2020 (9) TMI 1102 - AT - Income Tax

Computation of deduction u/s.10A - reducing the impugned expenses both from the export turnover as well as from the total turnover - HELD THAT - The issue raised is squarely covered in favour of assessee by the judgment in the case of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT had categorically held that when expenses are reduced from export turnover, the same needs to be reduced also from the total turnover, while computing deduction u/s. 10A - DRP is justified in its direction that the impugned expenditure that is reduced from the export turnover need to be reduced also from the total turnover, while computing deduction u/s. 10A - Decided against revenue. Set off of brought forward losses - AO has reduced the brought forward losses from Bangalore (10AA unit) and Mumbai (10A unit) before computation of deduction u/s 10A/10AA - HELD THAT - As relying on Yokogawa India Ltd. 2018 (5) TMI 357 - SUPREME COURT while holding that losses cannot be set off against profits of eligible unit. In view of the judgment of the Hon ble Apex Court, we direct the AO to calculate the deduction u/s.10A/ 10AA of the Act, without setting off the brought forward losses. It is ordered accordingly. Expenditure on buy-back of shares - revenue or capital expenditure - HELD THAT - In view of the judgment of the Hon ble High Court of Karnataka in the case of CIT v. Motor Industries Co. Ltd. 2014 (10) TMI 1026 - KARNATAKA HIGH COURT we hold that the expenses incurred by the assessee for buy-back of shares is allowed as a revenue expenditure.

Summary

Issues Involved:
1. Computation of deduction under section 10A/10AA of the Income-tax Act.
2. Disallowance of expenses incurred on buy-back of shares.

Issue-wise Detailed Analysis:

1. Computation of Deduction under Section 10A/10AA:

The revenue's appeal centered on whether the Assessing Officer (AO) should reduce the expenditure incurred in travel, telecommunication, etc., from both the Export Turnover and the Total Turnover for computing deductions under sections 10A and 10AA of the Income-tax Act. The AO had recalculated the deduction by reducing these expenses solely from the export turnover. The Dispute Resolution Panel (DRP) directed the AO to reduce the expenses from both the export turnover and the total turnover. The revenue challenged this direction.

The Tribunal referred to the judgment of the Hon’ble Apex Court in the case of CIT v. HCL Technologies Ltd., which held that when expenses are reduced from export turnover, the same must be reduced from the total turnover to avoid an illogical and unjust result. The Tribunal upheld the DRP's direction, stating that the impugned expenditure reduced from the export turnover should also be reduced from the total turnover while computing the deduction under section 10A. Consequently, the revenue's appeal was dismissed.

2. Disallowance of Expenses Incurred on Buy-back of Shares:

The assessee's appeal included the issue of whether the expenses incurred on the buy-back of shares should be treated as business expenditure under section 37 of the Act. The AO had disallowed these expenses, treating them as capital expenditure. The DRP upheld the AO's view, stating that such expenses do not qualify as business expenditure since they are related to the capital structure of the company.

The Tribunal examined the judgment of the Hon’ble Karnataka High Court in the case of CIT v. Motor Industries Co. Ltd., which held that expenses incurred for buy-back of shares are revenue in nature because they do not result in an expansion of the capital base but rather a reduction. The Tribunal concluded that the expenses incurred for the buy-back of shares should be allowed as revenue expenditure. Therefore, the assessee's appeal on this ground was allowed.

Conclusion:

The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal. The Tribunal directed the AO to compute the deduction under section 10A/10AA without setting off the brought forward losses and allowed the expenses incurred on the buy-back of shares as revenue expenditure. The judgment was pronounced in the open court on September 25, 2020.