2015 (3) TMI 933 - AT - Income Tax

Treatment of income from lease rent - Profits & Gains of Business or Profession OR Income from House Property - assessee reiterated its alternative claim that the income should be taxed under the head Other Sources - Held that - Ld. CIT(A) has very categorically and correctly stated that provisions of Sec. 56(2)(iii) are not applicable on the facts of the case. In the light of the decision of the Hon ble Supreme Court in the case of Shambu Investment wherein held that where prime object of the assessee under the agreement was to let out the portion of the said property to various occupants by giving them additional right of using the furniture and fixtures and other common facilities for which rent was being paid month by month. Income derived from the said property is an income from property and should be assessed as such - Decided against assessee. Computation of deduction u/s. 10A - CIT(A) reduced the allocation to 25% as pertaining to incurred for the purpose of providing technical services outside India and accordingly directed the AO to recomputed the deduction u/s. 10A of the Act - Held that - It can be seen that the expenditures considered in the immediately preceding assessment years are identical to the expenditure considered during the year under consideration. A similar issue was considered in the case of Patni Telecom (P) Ltd. Vs ITO (2008 (1) TMI 452 - ITAT HYDERABAD-A ) wherein the issue was that the assessee had incurred certain expenditure on account of travelling allowance for the purpose of development of Software at clients cited outside India and had also incurred certain expenditure on the delivery of software booked under Internet Service Provider (ISP), since it got leased ISP line exclusively. It was explained by the Tribunal that if the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In a case where only value of goods is quoted, expense is borne by the supplier. The logic and reason behind this have been explained by the CBDT vide its Circular No. 564 dt. 5.7.1990 that the delivery of the goods should be free on Board. In respect of expenses incurred in foreign exchange in providing technical services outside India, the Tribunal observed that on reading of clause (iv) of Explanation -2 to Sec. 10A, it is evident that all expenses need not be reduced from consideration received in convertible foreign exchange for the purpose of calculation of export turnover u/s. 10A of the Act. Only those expenses which are incurred in foreign exchange in providing technical services outside India are required to be reduced. Considering the facts of the case in hand, in the light of the decision of the Tribunal discussed hereinabove, we set aside the findings of the Ld. CIT(A) and direct the AO to allow the claim of deduction u/s. 10A as computed by the assessee. - Decided in favour of assessee. Deduction u/s. 10A on the profits in respect of Units I & II - loss of Unit-III be set off against the income computed under the head Profits & Gains of Business or Profession - Held that - We find force in the contention of the Ld. Counsel wherein the Hon ble High Court in case of Hindustan Unilever Ltd. Vs DCIT & Another 2010 (4) TMI 206 - BOMBAY HIGH COURT has held that all the four units of the assessee were eligible u/s. 10B of the Act. Three units had returned a profit during the course of the assessment year, while one unit had returned a loss. Hon ble High Court held that the assessee was entitled to deduction in respect of the profits of the three eligible units while the loss sustained by the fourth units could be set off against the normal business income. Facts being identical to the facts of the case in hand, respectfully following the decision of the Honb ble jurisdictional High Court, we set aside the findings of the Ld. CIT(A) and direct the AO not to set off eligible unit with the profits of the ineligible unit - Decided in favour of assessee. Disallowance made u/s. 14A of the Act r.w. Rule 8D. - Held that - A perusal of the assessment record shows that the AO has computed the disallowance u/s. 14A r.w. Rule 8D of the Act. It is a settled proposition of law that application of Rule 8D is w.e.f 2008-09 as held by the Hon ble High Court of Bombay in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT . Therefore, the action of the AO is not as per the settled position of the law. In our considered opinion, disallowance of ₹ 1,00,000/- would meet the ends of justice. We, accordingly direct the AO to restrict the disallowance u/s. 14A of the Act at ₹ 1,00,000/- - Decided Partly in favour of assessee.

Summary

Issues Involved:
1. Treatment of income from lease rentals.
2. Claim of deduction under Section 10A of the Income Tax Act.
3. Set-off of losses of one eligible unit against profits of other eligible units.
4. Disallowance under Section 14A read with Rule 8D.
5. Reopening of assessment under Section 147 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Income from Lease Rentals:
The primary issue was whether the income from lease rentals should be classified under "Profits & Gains of Business or Profession" or "Income from House Property." The assessee, engaged in software development, received Rs. 1,37,26,637/- from leasing out office space. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] classified this income as "Income from House Property," denying depreciation claims. The assessee's reliance on the Supreme Court's decision in Laxmi Silk Mills was deemed misplaced as the leased premises were not temporarily let out but sold subsequently. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT Vs Shambu Investment Pvt. Ltd., asserting that the primary objective was letting out property, thus income should be assessed as "Income from House Property."

2. Claim of Deduction under Section 10A:
The AO adjusted the export turnover by including expenses like freight, telecommunication charges, and insurance, reducing the deduction under Section 10A by Rs. 14.80 lakhs. The CIT(A) partially agreed but reduced the allocation to 25%. The Tribunal found no specific findings regarding the recovery of such expenses from foreign parties and referenced the Tribunal's earlier decision in the assessee's favor for the previous assessment year. The Tribunal directed the AO to allow the deduction as computed by the assessee, thus allowing the appeal on this ground.

3. Set-off of Losses of One Eligible Unit Against Profits of Other Eligible Units:
The assessee contended that the loss of one eligible unit should not offset the profits of other eligible units. The Tribunal, referencing the Bombay High Court's decision in Hindustan Unilever Ltd. Vs DCIT, agreed that the loss of one unit could be set off against normal business income, not against the profits of other eligible units. The Tribunal directed the AO accordingly, allowing the appeal on this ground.

4. Disallowance under Section 14A read with Rule 8D:
The assessee did not press grounds related to disallowance under Section 14A due to the smallness of the amount involved. The Tribunal dismissed these grounds as not pressed.

5. Reopening of Assessment under Section 147:
The Tribunal did not find it necessary to decide on the reopening of the assessment under Section 147, as the appeal was decided on merits.

Separate Judgments Delivered:
- ITA No. 2672/M/2010 (A.Y. 2004-05): The appeal was partly allowed, with specific directions on the treatment of lease rental income, Section 10A deductions, and set-off of losses.
- ITA No. 2750/M/2011 (A.Y. 2006-07): The appeal was partly allowed, following the detailed reasons given in ITA No. 2672/M/2010.
- ITA No. 5974/M/2010 (A.Y. 2002-03): The appeal was partly allowed, with directions to restrict disallowance under Section 14A to Rs. 1,00,000/- and to recompute book profits under Section 115JB.

Conclusion:
The Tribunal's comprehensive analysis addressed each issue, providing detailed justifications and referencing relevant case laws, ultimately delivering a balanced judgment favoring the assessee on certain grounds while upholding the Revenue's stance on others.