2015 (4) TMI 589 - AT - Income Tax

Disallowance of claim of deduction u/s.10A in respect of Unit No.2 & 3 - Held that - From the record we found that assessee is engaged in the business of IT Enabled services. In its computation of total income for the Asst. Year 2005-06, the it had claimed the exemption under section 10A of ₹ 124,179,095 for Unit II and of ₹ 383,205,319 for Unit III. No exemption has been claimed in respect of Unit 1. Unit-2 is engaged in non-voice BPO business (Insurance claim processing) whereas Unit-3 is engaged in voice BPO (Call Center). Units 2 and 3 were set-up in June 2000 and November 2001 respectively and accordingly the assessee started claiming exemption under section 10A in respect of each of these units from AYs 2001-02 and 2002-03 respectively. We also found that during the appellate proceedings, the CIT(A) has called a remand report from the AO, wherein the AO has categorically observed that assessee was engaged in its business activity in respect of its Units No.2 & 3 during previous year relevant to assessment year commencing on or after 1st April, 1994, therefore, the condition was fulfilled. The AO also observed that the Unit No.II & III have not been formed by splitting up or reconstruction of an existing business and are not formed by the transfer to a new business of machinery or plant previously used for any purpose. It is crystal clear from the remand report of AO that the units II and III fulfilled all the conditions prescribed under the relevant provisions of section 10A of the Act. Accordingly, we direct the AO to allow assessee's claim for deduction u/s.10A(2) of the Act in respect of Unit II and III.- Decided in favour of assessee. Disallowance made u/s.14A - Held that - We direct the AO to compute the disallowance u/s.14A, in terms of directions issued by the Tribunal in assessee's own case 2013 (9) TMI 116 - ITAT MUMBAI , wherein the tribunal has directed the AO to consider all the materials placed by the assessee before it while computing disallowance u/s.14A of the Act. We direct accordingly. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of claim of deduction under section 10A for Unit II and Unit III.
2. Disallowance of expenses under section 14A.

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Deduction under Section 10A for Unit II and Unit III:

The assessee, engaged in IT and IT-enabled services, claimed deduction under section 10A for Unit II and Unit III but not for Unit I and Unit IV. The AO disallowed the claim, stating that Unit II and III were not independent units but expansions of an existing unit. This conclusion was based on a letter from the Director of Software Technology Parks of India (STPI) which indicated that the units were not separate but expanded locations of the initial unit.

The CIT(A) upheld the AO's decision. However, upon appeal, the ITAT found that the AO had not thoroughly examined whether Units II and III were independent units or merely expansions. The ITAT directed the AO to re-examine the matter in light of the principles laid down in the case of Patni Computers Ltd. and the evidence provided by the assessee.

In the re-examination, the AO observed that Units II and III were set up with fresh investments, maintained separate books of accounts, and had different customers and employees. The AO, in a remand report, concluded that the units fulfilled all conditions under section 10A, including not being formed by splitting up or reconstruction of an existing business.

The ITAT reviewed the correspondence with the Director of STPI and the AO's remand report, concluding that the assessee was eligible for the deduction under section 10A for Units II and III. The ITAT directed the AO to allow the deduction.

2. Disallowance of Expenses under Section 14A:

The assessee contested the disallowance of expenses under section 14A, arguing that the total expenditure claimed was Rs. 13 lakhs, yet the AO disallowed about Rs. 16 lakhs. The assessee also contended that Rule 8D was not applicable for the assessment year in question.

The ITAT directed the AO to compute the disallowance under section 14A in accordance with the directions issued in the assessee's own case in an earlier order dated 31-1-2012. The AO was instructed to consider all materials placed by the assessee while computing the disallowance.

Conclusion:

The appeal was allowed in part. The ITAT directed the AO to allow the deduction under section 10A for Units II and III and to recompute the disallowance under section 14A based on the materials provided by the assessee. The order was pronounced in the open court on 21.1.2015.