2016 (5) TMI 1014 - AT - Income Tax

Deduction u/s 80HHE - Held that - Since the assessee has maintained separate books of accounts, in our considered view, there is no need, as per law, to aggregate accounts of all the businesses for computing amount of deduction allowable u/s 80HHE. Since all the amounts required for computing deduction u/s 80HHE i.e. profit of the export business (i.e. eligible business), its export turnover and its total turnover are separately available, therefore, the deduction has to be computed on the basis of these amounts only. Thus, these should not be clubbed with the corresponding amounts of the other business(es) for computing amount of deduction allowable u/s 80HHE. But the AO had decided this issue without examining the correctness of amount of profit of the eligible business, export turnover and total turnover; therefore, principally accepting the claim of the assessee, we send this issue back to the file of the AO to find out whether these amounts have been correctly computed by the assessee. Thus, for the limited purpose of verification of these facts, this issue is sent back to the file of the AO for which adequate opportunity of hearing shall be provided to the assessee. The assessee is free to raise all legal and factual issues before the AO. The AO shall pass the order afresh after taking into account all the details and evidences as may be brought on record by the assessee. License paid for Logistics Tracking Software (LTS) - revenue v/s capital expenses - Held that - In view of these findings of Ld. CIT(A) as well as submissions of both the sides, we find that there is nothing wrong in the findings of Ld. CIT(A) and the impugned expenses have been rightly held to be revenue expenditure in the hands of the assessee company. Disallowance on account of deferred revenue expenditure - Held that - The treatment of these expenses under the income tax law cannot be decided merely on the basis of manner of recording by the assessee in its books of accounts. The income has to be assessed and expenses are to be allowed under the income tax proceedings in view of the provisions of Income Tax Act, 1961, as explained by the courts as well as Central Board of Direct Taxes by way of its circulars/ instructions as have been issued time to time. It is well settled law that entries in the books of accounts are not determinative of the character of income or expenses. No case has been made out by the AO that these expenses are capital in nature. Thus, we find these expenses to be revenue nature expenses as has been held by the Ld. CIT(A) correctly. Contention of the AO for making the disallowance is that assessee has claimed the same as deferred revenue expenditure. We find that there is no concept of deferred revenue expenditure under the income tax Act except under specific sections i.e. where amortization is specifically provided e.g. u/s 35D of the Act. It has not been disputed that these expenses were incurred during the year under consideration and pertain to the same year and these have been incurred for the purpose of business of the assessee. Under these circumstances we find no reason to disallow these expenses. Allowably of deduction of interest - Held that - This issue as covered in favour of the assessee in view of judgment of Hon ble Supreme Court in the case of DCIT vs. Core Health Car 2008 (2) TMI 8 - SUPREME COURT OF INDIA wherein held An assessee is entitled to claim interest paid on capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Actual cost of an asset has no relevancy in relation to section 36(1)(iii). Disallowance of miscellaneous and other expenses holding the same as non-business expenses - Held that - CIT(A)corectly deleted the disallowance, as according to him ad-hoc disallowance was not permissible under the law.

Issues Involved:

1. Deduction under Section 80HHE of the Income Tax Act.
2. Treatment of license fees paid for Logistics Tracking Software (LTS).
3. Deferred revenue expenditure.
4. Deduction of interest under Section 36(1)(iii).
5. Miscellaneous and other expenses.
6. Computation of deduction under Section 80HHE.
7. Additional grounds related to tax deduction at source and royalty under DTAA.

Detailed Analysis:

1. Deduction under Section 80HHE of the Income Tax Act:

The primary issue was whether the deduction under Section 80HHE should be computed based on the separate books maintained for the software export division or on a consolidated basis for all businesses. The Assessing Officer (AO) computed the deduction using a formula considering all businesses, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the Tribunal found that the issue was covered in favor of the assessee by previous judgments, including Morgan Stanley India Securities P. Ltd. vs. ACIT and Datamatics Technologies Ltd. vs. DCIT. The Tribunal held that the deduction should be computed based on the separate books of accounts for the software export division. The matter was remitted to the AO for verification of the correctness of the amounts.

2. Treatment of License Fees Paid for Logistics Tracking Software (LTS):

The AO treated the license fees paid for LTS as a capital expense, disallowing the deduction. The CIT(A) reversed this decision, treating the expense as revenue in nature. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was for enhancing business efficiency and was not for acquiring a new business or product. The Tribunal also remitted additional grounds related to tax deduction at source and royalty under DTAA back to the CIT(A) for fresh adjudication, considering recent legal developments and various contentions.

3. Deferred Revenue Expenditure:

The AO disallowed the claim of deferred revenue expenditure, treating it as capital in nature. The CIT(A) allowed the deduction, stating that the expenses were revenue in nature and should be allowed in full in the year incurred. The Tribunal upheld the CIT(A)'s decision, emphasizing that the treatment of expenses under the Income Tax Act should not be determined solely based on their treatment in the books of accounts.

4. Deduction of Interest under Section 36(1)(iii):

The AO disallowed the deduction of interest on borrowings, which the assessee had capitalized in its books. The CIT(A) allowed the deduction, and the Tribunal upheld this decision, citing the Supreme Court's judgment in DCIT vs. Core Health Care, which clarified that interest on borrowed capital used for business purposes should be allowed as a deduction, irrespective of its capitalization in the books.

5. Miscellaneous and Other Expenses:

The AO made an ad-hoc disallowance of 5% of the total miscellaneous expenses due to incomplete documentation. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, stating that ad-hoc disallowances without proper basis are not permissible.

6. Computation of Deduction under Section 80HHE:

The Tribunal remitted the computation of deduction under Section 80HHE back to the AO for re-adjudication, in line with its decision on the assessee's appeal for the same issue.

7. Additional Grounds Related to Tax Deduction at Source and Royalty under DTAA:

The Tribunal admitted additional grounds raised by the Revenue related to the tax treatment of license fees as royalty under Section 9(1)(vi) and Article 12 of the DTAA between India and the USA. These grounds were remitted back to the CIT(A) for fresh adjudication, considering recent legal developments and various contentions raised by both parties.

Conclusion:

The Tribunal provided a detailed analysis and remitted several issues back to the AO and CIT(A) for re-adjudication, ensuring that all legal and factual aspects were thoroughly examined. The decisions were based on established legal precedents and aimed at ensuring a fair and just resolution of the disputes.

← Previous Next →