2016 (5) TMI 952 - AT - Income Tax

Disallowance of expenditure on computer software - Held that - The assessee during the year also claims to have purchased similar computer software i.e. application software for upgrading its systems, hence the same is to be allowed as revenue expenditure in the hands of assessee, in line with order of Tribunal in assessment year 2002-03 in appeal filed by the Revenue. We also find support from ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court ). The Assessing Officer is directed to allow the expenditure in totality and depreciation already allowed should be withdrawn. Disallowance of deduction under section 10(33) on dividend income earned on Master shares and other units of UTI - Held that - The issue is decided against the assessee by the Tribunal in assessment year 1998-99. The Tribunal (supra) had taken note of the fact that up to assessment year 1999-2000, income received in respect of units of UTI were eligible for deduction under section 80L of the Act. Thus, the dividend income was not taxable. Computation of deduction under section 80HHC - Held that - The issue arising before us is identical and we hold that receipts of income i.e. Interest on IT Refund, NSC Interest, Bank Interest and Other interest are not eligible for claim of deduction under section 80HHC of the Act. It may be clarified here that the assessee had raised issue of computation of book profits under section 115JA of the Act consequent to reworking of deduction under section 80HHC of the Act. Entitlement to claim of deduction under section 35AB @ 1/6 th of the total know-how fees paid allowed Disallowance of deduction claimed of appropriate part of exchange fluctuation loss - Held that - The claim of the assessee before us is identical as claimed in assessment year 1998-99. Following the same parity of reasoning, we remit this issue also back to Assessing Officer, who shall determine the amount, which is to be allowed in the hands of assessee in the present year on account of exchange fluctuation loss Claim of deduction under section 80HHC - whether unabsorbed depreciation of Titex India Pvt. Ltd. is to be adjusted or not? - Held that - The amalgamation of the said company was on 01.01.2001 i.e. during the financial year ending 31.03.2001 and after amalgamation, profits and losses of the said company gets merged with the profits and losses of the assessee before us. All the assets were taken over also get amalgamated. The said concern had carried forward unabsorbed depreciation relating to earlier years and after amalgamation, the assessee was entitled to claim set off of such unabsorbed losses of Titex India Pvt. Ltd., against its own business profits. Once such a claim is allowable in the hands of assessee, then the profits of assessee stand reduced on account of claim of unabsorbed depreciation. In order to work out the deduction under section 80HHC of the Act, such reduced profits after set off of unabsorbed depreciation of Titex India Pvt. Ltd. are to be considered for computing deduction under section 80HHC of the Act. Admittedly, the said losses relate to amalgamated company. However, unabsorbed depreciation becomes part of current depreciation of the assessee company after amalgamation and hence, the profits are to be re-computed and the profits as computed under the provisions of sections 28 and 29 of the Act are the eligible profits to be considered while computing deduction under section 80HHC of the Act. The Hon'ble Supreme Court in CIT Vs. Shirke Construction Equipment Ltd. (2007 (5) TMI 194 - SUPREME Court ) had held that while determining the business profits for deduction under section 80HHC of the Act, unabsorbed business losses of earlier years under section 72 of the Act should be set off. Treatment of scrap sales in the total turnover while computing deduction under section 80HHC - Held that - We find that the issue is squarely covered in favour of the assessee. While computing deduction under section 80HHC of the Act since the assessee has not shown export of scrap as such, scrap sales would not form part of total turnover, while computing deduction under section 80HHC of the Act. Hence, the scrap sale is excludable from both the export and total turnover for calculating deduction under section 80HHC of the Act. Setting off of loss from export of trading goods against profits from export of manufactured goods while computing deduction under section 80HHC - Held that - This issue stands covered against the assessee by the ratio laid down by the Hon'ble Supreme Court in IPCA Laboratories