earlier assessment year, we do not find any justification to have a different view. Computation of deduction u/s 90HHC - Income from software exports - for earlier year it has claimed exemption. However for the current year, it did not claim any exemption u/s 90HHC - Tribunal holding that income from software exports do not form part of other income mentioned in explanation (baa) to section 90HHC of the Act which is liable to be excluded before the Computation of deduction under section 90HHC of the Act - HELD THAT - As both the appellate authorities that for the current assessment year when the said amount is not claimed as a deduction u/s. 90HHC and deduction was claimed u/s.10A of the Act, the question whether the assessee could claim deduction of the said amount in addition to the income derived out of the sale of goods and merchandise which had been produced and manufactured in India and exported would not arise for consideration. Therefore, the aforesaid substantial question of law is wrongly framed and there is no need to answer the said question as it would not arise for consideration in the facts of this case. Exemption u/s.10A - corporate overheads remaining unallocated under section 10(A) including interest can be notionally attributed to the units claiming exemption under section 10(A) - tribunal on appreciation of the admitted facts of the case held, in the absence of any specific finding by the authorities below that the expenditure is incurred by various units claiming exemption/deduction, artificial way of allocating is not justifiable. The profits of undertaking under Section 10A of the Act is correctly worked out and no artificial working can be attributed thereto - HELD THAT - A perusal of the statement shows the Corporate Office has spent towards the expenses consisted of salaries etc. excluding interest less revenues. They allocated to the various sub-divisions other than the software export sub-division similarly they have recovered from software exports sub-division in the process the excess recoveries. Further, the interest out go to intra business and external agencies. The interest earned from deployment of founds intra-business and with external agencies. Considering the facts, it does not represent the expenditure incurred by the Corporate Office in respect of its sub-division. In those circumstances, the AO and the First Appellate Authority were not justified in allocating the substantial portion of the amount as the expenses incurred in respect of Section 10A and disallowing the deduction. That is precisely what the Tribunal has held on proper appreciation of the material on record. In that view of the matter we do not find any justification to interfere with the well considered order of the Tribunal. Accordingly, this question of law is answered in favour of the assessee and against to Revenue. Exemption u/s 10(A) - special import licence premium income and other miscellaneous income considered as income derived from the industrial undertaking - As per AO as the said income is not derived from export of goods manufactured by the assessee as it is in the nature of a by-product, the said amount is not allowable for exemption - HELD THAT - This special import licence has a direct nexus with the manufacture and export of the products. It falls within the first degree as explained by the Apex Court in more than one judgment. In the judgments relied on by the revenue, as there was no direct nexus and the income did not belong to the first degree and more so the exemption claimed was under Section 80HH not under 10A such exemption was not granted. Tribunal rightly held those judgments have no application to the facts of the case. This case arises under Section 10A and this special import licence has direct nexus with the manufacturing and export activity of the assessee and this special import licence is a special incentive given to improve the importing of goods. Therefore, the income derived from sale of licence constitutes profits and gains derived by the assessee from the industrial undertaking under Section 10A of the Act and is eligible for exemption. In that view of the matter, we do not see any justification to interfere with the well considered order passed by the Tribunal. Accordingly, this question is held in favour of the assessee and against the revenue. Deduction u/s 10A - Income from sale of old newspapers deemed to be held as income derived from eligible export oriented units - HELD THAT - While calculating the profit of the eligible business the expenses and the income of the same unit are required to be netted out. The expenses and the income are relatable to the same nature. Therefore, they directed the computation should be made after netting out expenditure by reducing the income in dispute. Without properly understanding the case put forth by the assessee, the authorities have proceeded on the basis that it is an income derived from the business which has no nexus and, therefore the assessee is not entitled to claim exemption u/s 10A. Therefore, the Tribunal was justified in setting aside those findings and granting the deduction sought for by the assessee. In that view of the matter in the first place the said question do not arise for consideration. We decline to answer the same in the facts of the case. Revenue or capital expenditure - Expenditure on imported software when the expenditure per se is capital in nature and is not allowable - assessee company claims import of software for the purpose of retail trading pre loading into the Hardware sold and also for in house use. The software is a commodity having copyrights - Tribunal held they cannot go into the question whether the expenditure is capital in nature as that is not what was urged before the lower authorities - HELD THAT - Assessee claimed deduction on the ground that it falls under revenue expenditure. When the assessing officer accepted the case of the assessee to the substantial portion, merely because the imported goods were used in house by the assessee he was of the opinion that was housed for catering into the requirements of the clients and, therefore, it amounts to royalty and TDS should have been deducted, the same having not been done, the entire amount cannot be claimed as deduction. Commissioner rightly pointed out it is not a royalty, it is a revenue expenditure and the entire amount is held to be deductible. In those circumstances, it was not open to the revenue to contend that it constitutes and asset. Therefore, the Tribunal declined to entertain the said contention and affirmed the order of the Appellate Authority. In those circumstances, the substantial question of law as framed do not arise for consideration in this appeal and we decline to answer the same.

