2022 (11) TMI 1316 - AT - Income Tax

Nature of expenses - Disallowance of Building repair expenses - adhoc disallowance of 10% by the Ld.AO - HELD THAT - Hon ble Supreme Court in the case of CIT vs. Kalyanji Mavji and Co 1980 (1) TMI 1 - SUPREME COURT has held that cost on repairs which are not current repairs can be allowed under section 37 (1). Section 30 and 31 are not a bar in this regard. AO has not identified any expenditure that has resulted in creation of a new asset. There is no basis for the to disallow adhoc 10% of the total expenditure incurred by the assessee of the building repairs. From the above case law it is apparent that expenditure on repairs although prolonging the life and increasing durability of the asset is not necessarily of capital nature. Hence in our considered opinion expenditure incurred by the assessee with regard to repairing/ renovating of existing make-up rooms have to be allowed as deduction as revenue expenditure as they cannot be treated as capital expenditure meant for bringing into existence a new asset or a new advantage and they are laid out wholly and exclusively for the purpose of business of the assessee. - Decided in favour of assessee. Taxability of Inducement fees - inducement fees was received for cancellation / lapse of proposed scheme of acquisition - Excess of inducement fees received over expenditure incurred and the same was treated as capital receipt by the assessee and consequently the said sum was not offered to tax - HELD THAT - As the proposed acquisition failed the assessee was in recipient of certain amount in connection to the cancellation/lapse of the proposed scheme of acquisition. It is submitted that the assessee had spent certain amount towards due diligence in the form of legal charges advisory etc. of the proposed acquisition. The said expenditure was reduced from the total amount received by the assessee and the balance was treated by the assessee as capital receipt that was not offered to tax. We have considered the above receipt by the assessee based on various provisions of the Act. The expenditure incurred by the assessee towards the due diligence legal advices and payments for other professional services are to considered as business loss for the reason that the same did not culminate into a completed transaction. In sofar as the excess amount received by the assessee over and above the expenditure is concerned the same cannot be held to be exempt since this excess amount was received by the assessee for failure of the proposal for acquisition. The said amount is taxable in the hands of the assessee as revenue receipt. Therefore in our considered opinion section 28(ii)(e) of the Act would come into play and the income received by the assessee would have to be certainly treated as profits and gain. Whether the amount will qualify for deduction under section 10AA ? - The answer to this is in negative and against assessee. In our opinion the money received by assessee does not arise out of the profits of the undertaking. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld. Disallowance of foreign exchange fluctuation loss - HELD THAT - The foreign exchange loss is due to the reinstatement of the accounts at the end of the financial year as well as loss incurred on account of exchange fluctuation on repayment of borrowings is similar to the interest expenditure and it is to be allowed as revenue expenditure u/s 37 of the I.T.Act as per the accounting standard approved by the Institute of Chartered Accountants of India. This issue is no longer res integra. Hon ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT has held that the actual payment was not a condition precedent for making adjustment in respect of foreign currency transactions at the end of the closing year. We direct the Ld.AO to carry out necessary verification in respect of the loss /gain incurred by the assessee for the years under consideration whether on account of Capital asset based on the principles laid down by Hon ble Mumbai Special Bench in case of Bank of Bahrain and Kuwait 2010 (8) TMI 578 - ITAT MUMBAI - In the event the loss/gain is out of trading liability no disallowance can be made. However we make it clear that there cannot be double claim by the assessee; once in the year under consideration and on actual settlement of the bill in any subsequent year. Reduction of export turnover u/s. 10A on account of later realization of export turnover into India - .AO denied the claim and held that the late realised export turnover cannot be reduced from the formula for computation of section 10A - HELD THAT - We note that the assessee has furnished the details wherein the authorised dealers under FEMA have not taken any adverse action for late realisation of export turnover and neither declined nor rejected the application for late realisation of such export turnover. We note that the authorities below have not verified any documents /evidences filed by the assessee. The question is whether the extension of time for realisation of the export proceeds by the Competent Authority under FEMA can be said to be the approval granted by the Competent Authority under section 10A(3) of the Income-tax Act 1961. In the event there is an approval granted by the competent authority under FEMA the claim of assessee deserves to be allowed. We therefore direct the Ld.AO to verify the evidences and the documents in respect of the RBI approval and to consider the claim of the assessee in accordance with law in the light of the above ratio by Hon ble Bombay High Court in in case of Mogan Stanley 2011 (8) TMI 279 - BOMBAY HIGH COURT Reduction of rental income from profits of 10A units - assessee had received rental income from its subsidiary companies that constituted income from incidental and ancillary activities that was subservient to carrying on the business of the assessee - The said rental income was claimed by the assessee as deduction u/s. 10A which was denied by the Ld.AO based on the turnover of the SEZ units - HELD THAT - As relying on this Tribunal for A.Y. 2005-06 in assessee s own case 2017 (11) TMI 2016 - ITAT BANGALORE we direct the Ld.AO to include the rental income received from the SEZ units for the purposes of computing profits u/s. 10A. MAT computation - disallowance u/s. 14A if any could be added for computing book profits - Addition of SEZ book profits u/s. 115JB - HELD THAT - This issue is no longer resintegra and the same stands settled by the decision of Hon ble Special Bench of Delhi Tribunal in case of ACIT vs. Vireet Investment (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI We accordingly direct the Ld.AO to delete the disallowance added while computing book profits. Enhancement of income by CIT(A) in respect of new source which was not at all dealt by the learned AO in the assessment order is bad in law - Reduction of 50% of overseas revenues from licensing of Finacle software from export turnover of 10A units - HELD THAT - As in a software development segment once a software developed cannot be used in perpetually the product has to undergo various changes in accordance with the demands of time and the business model. Product that gets outdated due to rapid change in the commercial requirement deserves to be replaced with a new model. In the present facts of the case the only dispute with the assessing officer is in respect of Finacle being a remodel of BANCS2000. It is not disputed that the said license fee generated out of licensing of Finacle software is eligible for deduction u/s. 10A. Whether there is a change in the product and whether there are new features that could categorise this Finacle software to be a new product has not been verified by the Ld.AO. Such technical analysis is definitely very difficult at the revenue s end due to the lack of expertise. We therefore direct the Ld.AO to verify with the assistance of the assessee on a technical level to understand the difference in both these softwares. In the event there is a difference in the products assessee deserves 100% deduction on the license fee received from the overseas in respect of licensing the product. We direct the assessee to provide sufficient assistance to the Ld.AO in order to understand the product model to come to a just conclusion.

