2011 (11) TMI 455 - HC - Income Tax

Deduction u/s 10A - consideration received for sale of eagle software by assessee to foreign subsidiary against allotment of shares as trading receipt against as held by assessee as long term capital gain - alternative claim of deduction u/s 10A and 80HHE denied by Revenue - Held That - Material on record reveals that assessee was STP unit when sale transaction took place. Also, expenditure incurred towards manufacture of the said software has been included in profit and loss account for the respective assessment years. Therefore, income received by the sale of Eagle software is to be treated as trade receipt and assessee is entitled to exemption admissible u/s 10A - Decided in favor of assessee. Amount paid to various clubs - Held that - Same is to be allowed as revenue expenditure as reling on assessee s own case 2013 (2) TMI 629 - Karnataka High Court - In favor of assessee. Deduction of expenditure incurred in foreign exchange for the purpose of deduction u/s 80HHE - Held that - Tribunal was not correct in holding that deduction u/s 80HHE should be allowed to the assessee without excluding the foreign exchange expenditure incurred by the Assessee as relying on its own case 2013 (6) TMI 193 - KARNATAKA HIGH COURT - Decided against the assessee.

Issues Involved:
1. Treatment of amounts paid to clubs for obtaining membership.
2. Deduction under Section 80HHE without excluding foreign exchange expenditure.
3. Classification of Eagle Software as a capital asset or trading receipt.
4. Eligibility of Eagle Software sale for deduction under Section 10A.
5. Consideration of Eagle Software project commencement before STP unit approval.
6. Consideration of corresponding expenditure for Eagle Software sale.
7. Inclusion of royalty from Canada in turnover for Section 80HHE deduction.
8. Application of Double Taxation Agreement between Canada and India for royalty inclusion in turnover.

Issue-wise Detailed Analysis:

1. Treatment of Amounts Paid to Clubs for Obtaining Membership:
The appellate authorities held that amounts paid to clubs for obtaining membership should be treated as revenue expenditure and allowable as a deduction. This decision was upheld, as the expenditure was not considered capital in nature.

2. Deduction Under Section 80HHE Without Excluding Foreign Exchange Expenditure:
The Tribunal's decision to allow the deduction under Section 80HHE without excluding foreign exchange expenditure was challenged. The court ultimately set aside the ITAT's order on this issue, stating that the foreign exchange expenses should be excluded before granting the deduction.

3. Classification of Eagle Software as a Capital Asset or Trading Receipt:
The assessing officer initially treated the income from the sale of Eagle Software as a trading receipt, not a capital gain. The appellate authority and ITAT confirmed this, stating that the income from the sale of Eagle Software should be treated as trading income. The court upheld this classification, noting that the software was developed and sold as part of the assessee's regular business activities.

4. Eligibility of Eagle Software Sale for Deduction Under Section 10A:
The appellate authority and ITAT found that the sale of Eagle Software was effected from the STP unit and thus eligible for deduction under Section 10A. The court agreed, stating that the transaction occurred after the establishment of the STP unit and the assessee was entitled to the exemption under Section 10A.

5. Consideration of Eagle Software Project Commencement Before STP Unit Approval:
The revenue argued that the project started before the STP unit's approval, thus disqualifying it from Section 10A benefits. However, the court found that the sale took place after the STP unit's establishment, and the assessee was entitled to the exemption.

6. Consideration of Corresponding Expenditure for Eagle Software Sale:
The court noted that the expenditure incurred for developing the software was included in the profit and loss account for the respective assessment years. The ITAT's decision to treat the income from the sale as a trading receipt and grant exemption under Section 10A was upheld.

7. Inclusion of Royalty from Canada in Turnover for Section 80HHE Deduction:
The court referred to a previous decision (ITA Nos. 2972/2005) where it was determined that the royalty received from Canada should be included in the turnover for the purpose of Section 80HHE deduction. This decision was in favor of the revenue.

8. Application of Double Taxation Agreement Between Canada and India for Royalty Inclusion in Turnover:
Similarly, the court referred to a previous decision (ITA Nos. 2972/2005) and held that the Double Taxation Agreement between Canada and India did not exclude the royalty from being part of the turnover for Section 80HHE purposes. This decision was also in favor of the revenue.

Conclusion:
The appeal was partly allowed. The ITAT's order allowing the deduction under Section 80HHE without excluding foreign exchange expenditure was set aside. However, the ITAT's decisions on other issues, including the treatment of club membership fees, classification of Eagle Software income, and eligibility for Section 10A deduction, were upheld.

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