2019 (3) TMI 128 - AT - Income Tax

Deduction u/s 80IC - denial of claim on unit I as it has not fulfilled the conditions of substantial expansion u/s 80IC(8) CIT (A) has allowed the claim following its earlier years decision- HELD THAT - Issue is already decided in favour of the assessee on the same set of facts in earlier years wherein vide para No. 11 the Co-ordinate Bench has allowed the claim of the assessee for deduction under section 80IC of the Act on substantial expansion. Allowability of other incomes such as sale of licenses, service charges, interest on fixed deposit received, interest on others, miscellaneous income and security bonds forfeiture u/s 80IC - HELD THAT - During the year the assessee has earned above income with respect to unit I on which CIT (A) has held that they are not derived from industrial undertaking, but disallowance can be only to the extent of 30% as unit is eligible for deduction under section 80IC of the Act. In fact the ground is misconstrued by the Revenue. In fact the impugned assessment year being the 6th assessment year and assessee is not eligible for deduction of the other income @ 100% but only 30% and, therefore, following his own decision for assessment year 2004-05 he has restricted the total deduction being 30%. In view of this, the ground No. 2 of the Revenue does not survive, hence dismissed. Regarding 30% disallowance in the appeal of assessee - following earlier years order - set aside the whole issue back to the file of the Assessing Officer to test each of the income whether they are derived from the industrial undertaking or not by considering the decision of the Hon ble Supreme Court in the case of Liberty India 2009 (8) TMI 63 - SUPREME COURT and then decide whether deduction under section 80IC of the Act is eligible or not on such income. Disallowance under section 14A - As the dividend income, if any, receivable from US company is not an exempt income thus CIT-A held that only half per cent of an average value of exempt income to the extent of investment in an Indian company could be disallowed under section 14A - HELD THAT - No infirmity in the order of the CIT (Appeals) to this extent with respect to expenditure. Further with respect to the interest expenditure, it was held that assessee has sufficient funds as paid up capital which fairly exceeds the investment of ₹ 7.25 lakhs and, therefore, no disallowance can be made. We do not find any reason to disagree with the above proposition of the learned CIT (Appeal). Nature of expenditure - software development expenditure - revenue or capital expenditure - benefit of enduring nature - HELD THAT - The above expenditure is product development expenditure and not software development expenditure. The above expenditure has been paid as a professional fees to M/s. Express Marketing, Dehradun, towards development of new product in unit I related to equipment required by rigs in oil industry. It was not a new line of business, but was merely expenditure in development of the existing line of the business. The assessee is engaged in the business of manufacturing of machineries and equipments and development is for the same product. In view of this such expenditure cannot be held to be capital expenditure, but it is a revenue expenditure - Decided in favour of assessee.

Issues Involved:
1. Disallowance of other income of Unit I for deduction under Section 80IC
2. Restriction of deduction under Section 80IC for Unit II
3. Disallowance of product development expenses as capital expenditure
4. Disallowance of profits/gains of Unit-1
5. Disallowance under Section 14A

Analysis:

1. Disallowance of Other Income of Unit I for Deduction under Section 80IC:
The assessee claimed deduction under Section 80IC for various incomes derived from Unit I, which included service charges, interests, and miscellaneous incomes. The Assessing Officer disallowed a portion of this income, stating it was not derived from the industrial undertaking. The CIT (Appeals) allowed a partial deduction, restricting it to 30% of the total income. The Tribunal upheld the decision, directing the Assessing Officer to reevaluate each income to determine eligibility for deduction under Section 80IC.

2. Restriction of Deduction under Section 80IC for Unit II:
The Assessing Officer disallowed a significant amount claimed under Section 80IC for Unit II, citing that certain incomes were not derived from the industrial undertaking. The Tribunal affirmed this disallowance, emphasizing that the income must be directly related to the manufacturing activity of Unit II to qualify for deduction under Section 80IC.

3. Disallowance of Product Development Expenses as Capital Expenditure:
The Assessing Officer treated software development expenses as capital expenditure, contending they provided an enduring benefit to the assessee. However, the Tribunal disagreed, ruling that the expenditure was for developing new products related to the existing business line. As it did not introduce a new line of business but enhanced the existing product line, the expenses were considered revenue expenditure eligible for deduction.

4. Disallowance of Profits/Gains of Unit-1:
The Revenue challenged the allowance of certain incomes as profits/gains of Unit-1 eligible for deduction under Section 80IC. The Tribunal dismissed this ground, relying on previous decisions in favor of the assessee regarding substantial expansion criteria for claiming deductions under Section 80IC.

5. Disallowance under Section 14A:
The Revenue contested the restriction of disallowance under Section 14A by the CIT (Appeals). The Tribunal upheld the CIT (Appeals) decision, stating that only a portion of the exempt income related to investments in Indian companies could be disallowed under Section 14A, based on the average value of the exempt income.

In conclusion, the Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, directing a reevaluation of certain incomes for deduction eligibility and recognizing product development expenses as revenue expenditure.

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