Ltd. Vs. DCIT reported in (2004 (3) TMI 9 - SUPREME Court ), wherein it has been held that before computing deduction under section 80HHC of the Act, losses from trading activity are to be adjusted against profits, if any, of the manufactured goods and then balance profits are eligible for claiming deduction under section 80HHC of the Act. Allowance of claim of VRS expenditure - Held that - The assessee had incurred the aforesaid expenditure on VRS Scheme floated by it in order to reduce number of its workforce for smooth and efficient running of its business operations and hence, the said expenditure had business expediency and where the expenditure was incurred wholly and exclusively for the purpose of running business, the same is allowable as revenue expenditure. Eligible profits while computing deduction under section 80HHC - whether interest on customers and hundies, interest on MSEB/MIDC were part of business income ? - Held that - We find that the Tribunal in assessment year 1996-97 had held that the interest received on deposits with MIDC/MSEB customers and Inter-corporate deposits part take the nature of business and hence, assessable under the head Profits and Gains of Business . Accordingly, these amounts shall be included in the business income for the purpose of relief under section 80HHC of the Act. Where there was no nexus between income earned and business activity of the assessee, the said amounts were held to be assessable as income from other sources. We find that the issue arising before us is in respect of interest on customers and hundies, interest on MSEB/MIDC and the same are to be included as profits and gains of business and are eligible for claiming deduction under section 80HHC of the Act. Loss set off against 90% of sum referred in clause (iiia), (iiib) and (iiic) in the same proportion as the export turnover as bears to the total turnover of the business - Held that - CIT(A) had held that considering the provisions of section 80HHC(1) of the Act, that in case of loss, the effect of proviso to section 80HHC(3) of the Act would be to allow set off of loss by 90% of sum referred to in clauses (iiia), (iiib) (iiic) in the same proportion as the export turnover bears to the total turnover of business. Otherwise, it would tantamount to allow deduction under section 80HHC of the Act more than the profits derived by the assessee from export of said goods or merchandise. Therefore, the claim of the assessee was rejected by CIT(A). Accordingly, we hold that ground of appeal No.3 raised is mis-placed and hence, the same is dismissed. Exclusion of sales tax and Excise duty collected from the total turnover for the purpose of computing deduction under section 80HHC of the Act - Held that - The present issue is squarely covered by the order of Hon'ble Supreme Court in CIT Vs. Lakshmi Machine Works (2007 (4) TMI 202 - SUPREME Court ), wherein it has been held that while computing deduction under section 80HHC of the Act and while computing total turnover, both sales tax and Excise duty cannot form part of turnover and such taxes have to be excluded from total turnover under section 80HHC(3) of the Act. Disallowance of liquidated damages by treating them as payment for infraction of law - Held that - The assessee has furnished one set of documents. However, the assessee has failed to furnish majority of evidences justifying his claim. Though the assessee has stated that it is difficult for him to dig out the details for earlier years, however, following the principles of natural justice, we deem it fit to restore the issue to the file of Assessing Officer and direct the assessee to furnish requisite details before the Assessing Officer in order to establish its claim. The Assessing Officer shall afford reasonable opportunity of hearing to the assessee Disallowance of set off of interest paid against interest received - Held that - The interest paid under sections 220, 234B and 234C of the Act cannot be set off against interest received under section 244 of the Act. Whether interest under section 244A received for assessment year 1999-2000 is to be assessed in assessment year 1999-2000 itself as the assessment proceedings for the year were in progress? Held that - The interest was computed by the Assessing Officer on 30.06.2000 and consequently, the same is includable in the hands of assessee in the year ending 31.03.2001, which has been so included by the authorities below. Further, there is no merit in the plea raised by the assessee that only interest as finally determined could be assessed in the hands of assessee

