2012 (3) TMI 728 - AT - Income Tax

Summary

Issues:
1. Allocation of interest and foreign exchange loss to STP unit for deduction u/s 10A.
2. Addition of delayed deposit of employee's contribution to provident fund.
3. Addition of capitalization of leasehold improvement expenses.

Allocation of interest and foreign exchange loss to STP unit for deduction u/s 10A:
The case involved cross-appeals by the assessee and the revenue against the CIT(A)'s order related to the assessment year 2001-02. The assessee contested the apportionment of interest and foreign exchange loss to the STP unit while computing deduction u/s 10A of the Act. The CIT(A) had partly sustained the disallowance at the rate of 3.39% of the total interest and foreign exchange loss. The Tribunal observed that the AO had not established any nexus between the STP unit's fund requirements and the ECB loan. The CIT(A) had allocated expenses of 3.39% to the STP unit profits despite acknowledging the lack of nexus. The Tribunal concluded that without establishing a nexus, such disallowance could not be made, and thus deleted the allocation of expenses at 3.39% as made by the CIT(A).

Addition of delayed deposit of employee's contribution to provident fund:
The revenue's appeal focused on the addition of Rs. 805,267 on account of delayed deposit of employee's contribution to the provident fund. The CIT(A) had deleted this addition, and the Tribunal upheld this decision. It was noted that the employees' contribution to the PF had been deposited by the assessee before the due date of filing the return. Citing the decision of the Hon'ble Delhi High Court in a similar case, the Tribunal upheld the CIT(A)'s decision on this issue.

Addition of capitalization of leasehold improvement expenses:
The second ground in the revenue's appeal concerned the addition of Rs. 490,414 on account of capitalization of leasehold improvement expenses. The CIT(A) had also deleted this addition, and the Tribunal found no infirmity in this decision. The Tribunal noted that the expenditure was necessary for the day-to-day smooth working of the business and facilitated the profit-generating apparatus. Citing relevant case law, the Tribunal upheld the CIT(A)'s order on this issue as well.

In conclusion, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both the issues raised by the revenue.