Summary

Issues Involved:

1. Denial of deduction under section 10AA for SEZ units.
2. Transfer pricing adjustment for interest receivable from foreign subsidiaries.
3. Disallowance under section 14A.
4. Disallowance under section 40(a)(i) for subscription charges.
5. Disallowance under section 40(a)(ia) for software expenses.
6. Treatment of software expenses as capital expenditure.
7. Disallowance of brand building expenditure.
8. Disallowance of commission paid to non-resident agents.
9. Reduction of export turnover for late realization.
10. Reduction of rental income from profits of 10A units.
11. Addition of SEZ book profits under section 115JB.
12. Enhancement of income by CIT(A) for new sources.
13. Deduction under section 37 for state taxes paid in foreign countries.
14. Additional foreign tax credit claim.
15. Deduction for education cess and secondary and higher secondary cess.

Detailed Analysis:

1. Denial of Deduction Under Section 10AA for SEZ Units:
The Tribunal considered the denial of deduction under section 10AA for SEZ units in the years 2010-11 and 2011-12. The Tribunal referred to its previous order for A.Y. 2012-13 and applied the same view, allowing the deduction claimed by the assessee for SEZ units, including Chennai, Chandigarh, Mangalore, and Pune units. The Tribunal found that the SEZ units were not formed by splitting up or reconstruction of an existing business.

2. Transfer Pricing Adjustment for Interest Receivable from Foreign Subsidiaries:
For the years 2010-11 and 2011-12, the Tribunal upheld the interest rate of 6% computed by the assessee for interest receivable from Infosys China and Infosys Brazil, dismissing the revenue's appeal.

3. Disallowance Under Section 14A:
The Tribunal remanded the issue of disallowance under section 14A to the Assessing Officer (AO) for computation as per directions, partially allowing the assessee's appeals and dismissing the revenue's appeals.

4. Disallowance Under Section 40(a)(i) for Subscription Charges:
The Tribunal allowed the assessee's appeal, holding that no disallowance was warranted for subscription charges paid to M/s Forester Research and M/s Gartner, as there was no amount payable as of the last day of the previous year.

5. Disallowance Under Section 40(a)(ia) for Software Expenses:
The Tribunal remanded the issue to the AO to consider in accordance with the Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, directing verification of the nature of expenses.

6. Treatment of Software Expenses as Capital Expenditure:
The Tribunal remanded the issue to the AO to verify the claim as per the Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, allowing both revenue and assessee's appeals for statistical purposes.

7. Disallowance of Brand Building Expenditure:
The Tribunal allowed the assessee's appeal, following the decision in Infosys BPO Ltd v DCIT, and held that the brand building expenditure was allowable.

8. Disallowance of Commission Paid to Non-Resident Agents:
The Tribunal remanded the issue to the AO to verify the claims in accordance with the Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, allowing both revenue and assessee's appeals for statistical purposes.

9. Reduction of Export Turnover for Late Realization:
The Tribunal directed the AO to verify the RBI approval for late realization of export turnover and consider the claim in accordance with the Bombay High Court decision in CIT vs. Morgan Stanley Advantage Services.

10. Reduction of Rental Income from Profits of 10A Units:
The Tribunal allowed the assessee's appeal, directing the AO to include the rental income received from SEZ units for computing profits under section 10A, following the Karnataka High Court decision in Subex Ltd. vs. ITO.

11. Addition of SEZ Book Profits Under Section 115JB:
The Tribunal directed the AO to delete the disallowance added while computing book profits under section 115JB, following the Special Bench decision in ACIT vs. Vireet Investment (P) Ltd.

12. Enhancement of Income by CIT(A) for New Sources:
The Tribunal remanded the issue to the AO to verify the technical aspects of the Finacle software and determine if it was a new product eligible for 100% deduction under section 10A.

13. Deduction Under Section 37 for State Taxes Paid in Foreign Countries:
The Tribunal held the issue to be academic at this stage, as the main issue of foreign tax credit was remanded to the AO for verification in light of the Karnataka High Court decision in Wipro Ltd. vs. DCIT.

14. Additional Foreign Tax Credit Claim:
The Tribunal directed the AO to verify the taxes paid in respect of the income for the previous year 2010-11 and grant credit as per section 90.

15. Deduction for Education Cess and Secondary and Higher Secondary Cess:
The Tribunal dismissed the additional ground raised by the assessee for deduction of education cess and secondary and higher secondary cess, following the Supreme Court decision against the assessee.

Conclusion:
The appeals filed by the assessee and revenue were partly allowed as indicated in the detailed analysis. The Tribunal directed the AO to verify various claims and compute deductions as per the directions and relevant case laws.