2009 (2) TMI 242 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under sections 80HHC and 80HHE.
2. Amortization of expenditure on leasehold improvements.

Issue-wise Detailed Analysis:

1. Deduction under sections 80HHC and 80HHE:

The primary dispute revolves around whether training school receipts, license fees, and the write-back of provisions and liabilities qualify as charges or other receipts of similar nature under Explanation (baa) to section 80HHC and Explanation (d) to section 80HHE of the Income Tax Act.

Training School Receipts:
The Assessing Officer (AO) excluded 90% of the training school receipts from the business profits, arguing that these receipts do not have any element of turnover and are not derived from the export business of the assessee. The AO cited the Bombay High Court's decision in CIT vs. K.K. Doshi & Co., which held that receipts not having a direct nexus with export activities should be excluded from business profits for deduction purposes. The CIT(A) upheld this view, agreeing that the training school receipts are incidental to the main business and do not qualify as part of turnover or export-derived income.

License Fees:
Similarly, the AO and CIT(A) excluded 90% of the license fees, stating that these fees are merely charges for the use of a license and do not form part of the turnover or export-derived income. The license fees were considered independent income, not directly linked to the export business.

Write-back of Provisions and Liabilities:
The AO noted that the assessee did not provide details proving the direct nexus of the written-back liabilities and provisions with export profits. Therefore, these amounts were also excluded from business profits under Explanation (baa) to section 80HHC.

Assessee's Argument:
The assessee argued that training school receipts are integral to its business, as training is necessary for operating its specialized products. Similarly, license fees collected from a supplier for using outsourced licenses were claimed to be business receipts linked to the main business operations. The write-back of provisions and liabilities was argued to be business income, as these were expenses claimed in prior years.

Tribunal's Decision:
The Tribunal upheld the AO and CIT(A)'s decision, referencing the Supreme Court's judgment in CIT vs. K. Ravindranathan Nair, which clarified that independent incomes like processing charges should be excluded from business profits under Explanation (baa). The Tribunal concluded that training school receipts, license fees, and written-back provisions are independent receipts, not directly linked to export turnover, and thus rightly excluded from business profits for deduction purposes.

2. Amortization of Expenditure on Leasehold Improvements:

The second issue concerns the disallowance of Rs. 17,33,360 claimed by the assessee as amortization of expenditure on leasehold improvements, which the AO treated as capital expenditure.

Assessee's Argument:
The assessee argued that the expenditure on leasehold improvements should be amortized over the lease period, as this practice was accepted by the Department in earlier years. The assessee relied on the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs. CIT, which allowed spreading revenue expenditure over several years.

AO's Decision:
The AO disallowed the amortization, citing Explanation 1 to section 32, which treats capital expenditure on leased premises as if the structure or work is a building owned by the assessee, thus allowing only depreciation. The AO allowed depreciation of Rs. 1,73,336 on the capital expenditure but disallowed the remaining amount.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, agreeing that the expenditure was capital in nature and should be treated as such under Explanation 1 to section 32. The CIT(A) rejected the assessee's reliance on the Madras Industrial Investment Corporation Ltd. case, noting that the nature of expenses in that case was revenue, not capital.

Tribunal's Decision:
The Tribunal agreed with the AO and CIT(A), stating that the expenditure on leasehold improvements is capital in nature and should be treated as if the structure is owned by the assessee. The Tribunal upheld the disallowance of amortization and allowed only depreciation as per the provisions of the Act.

Conclusion:
The appeal was dismissed, with the Tribunal upholding the exclusion of training school receipts, license fees, and written-back provisions from business profits for deduction purposes under sections 80HHC and 80HHE. The Tribunal also upheld the disallowance of amortization of leasehold improvement expenditure, allowing only depreciation as per the statutory provisions.