2017 (11) TMI 109 - AT - Income Tax

Interest on Fixed Deposits as well as the interest from staff loans is not income derived from the undertaking for the purpose of allowing deduction u/s 10A/10B of the Act. Disallowance of cost of software - Held that - It is the contention of the assessee that it is into purchase and sale of software and there is a trading activity. Therefore, the cost of software purchased for sale cannot be treated as capital expenditure, has considerable force. It is the contention of the assessee that the profit and sale of software has been offered to tax and there is a trading activity and in such circumstances such cost of software cannot be treated as capital in nature. For the limited purpose of verification as to whether this cost of software was on account of trade in software or it was used for internal purpose, we restore this matter to the file of the Assessing Officer who shall verify the fact and if it is found that this cost of software was incurred for sale the same shall be allowed as cost of purchase and no disallowance should be made treating it as capital expenditure. The Assessing Officer shall pass orders after verification of this fact and after providing opportunity to the assessee. This ground is allowed for statistical purposes. Setoff of loss while computing the deduction u./s 10A - Held that - This issue is now decided by the Hon ble Supreme Court in the case of CIT v. Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT as held the deduction under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression total income of the assessee in section 10A can be reconciled by understanding the expression total income of the assessee in section 10A as total income of the undertaking . Therefore, though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. Software consumable expenses are revenue in nature Revision u/s 263 - entitled to carry forward unabsorbed depreciation beyond 8 years and set off against the current year profits - Held that - As perused the Assessment Order and also the appellate order arising out of the original Assessment Order and find that this specific issue as to whether the assessee is entitled to carry forward unabsorbed depreciation beyond 8 years and set off against the current year profits is not the subject matter of assessment order or appellate proceedings. Therefore, we are of the view that since the Assessing Officer has not examined this aspect of the matter the Ld.CIT is justified in directing the Assessing Officer to look into these aspects. In any case the Ld.CIT has set aside the re-assessment and directed to conduct enquiry and take a decision in accordance with the law after giving proper opportunity. There is no prejudice caused to the assessee as there is no specific direction to disallowance unabsorbed depreciation as well as deduction u/s 10A while computing the book profits. Since issues have not been examined by the Assessing Officer in the course of the assessment proceedings, we are of the view that the action of Ld.CIT u/s 263 is in order. However, we make it clear that the Assessing Officer may also examine the contention of the assessee that if the profits are not eligible for deduction u/s 10A the same may be considered for deduction u/s 80HHE while computing the incomes of the assessee under normal provisions as well as while computing book profits u/s 115JB of the Act. Hence the appeal of the assessee preferred against 263 order is dismissed with the above observations.

Issues Involved:
1. Disallowance of depreciation on fixed assets.
2. Restriction of deduction under Sections 10A and 10B of the Income Tax Act.
3. Exclusion of unrealized sale proceeds from deductions under Sections 10A and 10B.
4. Disallowance of interest on deposits and staff loans for deductions under Sections 10A and 10B.
5. Disallowance of cost of software as capital expenditure.
6. Setoff of loss while computing deduction under Section 10A.
7. Carry forward and setoff of losses in subsequent assessment years.
8. Non-adjudication of grounds by CIT(A).
9. Deletion of disallowance of software consumable expenses as revenue expenditure.
10. Revision of reassessment order under Section 263 of the Act.

Detailed Analysis:

1. Disallowance of Depreciation on Fixed Assets:
The assessee did not claim depreciation on fixed assets for Assessment Years 2001-02 and 2002-03, relying on certain judicial pronouncements. However, the Assessing Officer (AO) calculated and allowed depreciation, stating it was mandatory from Assessment Year 2002-03 onwards. This decision was upheld by the CIT(A). The assessee’s appeal was dismissed, following the Coordinate Bench's decision in ITA.No.4180/2005 and the judgment of the Bombay High Court in Indian Rayon Corporation Ltd. v. CIT [261 ITR 98].

2. Restriction of Deduction under Sections 10A and 10B:
The AO excluded unrealized sale proceeds from deductions under Sections 10A and 10B. The CIT(A) upheld this action. The Coordinate Bench had previously ruled that the assessee could file for rectification under Section 155(13) when export proceeds are realized. This finding was applied to the current year, and the grounds were partly allowed for statistical purposes.

3. Exclusion of Unrealized Sale Proceeds:
The Coordinate Bench ruled that deductions under Sections 10A/10B are available only for sale proceeds received in convertible foreign exchange within six months from the end of the previous year or as extended by the competent authority. The disallowance was upheld, but the assessee could file a rectification application under Section 154 if proceeds are received later.

4. Disallowance of Interest on Deposits and Staff Loans:
The AO excluded interest on fixed deposits and staff loans from deductions under Sections 10A/10B, stating they were not derived from the business undertaking. The CIT(A) sustained this action. The Coordinate Bench, following the Supreme Court decision in Pandyan Chemicals (262 ITR 278), ruled against the assessee, stating such interest is not income derived from the undertaking.

5. Disallowance of Cost of Software:
The AO treated the cost of software as capital expenditure. The CIT(A) upheld this decision. The assessee contended that the cost was for trading purposes. The matter was remanded to the AO for verification. If the software was for sale, it should be allowed as a purchase cost, not capital expenditure.

6. Setoff of Loss while Computing Deduction under Section 10A:
The issue was decided by the Supreme Court in CIT v. Yokogawa India Ltd. [391 ITR 274], stating that deduction under Section 10A should be granted before setoff of losses. The AO was directed to follow this decision.

7. Carry Forward and Setoff of Losses in Subsequent Years:
This issue was deemed consequential. The AO was directed to allow carry forward and setoff of losses in accordance with the law.

8. Non-Adjudication of Grounds by CIT(A):
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

9. Deletion of Disallowance of Software Consumable Expenses:
The CIT(A) treated software consumable expenses as revenue expenditure. The Coordinate Bench upheld this decision, following the Special Bench of the Delhi Tribunal in Amway India Enterprise and the Delhi High Court in CIT v. Amway India Enterprises (346 ITR 341).

10. Revision of Reassessment Order under Section 263:
The Commissioner issued a show cause notice to revise the reassessment order on two grounds: setoff of unabsorbed depreciation beyond eight years and non-disallowance of deduction under Section 10A while computing book profits under Section 115JB. The ITAT found that the specific issue of unabsorbed depreciation was not part of the original assessment or appellate proceedings. The Commissioner’s action under Section 263 was justified, and the AO was directed to re-examine the issues, including the assessee’s contention regarding deduction under Section 80HHE if not under Section 10A.

Conclusion:
The assessee’s appeals for Assessment Years 2003-04 and 2005-06 were partly allowed for statistical purposes. The Revenue’s appeal for Assessment Year 2003-04 was dismissed. The assessee’s appeal for Assessment Year 2004-05 was dismissed. The order was pronounced in the open court on June 30, 2017.

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