Summary

Issues Involved:
1. Deduction under section 37(1) of the Income-tax Act, 1961 in respect of expenditure on computer software.
2. Exemption under section 10(33) of the Act in respect of dividend income on Master shares and other units of Unit Trust of India (UTI).
3. Computation of book profits under Section 80HHC of the Act.
4. Deduction under section 35AB of the Income Tax Act, 1961 in respect of lump sum know-how fees.
5. Deduction of Exchange Fluctuation loss.
6. Claim of VRS expenditure as revenue in nature.
7. Income classification of interest on customers and hundies, interest on MSEB/MIDC.
8. Set off of losses from trading activity against profits from manufacturing activity under section 80HHC.
9. Inclusion of scrap sales in total turnover for computing deduction under section 80HHC.
10. Set off of interest paid under sections 220, 234B, and 234C against interest received under section 244A.
11. Levy of interest under section 234D.
12. Treatment of interest under section 244A as income from other sources.

Detailed Analysis:

1. Deduction under section 37(1) of the Income-tax Act, 1961 in respect of expenditure on computer software:
The Tribunal allowed the assessee's claim for deduction of computer software expenses as revenue expenditure. It was noted that similar issues were decided in favor of the assessee in earlier years by the Tribunal and the Hon'ble Bombay High Court, which held that expenses incurred to obtain application software that needs to be upgraded from time to time due to changes in technology should be allowed as revenue expenditure.

2. Exemption under section 10(33) of the Act in respect of dividend income on Master shares and other units of Unit Trust of India (UTI):
The Tribunal dismissed the assessee's claim for exemption under section 10(33), noting that the issue had been decided against the assessee in earlier years. It was held that up to assessment year 1999-2000, income from units of UTI was eligible for deduction under section 80L, and thus, the dividend income was not taxable.

3. Computation of book profits under Section 80HHC of the Act:
The Tribunal upheld the CIT(A)'s decision to exclude certain receipts (interest on IT refund, NSC interest, bank interest, and other interest) from the profits eligible for deduction under section 80HHC. The Tribunal followed earlier decisions which held that such receipts were not includible in eligible profits of business for computing deduction under section 80HHC.

4. Deduction under section 35AB of the Income Tax Act, 1961 in respect of lump sum know-how fees:
The Tribunal allowed the assessee's claim for deduction under section 35AB, holding that the assessee is entitled to claim deduction on the total lump sum know-how fees paid. The Tribunal followed earlier decisions which held that such expenditure should be amortized and allowed over six years as per section 35AB.

5. Deduction of Exchange Fluctuation loss:
The Tribunal remitted the issue back to the Assessing Officer to re-compute the exchange fluctuation loss. It was noted that similar issues in earlier years were set aside to the Assessing Officer for re-computation.

6. Claim of VRS expenditure as revenue in nature:
The Tribunal upheld the CIT(A)'s decision allowing the assessee's claim for VRS expenditure as revenue expenditure. It was noted that similar issues were decided in favor of the assessee in earlier years by the Hon'ble Bombay High Court and the Hon'ble High Court of Madras, which held that such expenditure is incurred for business exigency and is allowable as revenue expenditure.

7. Income classification of interest on customers and hundies, interest on MSEB/MIDC:
The Tribunal upheld the CIT(A)'s decision that interest on customers and hundies, and interest on MSEB/MIDC, should be treated as business income and included in eligible profits for deduction under section 80HHC. The Tribunal followed earlier decisions which held that such interest receipts pertain to business income.

8. Set off of losses from trading activity against profits from manufacturing activity under section 80HHC:
The Tribunal dismissed the assessee's claim, following the Hon'ble Supreme Court's decision in IPCA Laboratories Ltd., which held that losses from trading activity should be set off against profits from manufacturing activity before computing deduction under section 80HHC.

9. Inclusion of scrap sales in total turnover for computing deduction under section 80HHC:
The Tribunal allowed the assessee's claim, holding that scrap sales should not be included in the total turnover for computing deduction under section 80HHC. The Tribunal followed the Hon'ble High Court of Madras' decision in CIT Vs. Ashok Leyland Ltd.

10. Set off of interest paid under sections 220, 234B, and 234C against interest received under section 244A:
The Tribunal dismissed the assessee's claim, following earlier decisions which held that interest paid under sections 220, 234B, and 234C cannot be set off against interest received under section 244A.

11. Levy of interest under section 234D:
The Tribunal upheld the levy of interest under section 234D, following the Hon'ble Bombay High Court's decision in CIT Vs. Indian Oil Corporation Ltd., which held that section 234D is applicable even to periods prior to assessment year 2004-05.

12. Treatment of interest under section 244A as income from other sources:
The Tribunal upheld the inclusion of interest under section 244A as income from other sources for the assessment year 2001-02, noting that the interest was granted to the assessee during the year ending 31.03.2001 and should be included in the income for that year.