2014 (12) TMI 602 - AT - Income Tax

Allowability of claim of deduction u/s 10A - SEZ Unit Held that - The assessee in its return of income has not claimed any deduction/exemption u/s 10A of the Act on the ground that there was net loss from the business of the eligible undertaking - CIT(A) was not justified in rejecting the claim of the assessee assessee claimed that it could not claim exemption u/s 10A as according to its return there was loss from the eligible unit and consequently for the first time opportunity to claim exemption u/s 10A arose only when certain disallowances/additions were made by the AO which resulted in positive income of the eligible undertaking - the AO has not allowed any opportunity to the assessee for claiming exemption u/s 10A after computing the business income of the alleged eligible undertaking at a positive figure for the first time - while making the assessment u/s 143(3) of the Act, the AO is duty bound to compute the total income as per the provisions of Income tax Act and in allowing deductions/exemptions also to the assessee which is statutorily allowable to the assessee thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO for verification of claim of the assessee for deductions u/s 10A Decided in favour of assessee. Treatment of technical charges Capital or revenue expenses Held that - CIT(A) rightly was of the view that except for giving the bill of technical charges the assessee was not able to give any evidence regarding the nature of the technical charges - the technical charge was only in respect of particular machinery which has not been produced in future but the technical consultancy as it appears from the assessee s submission is in respect of manufacturing machine. The technical knowledge provided can be used by the assessee in future to produce more such machinery - The assessee claimed deduction for technical consultancy charges paid to a Korean company for manufacturing of machine which was exported to China - assessee contended that earlier it was not making export to China and to make export to China and to overcome the competition, it had to incur such expenditure to improve the quality of machine so that the assessee could make export to China - assessee could not bring any material to show that the assessee had incurred this expenditure and the benefit of which will not be derived by it in future - the technical consultancy charges are capital in nature as know-how on which the assessee will derive benefit of enduring nature and the order of the CIT(A) is upheld Decided against assessee. Travelling expenses partially allowed @ 50% Expenses incurred wholly and exclusively for business purpose or not - Held that - The foreign traveling expense was relating to foreign travel to Korea and Japan - the assessee exported machineries to these countries - the assessee could not support these expenses by producing the relevant bills and vouchers - the disallowance reduced to 20% - Decided partly in favour of assessee. Rejection of books of accounts Estimation of GP Held that - Assessee placed a working of the gross profit rate of the year under consideration along with copy of the Tax Audit Report - The working shows that the gross profit rate disclosed during the year was 17.26% and not 9.05% as assumed by the AO - the AO proceeded in the case on a wrong assumption that the gross profit rate disclosed by the assessee during the year was 9.05% - as observed by the CIT(A) the market in which the assessee sold its goods in earlier years was different from the market in which the assessee sold its goods during the year under consideration and this change in the market caused change in the gross profit rate the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Deduction under Section 10A for SEZ unit.
2. Treatment of technical charges as capital or revenue expenditure.
3. Disallowance of foreign traveling expenses.
4. Rejection of books of accounts and estimation of gross profit.

Detailed Analysis:

1. Deduction under Section 10A for SEZ unit:
The assessee claimed a deduction under Section 10A for the SEZ unit for the first time during appellate proceedings. The CIT(A) rejected this claim on the grounds that it was not made in the original return or during assessment proceedings, and the time for revising the return under Section 139(5) had expired. The CIT(A) also noted that the case law cited by the assessee was not applicable due to changes in the law. However, the Tribunal found that the Assessing Officer should have allowed the assessee to claim this deduction after computing the business income at a positive figure. The Tribunal set aside the orders of the lower authorities and remanded the matter back to the Assessing Officer for verification and appropriate action.

2. Treatment of technical charges as capital or revenue expenditure:
The assessee claimed technical consultancy charges of Rs. 45,55,000 as revenue expenditure. The Assessing Officer and CIT(A) treated this expenditure as capital in nature, providing enduring benefits to the assessee. The CIT(A) allowed depreciation on this capital expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the assessee failed to provide evidence that the expenditure did not result in enduring benefits or new technical know-how.

3. Disallowance of foreign traveling expenses:
The Assessing Officer disallowed Rs. 19,46,144 out of the total foreign traveling expenses claimed by the assessee due to lack of supporting vouchers. The CIT(A) restricted the disallowance to 50%, considering the evidence of passport entries and purchase of foreign currency. The Tribunal further reduced the disallowance to 20%, acknowledging the business purpose of the travel but noting the absence of supporting bills and vouchers.

4. Rejection of books of accounts and estimation of gross profit:
The Assessing Officer rejected the assessee's books of accounts and estimated the gross profit by taking an average of the previous two years, resulting in an addition of Rs. 1,08,96,008. The CIT(A) deleted this addition, noting that the assessee provided detailed reasons for the fall in gross profit, which were not adequately addressed by the Assessing Officer. The Tribunal confirmed the CIT(A)'s decision, highlighting that the gross profit rate disclosed by the assessee was higher than assumed by the Assessing Officer and that the change in market conditions justified the variation in gross profit rate.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes regarding the Section 10A deduction and upheld the CIT(A)'s decisions on technical charges and gross profit estimation. The disallowance of foreign traveling expenses was partially reduced. Both the assessee's and Revenue's appeals were partly allowed.