2012 (2) TMI 645 - AT - Income Tax

Summary

Issues Involved:

1. Exclusion of telecommunication and insurance expenses from total turnover u/s 10A.
2. Allowability of professional fees u/s 37.
3. Nature of software expenses as capital or revenue.
4. Set off of losses of non-10A units against profits of 10A units.

Summary:

Issue 1: Exclusion of Telecommunication and Insurance Expenses from Total Turnover u/s 10A

The CIT(A) directed the Assessing Officer to exclude telecommunication and insurance expenses amounting to Rs. 86,18,618/- and foreign currency expenses of Rs. 22,03,62,997/- from both the export turnover and the total turnover while computing deduction u/s 10A of the Act. This decision was supported by the judgment of the Hon'ble Karnataka High Court in the assessee's own case, which followed the precedent set in CIT v M/s Tata Elxsi Ltd. & Others. The principle established is that if certain expenses are excluded from the export turnover, they must also be excluded from the total turnover to maintain parity in the formula for computing deductions. Consequently, the revenue's appeal on this ground was dismissed.

Issue 2: Allowability of Professional Fees u/s 37

The CIT(A) allowed the consultancy fees of Rs. 1,55,890/- as a deductible expense u/s 37 of the Act, considering it as incurred for business purposes. However, the Tribunal found that the details of the expenses were not discussed in detail and thus restored the matter to the Assessing Officer for fresh consideration. The revenue's appeal on this ground was allowed for statistical purposes.

Issue 3: Nature of Software Expenses as Capital or Revenue

The assessee's claim that software expenses of Rs. 7,71,400/- and Rs. 70,400/- were revenue in nature was rejected by the CIT(A), who treated them as capital expenses. The Tribunal, referencing the jurisdictional High Court's judgment in CIT v M/s Toyota Kirloskar Motors Pvt. Ltd., and the Special Bench decision in Amway India Enterprises v DCIT, remanded the issue back to the Assessing Officer for a detailed examination. The assessee's appeal on this ground was allowed for statistical purposes.

Issue 4: Set Off of Losses of Non-10A Units Against Profits of 10A Units

The CIT(A) upheld the Assessing Officer's decision to set off losses from non-10A units against the profits of 10A units. However, the Tribunal, following the jurisdictional High Court's judgment in CIT v M/s Axa Business Services Pvt. Ltd., held that deduction u/s 10A should be calculated on a stand-alone basis and that losses from non-10A units cannot be set off against the income of 10A units. The assessee's appeal on this ground was allowed.

Conclusion:

The revenue's appeal was partly allowed for statistical purposes, and the assessee's appeal was partly allowed. The Tribunal directed the Assessing Officer to reconsider certain issues and adhere to the principles laid down by the jurisdictional High Court.