2010 (11) TMI 576 - AT - Income Tax

Disallowed - Deduction u/s 080IA - Deductions exceeded 100% of the profits of the undertaking - Assessee claimed deduction u/s 80 HHC as well as 80 I/80IA of the Act - Assessee has been claiming deduction under section 80 I since the assessment year 1991-92 and the assessment year 2000-01 was the last of the 10 years for which the deduction under section 80I is claimed -- Held that - Section 80 IA was inserted by the Finance Act 1991 w.e.f. 1/4/1991. The provisions of sub-section (9A) referred to above were inserted by the Finance Act 1998 w.e.f. 1/4/1999. Section 80IA(1) specifically mentions that the deduction under section 80IA shall be allowed in accordance with and subject to the provisions of section 80 IA - Upto assessment year 1998-99 there was no condition regarding allowing deduction both under section 80IA as well as 80 HHC of the Act. From A.Y 1999-2000 however this provision came into effect - Hence pointed out in the order of the CIT(A) for A.Y 1998-99 the deductions exceeded 100% of the profits of the undertaking. We are of the view that in the light of the law as it existed in A.Y 2000-01 the restrictions imposed by the provisions of sub-section (9A) cannot be over looked - Decided against of assessee. whether the service charges amounting to Rs.20, 17, 524 are to be excluded from the profits of the Business for computing deduction u/s.80-HHC of the Act - As per the Hon ble Supreme Court in the case of CIT vs. K. Ravindranathan Nair (2007 -TMI - 2378 - Supreme Court of India) held that any income which is independent of exports business even if it falls under the head Profits and gains of business or profession will not per se become eligible for deduction under section 80HHC - the claim of the assessee cannot be decided without finding out the nature of the service charges which has not been spelt out either in the order of the AO or the CIT(A). In this circumstances we set aside the order of CIT(A) and remand the issue to the AO for fresh consideration in the light of the principles laid down by the Apex Court. Method of accounting - vlauation of stock - section 145 - addition to closing stock on account of excise duty - Held that - The Assessing Officer has given a finding that the assessee follows exclusive method of valuation. It is clear from the financial statements that the assessee was following inclusive method of valuation of inventory as contemplated by section 145A of the of the Act. Consequently the addition made by the Assessing Officer is without any basis.

Summary

Issues Involved:
1. Treatment of excise duty and sales tax in total turnover for section 80 HHC deduction.
2. Inclusion of net exchange gain and miscellaneous receipts in business profits for section 80 HHC deduction.
3. Allowance of advances written off as business loss.
4. Treatment of software expenses as capital or revenue expenditure.
5. Eligibility for deduction under section 80I along with section 80 HHC.
6. Exclusion of service charges from business profits for section 80 HHC deduction.
7. Addition of excise duty to closing stock.
8. Deduction of agency commission expenses.
9. Deduction of excise duty written off/provisions.

Detailed Analysis:

1. Treatment of Excise Duty and Sales Tax in Total Turnover for Section 80 HHC Deduction:
The revenue's appeal to include excise duty and sales tax in the total turnover was dismissed. The CIT(A) followed the Supreme Court decision in Laxmi Machine Works, which held that turnover should exclude these duties for section 80 HHC computation.

2. Inclusion of Net Exchange Gain and Miscellaneous Receipts in Business Profits for Section 80 HHC Deduction:
The CIT(A) included net exchange gain and miscellaneous receipts in business profits, following ITAT Delhi Bench's decision in Smt. Sujatha Grover. The Tribunal upheld this, noting the exchange gain was shown in the audited accounts and supported by a Chartered Accountant's certificate. Miscellaneous receipts, including sale of scrap and insurance claims, were also considered part of business profits, consistent with past Tribunal decisions in the assessee's case.

3. Allowance of Advances Written Off as Business Loss:
The CIT(A) allowed the deduction of advances written off, recognizing the assessee's systematic practice of making Inter Corporate Deposits (ICDs) and treating interest income from these as business income. The Tribunal upheld this, citing the assessee's Memorandum of Association and past assessment orders.

4. Treatment of Software Expenses as Capital or Revenue Expenditure:
The CIT(A) treated software expenses as revenue expenses, but the Tribunal remanded the issue to the AO for fresh consideration in light of the Special Bench decision in Amway Enterprises. The Tribunal also directed the AO to verify additional evidence for software expenses not previously submitted.

5. Eligibility for Deduction Under Section 80I Along with Section 80 HHC:
The Tribunal upheld the CIT(A)'s decision that the assessee could not claim more than 100% of profits of the Nashik Unit under both sections 80I and 80 HHC, following the clarificatory nature of section 80IA(9A) introduced from A.Y 1999-2000.

6. Exclusion of Service Charges from Business Profits for Section 80 HHC Deduction:
The Tribunal remanded the issue to the AO to determine the nature of service charges, referencing the Supreme Court's decision in CIT vs. K. Ravindranathan Nair, which clarified that independent income not related to export business should be excluded from "profits of the business."

7. Addition of Excise Duty to Closing Stock:
The Tribunal found that the assessee followed the inclusive method of inventory valuation as required by section 145A, contrary to the AO's finding. Consequently, the addition of excise duty to closing stock was deleted.

8. Deduction of Agency Commission Expenses:
The Tribunal allowed the deduction of agency commission expenses, consistent with its decisions in the assessee's earlier assessment years.

9. Deduction of Excise Duty Written Off/Provisions:
The Tribunal upheld the CIT(A)'s direction to the AO to verify actual payments of excise duty and allow deductions accordingly, as per section 43B.

Conclusion:
The appeals were partly allowed for statistical purposes, with several issues remanded to the AO for fresh consideration. The Tribunal upheld the CIT(A)'s decisions on key issues, including the treatment of excise duty and sales tax, net exchange gain, miscellaneous receipts, and advances written off. The Tribunal also provided specific directions for the AO to verify additional evidence and apply relevant legal principles.