Summary

Issues Involved:
1. Provision for bad and doubtful debts as allowable deduction.
2. Inclusion of excise duty in total turnover for Section 90HHC deduction.
3. Notional/hypothetical cost for raw material purchase price under Sections 80HH and 80-I.
4. Income from software exports and its exclusion under Section 90HHC.
5. Allocation of corporate overheads and interest for Section 10(A) units.
6. Special import license premium income under Section 10(A).
7. Income from sale of old newspapers and other items under Section 10(A).
8. Expenditure on imported software and its capital nature.

Detailed Analysis:

1. Provision for Bad and Doubtful Debts:
The Tribunal held that the provision for bad and doubtful debts is an allowable deduction. The Tribunal emphasized the absolute satisfaction of the assessee in writing off bad debts and directed the Assessing Officer to allow the claim after providing the assessee an opportunity to furnish details. The High Court upheld the Tribunal's decision to remand the matter to the Assessing Officer, referencing judgments from the Supreme Court in Vijaya Bank and T.R.F. Ltd.

2. Inclusion of Excise Duty in Total Turnover:
The Tribunal ruled that excise duty should not form part of the total turnover for computing deductions under Section 90HHC. The High Court affirmed this view, citing the Supreme Court's judgment in Commissioner of Income Tax Vs Laxmi Machine Tools, which held that excise duty and sales tax do not have any element of turnover and should be excluded from total turnover.

3. Notional/Hypothetical Cost for Raw Material Purchase Price:
The Tribunal allowed the assessee to use the market price prevailing in Bombay for the purpose of Sections 80HH and 80-I deductions. The High Court upheld this decision, referencing an earlier judgment which stated that market value includes the cost of goods and additional expenses, including transport and local taxes.

4. Income from Software Exports:
The Tribunal found that software export income should not be excluded from the profits of business for Section 90HHC purposes if the assessee claimed exemption under Section 10A. The High Court agreed, noting that the assessee did not claim Section 90HHC deduction for software exports in the relevant year, thus making the issue moot.

5. Allocation of Corporate Overheads and Interest:
The Tribunal ruled that corporate overheads and interest expenses should not be artificially allocated to Section 10A units. The High Court affirmed this, stating that the Tribunal's decision was based on proper appreciation of the material on record, and that the expenses should be allocated based on actual expenditure rather than proportionate profits.

6. Special Import License Premium Income:
The Tribunal held that income from the sale of special import licenses is derived from the industrial undertaking and eligible for Section 10A exemption. The High Court agreed, stating that the special import license has a direct nexus with the manufacturing and export activities of the assessee and falls within the first degree of income derived from the industrial undertaking.

7. Income from Sale of Old Newspapers and Other Items:
The Tribunal ruled that income from the sale of old newspapers, diesel drums, and wooden racks should be netted against related expenses and not treated as other income. The High Court upheld this view, noting that the expenses and income are relatable to the same nature and should be netted out.

8. Expenditure on Imported Software:
The Tribunal affirmed the Appellate Authority's decision that expenditure on imported software is of a revenue nature and not capital, thus allowable as a deduction. The High Court agreed, stating that the software was used as a tool for business operations and not for commercial exploitation of the copyright, and hence, the expenditure is deductible.

Conclusion:
The High Court dismissed the appeal, affirming the Tribunal's decisions on all substantial questions of law raised by the revenue.