2013 (6) TMI 193 - HC - Income Tax

Deduction u/s 80HHE - exclusion of the foreign exchange expenditure - held that - while theoretically speaking, if the activity relates to the first part of sub-section (1) of Section 80HHE of the Act, it is one of export of computer software, whether actual or in deemed basis, by an on site development and delivery of software in a foreign location, the provisions of clause-(c) of the explanation to the section does say so, the difficulty we find in answering the questions is that such a finding of the tribunal is a finding not based on the actual position which the assessee had made good before the tribunal, either in terms of the actual transaction, which had produced the foreign exchange remittance, or by production of an agreement entered into at the relevant point of time, with its customer from whom remittance/payment had been received in foreign exchange. Tribunal in proceeding to allow the appeals and to reverse the finding of the appellate commissioner, had not really based its finding on any available and relevant material for giving its finding on the question as to whether the activity related to the first part of sub-section (1) of Section 80HHE or second part thereof and in the absence of the same, directing exclusion of the expenses becomes a hypothetical situation for excluding and it is because of this position Not agreed with the view that the deduction as claimed by the assessee under Section 80HHE of the Act should have been allowed without excluding the foreign exchange expenditure incurred by the assessee during the current assessment year. It is open to the assessee to place the materials relevant for the period related to the assessment year in question and the assessing officer to examine the same and to record a finding as to the nature of the activity keeping in view the legal position as we discussed above and answer the question related to exclusion of expenses strictly keeping in view the kind of amounts sought to be excluded in the case of export turnover being attributable to export of computer software, in which event, the exclusion being only freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India and if it is the case of providing technical services outside India in connection with development of computer software, then the actual expenditure, if any, incurred in foreign exchange in providing technical services outside India should be excluded. This legal position equally applies to the other exclusion also and has to be strictly in conformity with the exclusion as provided for in clause (c) and (e) to the explanation to the Section 80HHE of the Act. - Matter remanded back with direction - Decided in favor of revenue.

Issues Involved:
1. Deduction under Section 80HHE without excluding foreign exchange expenditure.
2. Classification of expenses on leased premises as major repairs or allowable revenue expenditure.
3. Allowability of contributions to the Traffic Police under Section 37.
4. Deduction of payments made to police for maintaining traffic under Section 37.

Issue-wise Detailed Analysis:

1. Deduction under Section 80HHE without excluding foreign exchange expenditure:

The primary issue revolves around whether the Tribunal was correct in allowing the deduction under Section 80HHE of the Income Tax Act, 1961, without excluding foreign exchange expenditure incurred by the assessee. The revenue contended that the Tribunal erred in reversing the findings of the assessing officer and the appellate commissioner, who had excluded such expenditures on the grounds that they were attributable to providing technical services outside India. The Tribunal, however, held that the expenditure was related to the export of computer software and thus should not be excluded. The High Court found that the Tribunal's decision was not based on relevant material and remanded the matter to the assessing officer for a fresh examination, directing the assessee to produce relevant materials for the assessment years in question.

2. Classification of expenses on leased premises as major repairs or allowable revenue expenditure:

The Tribunal had to determine whether expenses incurred by the assessee on leased premises for activities such as brick works, cement, plastering, painting, and other similar activities amounted to major repairs or allowable revenue expenditure under Section 30(a) of the Act. The revenue argued that these were capital expenditures and should not be allowed as revenue expenses. The Tribunal, however, held that these expenses were for repairs and maintenance and thus allowable as revenue expenditure. The High Court did not provide a separate judgment on this issue, implying acceptance of the Tribunal's decision.

3. Allowability of contributions to the Traffic Police under Section 37:

The Tribunal examined whether contributions made by the assessee to the Traffic Police to regulate traffic on Hosur Road were allowable under Section 37 of the Act. The Tribunal held that these contributions were made out of business compulsions and commercial expediency, thus allowing the deduction. The revenue argued that such payments to public servants for discharging public duties are prohibited under law and cannot be allowed as deductions. The High Court did not provide a separate judgment on this issue, implying acceptance of the Tribunal's decision.

4. Deduction of payments made to police for maintaining traffic under Section 37:

The Tribunal had to decide if payments made to the police for maintaining traffic could be deducted under Section 37 of the Act. The revenue contended that such payments are prohibited under the Indian Penal Code and the Prevention of Corruption Act and thus cannot be allowed as deductions. The Tribunal, however, held that these payments were made out of business necessity and commercial expediency. The High Court did not provide a separate judgment on this issue, implying acceptance of the Tribunal's decision.

Conclusion:

The High Court allowed the appeals, answering the questions in favor of the revenue and against the assessee. The matter was remitted to the assessing officer for a fresh examination, with the assessee directed to produce relevant materials for the assessment years in question. The assessing officer was instructed to complete the matter expeditiously, keeping in view the legal position discussed by the High Court.

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