2014 (10) TMI 1016 - HC - Income Tax

Nature of expenditure - rent paid to the landlord and registration expenses of Chennai unit - revenue or capital expenditure - HELD THAT - 5th unit at Chennai was set up in a rented premises. After taking the premises on rent for two months, they were involved in making interior infrastructure. It is only after two months, they were able to commence the unit. The rent paid subsequent to the period is allowed as revenue expenditure. Rent of two months prior to the commencement of the unit is disallowed, on the ground that it constitute the capital expenditure and ₹ 2,500/- is disallowed on the ground that the same being registration fees. If the assessee has taken the premises on rent, merely because the date on which the premises is taken on rent, is unable to carry on the business, would in law, make no difference and the rent paid would not become the capital expenditure if two months is taken to commence the business of the unit. The finding recorded by the three authorities that two months prior to the commencement of the unit constitutes the capital expenditure is unsustainable. Similarly, the payment of registration fees constitutes capital expenditure is unsustainable and therefore,the findings recorded by the three authorities are hereby set aside and the 1st substantial question of law is answered in favour of the assessee and against the revenue. Telecommunication expenses inclusion - excluded from the export turnover when such expenses were not part of negotiated price and hence did not originally form part of negotiated price and hence did not originally form part of export turnover? - HELD THAT - As relying on M/s.Sasken Communication Techonologies Ltd. 2014 (9) TMI 1210 - KARNATAKA HIGH COURT had remanded the matter to the Tribunal to record the findings on merits as well as on the alternative grounds. Following the said judgment, the findings recorded on the 2nd substantial question of law by the authorities, are hereby set aside and the matter is remitted back to the Tribunal for fresh consideration and in accordance with law Benefit of tax holiday under Section 10-A - interest income although the same formed part of business income of the appellant - HELD THAT - As relying on M/S MOTOROLA INDIA ELECTRONICS PVT LTD 2014 (1) TMI 1235 - KARNATAKA HIGH COURT the benefit of tax holiday under Section 10-A of the Act is available even in respect of interest on income. Accordingly, the 3rd substantial question of law is answered in favour of the assessee and against the revenue.

Summary

Issues:
1. Whether rent paid and registration expenses for setting up a unit constitute capital expenditure?
2. Whether telecommunication expenses should be excluded from export turnover?
3. Whether tax holiday under Section 10-A applies to interest income?

Analysis:

Issue 1: Rent and Registration Expenses
The first issue revolves around the nature of expenses incurred for setting up a unit in Chennai. The Tribunal disallowed rent and registration fees as capital expenditure. However, the High Court found that the rent paid prior to the commencement of the unit cannot be considered capital expenditure merely because there was a delay in starting operations. The Court held that such expenses should be treated as revenue expenditure. Similarly, the registration fees were also considered revenue expenditure. The Court set aside the findings of the lower authorities and ruled in favor of the assessee.

Issue 2: Telecommunication Expenses
Regarding the exclusion of telecommunication expenses from export turnover, the High Court referred to a similar case and remanded the matter back to the Tribunal for fresh consideration. The Court directed the Tribunal to reexamine the issue on merits and alternative grounds, following the precedent set in a previous judgment.

Issue 3: Tax Holiday for Interest Income
The final issue pertains to the availability of tax holiday under Section 10-A for interest income. Citing a previous case, the Court highlighted that income derived from export-related activities should be considered as income of the business undertaking. The Court concluded that the benefit of tax holiday under Section 10-A extends to interest income as well. Therefore, the Court ruled in favor of the assessee, setting aside the findings of the lower authorities.

In conclusion, the High Court's judgment addressed the issues raised by the appellant comprehensively, providing clarity on the treatment of expenses, turnover calculations, and eligibility for tax benefits under Section 10-A. The Court's decisions were based on legal principles and precedents, ensuring a fair and just outcome for the parties involved.