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2011 (12) TMI 377 - AT - Income TaxReopening - Deduction u/s 10A - The assessee was engaged in development of software and also offers consultancy, data hosting and other related activities - AO noticed that there was a mistake apparent on the record in allowing the carry forward of loss and that from 1.4.2001 onwards deduction u/s. 10A should have been allowed only on the total income of the assessee and not in the individual STPI - ld. counsel for the assessee submitted that section 10A of the Act is a complete code in itself and therefore deduction under this section is allowable on the profits for the year arising to the undertaking before setting off of the loss from other units or brought forward lossess of the earlier years - High Court in the case of CIT v. Yokogawa India Ltd. and Ors. (2011 -TMI - 211353 - Karnataka High Court) wherein it was held that the income of the unit eligible for deduction u/s. 10A of the Act is to be excluded at source itself before arriving at the gross total income, therefore the loss of non-10A unit cannot be set off against the income of section 10A unit for carry forward of loss u/s. 72. Regarding disallowance of additional liability arising due to exchange fluctuation - ld. counsel for the assessee submitted that during the year under consideration the assessee claimed only the expenses related to foreign exchange variation and the actual expenses were allowed in the earlier year - In the present case, one of the contentions of the ld. counsel for the assessee was that the expenditure incurred for restrictive covenant in the preceding year has been allowed and it was only the exchange fluctuation variation which was claimed as revenue expenditure in the year under consideration - Held that this fact is not verifiable as to whether the expenditure incurred in the earlier year was considered as revenue expenditure by the department and the claim of the assessee was allowed and this year only the exchange fluctuation variation was claimed - Decided in favor of the assessee by way of remand to AO. Reduction of telecommunication expenses from export turnover. - held that - for the purpose of computation of deduction u/s. 10A of the Act, if any expenditure is excluded from the export turnover, the same has to be excluded from the total turnover also.
Issues Involved:
1. Reopening of assessment under section 147 of the Income-tax Act, 1961. 2. Deduction under section 10A of the Income-tax Act, 1961. 3. Disallowance of additional liability due to exchange fluctuation. 4. Reduction of telecommunication expenses from export turnover. Issue-wise Detailed Analysis: 1. Reopening of Assessment under Section 147: The assessee raised grounds challenging the reopening of assessment for the year under appeal under section 143 read with section 147 of the Income-tax Act, 1961, asserting it was based on a mere change of opinion. However, these grounds (1.1 to 1.3) were not pressed by the assessee during the hearing and were dismissed as not pressed. 2. Deduction under Section 10A: The grievance of the assessee was related to the deduction under section 10A of the Income-tax Act, 1961. The facts revealed that the assessee filed a return declaring a loss, and the assessment framed allowed the carry forward of loss. The AO later noticed a procedural mistake and issued a notice under section 147 r.w. sec. 148 of the Act. The AO determined that the loss from non-STP units should be set off against the income of STP units before allowing the deduction under section 10A. The CIT(A) upheld the AO's decision. However, the Tribunal found that the issue was covered by the judgment of the Hon'ble jurisdictional High Court in CIT v. Yokogawa India Ltd., which stated that the income of the 10A unit must be excluded at source before arriving at the gross total income, and the loss of non-10A units cannot be set off against the income of 10A units. Thus, the Tribunal set aside the CIT(A)'s order and directed the AO to allow the benefit of carrying forward the loss of non-STP units. 3. Disallowance of Additional Liability due to Exchange Fluctuation: The AO disallowed the additional liability arising due to exchange fluctuation related to non-compete fees, treating it as capital expenditure. The CIT(A) confirmed this action. The assessee argued that the non-compete fee was allowed as revenue expenditure in the preceding year, and thus, the exchange fluctuation should also be allowed as revenue expenditure. The Tribunal noted that it was not verifiable from the record whether the expenditure was considered as revenue expenditure by the department in the earlier year. Therefore, the Tribunal set aside the issue to the AO for fresh consideration, directing the AO to verify the facts and consider the Supreme Court's ratio in Radhasaomi Satsang v. CIT. 4. Reduction of Telecommunication Expenses from Export Turnover: The AO reduced telecommunication expenses from export turnover but not from total turnover, affecting the deduction under section 10A. The CIT(A) upheld this decision. The assessee cited the decision in ITO v. Sak Soft Ltd. and the Hon'ble jurisdictional High Court's ruling in CIT v. Tata Elxsi Ltd., which stated that if any expenditure is excluded from the export turnover, it must also be excluded from the total turnover. The Tribunal agreed with this view and set aside the CIT(A)'s order, directing the AO to exclude telecommunication charges from both export turnover and total turnover while computing the deduction under section 10A. Appeal Against the Order Dated 2.6.2010: The appeal against the order dated 2.6.2010 was considered infructuous by the CIT(A) as the assessment had been superseded by a notice under section 148 and a subsequent assessment order. The Tribunal upheld this view, noting that the issues raised were already adjudicated in the appeal against the assessment order dated 28.12.2007, making the current appeal infructuous. Conclusion: The appeal in ITA No.975/Bang/2010 was partly allowed for statistical purposes, and the appeal in ITA No.979/Bang/2010 was dismissed. The Tribunal directed the AO to allow the benefit of carrying forward the loss of non-STP units and to exclude telecommunication charges from both export turnover and total turnover while computing the deduction under section 10A. The issue of additional liability due to exchange fluctuation was remanded to the AO for fresh consideration.
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