2010 (2) TMI 744 - AT - Income Tax

Deduction / exemption u/s 10A - interest on bank deposits and other advances - Business income or other sources - held that - As rightly brought out by the AO in his impugned order the amounts for both the assessment years under dispute representing interest incomes which are assessed as income from other sources and were therefore not part of profits and gains derived from the industrial undertakings qualifying for exemption u/s 10-A of the Act. - Order of AO maintained - Decided against the assessee. Expenditure on software - capital expenditure or revenue expenditure - AO took a view that the software resulted in enduring benefit to the company and also the word enduring was not synonymous with the words everlasting or perpetual . - AO treated such expenditure as capital in nature - Held that - In the case of Amway India Enterprises vs. DCIT (2008 -TMI - 64346 - ITAT DELHI) the Special Bench has considered the allowability of expenditure incurred on acquisition of software. After elaborately considering the precedents on the subject the Special Bench of the Tribunal has laid down various tests to determine whether the expenditure involved is capital or revenue. - Matter remanded back to AO to decide the issue accordingly.

Issues Involved:
1. Treatment of interest on bank deposits and other advances as 'income from Other sources'.
2. Inclusion of said interest in profits derived from Export Oriented Undertakings (EOU) for computing the deduction under Section 10-A of the Income Tax Act.
3. Disallowance of amounts paid to LIC towards contribution for Employees' Gratuity Fund under Sections 40A(7) and 40A(9) of the Act.
4. Treatment of expenses on application software as capital expenditure.
5. Allowability of depreciation at 25% instead of 60%.
6. Disallowance of Rs.1.66 lakhs, a purported liability due to Cochin SEZ.
7. Whether sales-tax collected forms part of total turnover for the purpose of computation of exemption under Section 10-A.
8. Treatment of interest on bank deposits and other advances as income from "business" for AY 2003-04.

Analysis:

I. Grievances of the Assessee (AYs 2001-02 and 2002-03):

1. Treatment of Interest on Bank Deposits and Advances:
The assessee claimed interest on bank deposits as business income and sought exemption under Section 10-A. The AO treated the interest as income from 'Other Sources'. The CIT(A) upheld the AO's decision, citing the Kerala High Court's ruling in CIT vs. G. Sathish Nair, which held that interest on deposits must be assessed under 'Other Sources'. The Tribunal agreed with the AO and CIT(A), stating that Section 10A grants exemption only to profits derived from export activities, not interest income.

2. Inclusion of Interest in Profits for Section 10-A Deduction:
The AO and CIT(A) excluded the interest income from the computation of exemption under Section 10-A, supported by legal precedents like CIT vs. Sterling Foods and K Ravindranatha Nair vs. DCIT. The Tribunal upheld this exclusion, emphasizing that interest income does not qualify as profits derived from export activities.

3. Disallowance of Contribution to Gratuity Fund:
The AO disallowed contributions to an unapproved gratuity fund under Sections 40A(7) and 40A(9). The CIT(A) confirmed this disallowance. The Tribunal, however, remitted the issue back to the AO, directing that the deduction should be allowed if the fund gets approved by the CIT.

4. Treatment of Software Expenses as Capital Expenditure:
The AO treated software expenses as capital expenditure and allowed depreciation at 60%. The CIT(A) reduced the depreciation rate to 25%, resulting in an enhancement of income without prior notice to the assessee. The Tribunal remitted the issue back to the CIT(A) to re-examine whether the expenditure on software is capital or revenue, following the guidelines laid down by the Special Bench in Amway India Enterprises vs. DCIT.

5. Depreciation on Software:
The CIT(A) reduced the depreciation rate on software from 60% to 25%, which the Tribunal found to be an enhancement of income without proper notice. The issue was remitted back to the CIT(A) for re-examination.

6. Disallowance of Rs.1.66 Lakhs Liability to Cochin SEZ:
The CIT(A) disallowed Rs.1.66 lakhs as a liability to Cochin SEZ, which was neither claimed by the assessee nor disallowed by the AO. The Tribunal found this to be a mistake and ordered the AO to ignore this finding.

II. Grievances of the Revenue:

1. Sales-Tax Collected and Total Turnover:
For AYs 2001-02 and 2002-03, the Revenue contended that sales-tax collected should form part of total turnover for computing exemption under Section 10-A. The CIT(A) excluded sales-tax from total turnover, supported by the Supreme Court rulings in CIT vs. Lakshmi Machine Works and CIT vs. Catapharma (India) P. Ltd. The Tribunal upheld the CIT(A)'s decision, agreeing that sales-tax should not be included in total turnover.

2. Treatment of Interest on Bank Deposits as Business Income (AY 2003-04):
The CIT(A) directed the AO to treat the interest on bank deposits as business income. The Tribunal disagreed, referencing its earlier decision for AYs 2001-02 and 2002-03, and ruled that such interest should be treated as income from 'Other Sources'.

Conclusion:
1. The assessee's appeals for AYs 2001-02 and 2002-03 are partly allowed.
2. The Revenue's appeals for AYs 2001-02 and 2002-03 are dismissed.
3. The Revenue's appeal for AY 2003-04 is allowed.

Pronounced in the open court on 5.2.2010.

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