2018 (6) TMI 881 - AT - Income Tax

Disallowance of share issue expenditure u/s 35D - Held that - Assessee was unable to bring any evidence to demonstrate that funds from increased share capital was used for extension of its existing industrial undertaking or spent in connection with the setting up of a new industrial unit - since the disallowance was made due to inability of the assessee to substantiate its claim, we do not find any reason to interfere with the orders of the lower authorities - Decided against the assessee. Interest on fixed deposit can be claimed as business income eligible for deduction u/s 80HHE - Held that - Assessee claimed that the fixed deposits were kept for the purpose of meeting margin requirement for opening LOC and obtaining bank guarantees - assessee could not substantiate this claim before the lower authorities despite opportunities given to it - thus CIT(A) relied on the judgment in the case of Dollar Apparels vs. ITO 2007 (2) TMI 120 - HIGH COURT, MADRAS and confirmed the disallowance - since assessee was unable to support the claim with proper evidence, we do not find any reason to interfere with the orders of the lower authorities - Decided against the assessee. Disallowance of prior period expenditure - Held that - It is not disputed that the expenditure did not relate to the impugned assessment year - hence, in our opinion, the claim was rightly disallowed - we therefore find no reason to interfere with the orders of the lower authorities - Decided against the assessee. Lease rent deposits which were written off were and disallowed as expenditure - Held that - following the decision of Delhi Bench of the Tribunal in the case of Fab India Overseas P. Ltd vs. CIT 2013 (9) TMI 301 - ITAT DELHI where it is held that security deposits which were written off were given for a lease which never went through. The Tribunal had held that there was no binding agreement between assessee and the lessor, since the lease deed was not registered and held that security deposit written-off was a business loss. However, in the case before us, there is nothing on record to show that rental deposits written off by the assessee pertained to any lease which had not materialized - hence we do not find any reason to interfere with the orders of the lower authorities - Decided against the assessee. Disallowance of software expenditure - Held that - Assessee could not furnish any evidence to show the nature of the software expenses. Assessee was unable to demonstrate whether it was paid as software licence fee or paid for outright acquisition of a software - lower authorities were justified in not allowing the claim as revenue outgo. However, we find that ld. Assessing Officer had allowed depreciation @ 25% only. Once purchase of software is considered as a capital expenditure, it has to be given the same rate of depreciation as applicable for computer. Assessee is therefore, in our opinion entitled to depreciation on the software expenditure at the rate applicable for computer for the impugned assessment year. Disallowance of expenditure as incurred for improvement of leasehold property - Held that - assessee failed to support its claim that the expenditure was incurred for erecting a temporary structure in the leasehold property. Since the disallowance was made due to inability of the assessee to produce evidence regarding nature of expenditure incurred, we do not find any reason to interfere with the orders of the lower authorities. Ground No.4 of the assessee stands dismissed. Disallowance being gratuity payments to LIC - Held that - It is not disputed that the payments to LIC were not a provision but made under the gratuity scheme. We are therefore of the opinion that assessee was eligible to claim such deduction. Non-exclusion of items deducted from export turnover, from total turnover while working out the eligible deduction u/s.10A - Held that - By virtue of the judgments of Hon ble Karnataka High Court in the case Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT exclusions made from export turnover have to be considered for reduction from total turnover also while working out deduction available u/s.10A of the Act. Accordingly, we direct the ld. Assessing Officer to rework the deduction available to the assessee u/s.10A Denial of its claim for deduction u/s. 10A for its STPI units - Held that - Deduction u/s.10A of the Act has to be considered on stand alone basis without setting off of loss another unit. Accordingly, we direct the ld. Assessing Officer to allow the claim made by the assessee u/s.10A of the Act without setting off such loss.

Issues Involved:
1. Disallowance of share issue expenditure.
2. Disallowance of interest income for deduction computation u/s.80HHE.
3. Disallowance of prior period expenditure.
4. Disallowance of lease rent deposits written off.
5. Disallowance of software expenditure as revenue outgo.
6. Disallowance of expenditure for improvement of leasehold property.
7. Disallowance of gratuity payments to LIC.
8. Non-exclusion of items deducted from export turnover from total turnover for deduction u/s.10A.
9. Denial of deduction claim u/s.10A for STPI units after setting off losses.

Detailed Analysis:

1. Disallowance of Share Issue Expenditure:
The Tribunal upheld the disallowance of share issue expenditure claimed by the assessee under Section 35D of the Income Tax Act, 1961, due to the assessee's inability to provide evidence that the funds from increased share capital were used for extending its industrial undertaking or setting up a new industrial unit. This decision was consistent across multiple assessment years (1999-2000, 2003-04, and 2004-05).

2. Disallowance of Interest Income for Deduction Computation u/s.80HHE:
The Tribunal dismissed the assessee's claim that interest earned on fixed deposits for meeting margin requirements for LOC and bank guarantees should be considered business income eligible for deduction under Section 80HHE. The assessee failed to substantiate this claim with proper evidence.

3. Disallowance of Prior Period Expenditure:
The Tribunal upheld the disallowance of prior period expenditure, noting that the expenditure did not relate to the assessment year in question. The assessee's argument that such expenditure should be allowed in the earlier years was rejected, as claims should have been filed in the respective years.

4. Disallowance of Lease Rent Deposits Written Off:
The Tribunal upheld the disallowance of lease rent deposits written off, stating that the amount written off was not a trading debt nor money lent in the ordinary course of business. The assessee failed to demonstrate that the rental deposits pertained to any lease which had not materialized.

5. Disallowance of Software Expenditure as Revenue Outgo:
The Tribunal upheld the classification of software expenditure as capital outgo rather than revenue outgo due to the assessee's failure to provide evidence of the nature of the software expenses. However, the Tribunal allowed depreciation at the rate applicable for computers.

6. Disallowance of Expenditure for Improvement of Leasehold Property:
The Tribunal upheld the disallowance of expenditure claimed for the improvement of leasehold property, as the assessee could not provide evidence to prove that the expenditure was for temporary structures. This decision was consistent across multiple assessment years (2003-04, 2007-08, and 2008-09).

7. Disallowance of Gratuity Payments to LIC:
The Tribunal allowed the deduction for gratuity payments made to LIC under a scheme for ensuring gratuity to employees, noting that the payments were not provisions but actual payments under the gratuity scheme. This decision was consistent across multiple assessment years (2003-04, 2004-05, and 2007-08).

8. Non-Exclusion of Items Deducted from Export Turnover from Total Turnover for Deduction u/s.10A:
The Tribunal directed the Assessing Officer to rework the deduction available to the assessee under Section 10A, ensuring parity between export turnover and total turnover, in line with the judgments of the Karnataka High Court and the Supreme Court.

9. Denial of Deduction Claim u/s.10A for STPI Units after Setting Off Losses:
The Tribunal directed the Assessing Officer to allow the deduction under Section 10A on a stand-alone basis without setting off losses from other units, in line with the Supreme Court's judgment in the case of Yokogawa India Ltd. This decision was consistent across multiple assessment years (2007-08 and 2008-09).

Summary of Results:
The appeal of the assessee for the assessment year 1999-2000 was dismissed, whereas appeals for all other years were partly allowed for statistical purposes. The order was pronounced on June 12, 2018, at Chennai.

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