2017 (6) TMI 1155 - AT - Income Tax

Disallowance u/s 10A - exclusion of payments made for import of goods and services from export turnover and exclusion of foreign travel related cost incurred in foreign currency from the export turnover - Held that - As decided in ITO Vs. Sak Soft Limited 2009 (3) TMI 243 - ITAT MADRAS-D for the purpose of applying the formula under sub-s. (4) of s. 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the Department are thus dismissed. Disallowance u/s 14A - Held that - We find lot of force in this argument of Ld. AR and accordingly admitting the additional evidence and direct the Ld. AO to verify the claim of the assessee in this regard and make disallowance accordingly without resorting to Rule 8D of the Rules in these facts and circumstances of the case. W also find lot of force in the arguments advanced by the Ld. AR that in any case, investments yielding taxable income need to be excluded while computing disallowance under Rule 8D of the Rules. However, this finding becomes infructous in view of our earlier directions given herein above. Disallowance u/s. 14A in the computation u/s. 115JB - Held that - While computing the Book Profit of the company under the provisions of section 115JB of the Act; any disallowance made under the normal provisions of the Act also cannot be given effect to for arriving at the Book Profit for the purpose of Section 115JB of the Act. Thus we direct the Ld. AO not to make any disallowance u/s. 14A of the Act while computing book profits u/s. 115JB of the Act. Whether disallowance made u/s. 14A of was only on account of disallowance of business expenses of the assessee and thereby correspondingly would only increase the business profit of the assessee which would in turn consequently increase in the claim of deduction u/s. 10A ? - Held that - The assessee was entitled to exemption u/s. 10A with reference to addition or disallowance of various payments, as the plain consequence of the disallowance and add back made by the Assessing Officer is an increase in the business profits of the assessee and the same to be considered for the purpose of computation of deduction u/s. 10A of the Act. Adopting the similar principles, we are inclined to direct the Assessing Officer to consider the disallowance u/s. 14A r.w.Rule 8D as part of business profit so as to compute deduction u/s. 10A of the Act. Disallowing the fringe benefit tax for the purpose of computing book profits u/s. 115JB - Held that - We direct the Ld. AO to grant deduction for fringe benefit tax while computing book profit u/s. 115JB of the Act. Accordingly, raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance under Section 10A of the Income Tax Act.
2. Disallowance under Section 14A of the Income Tax Act.
3. Disallowance of Fringe Benefit Tax under Section 115JB of the Income Tax Act.
4. Chargeability of interest under Section 234C of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 10A of the Income Tax Act:

Exclusion of Payments and Foreign Travel Costs:
The assessee, a private limited company engaged in software development, filed a return declaring an income of ?11,08,48,280 after claiming a deduction of ?39,04,10,134 under Section 10A. The Assessing Officer (AO) excluded certain expenditures (salary, wages, allowances, traveling expenses, and import payments) from the export turnover, treating them as expenses incurred for technical services outside India. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this exclusion but granted relief by directing that these exclusions should also be made from the total turnover. The assessee appealed against this decision, arguing that these exclusions were erroneous.

Exclusion of Telecommunication Expenditure:
The AO also excluded telecommunication expenditure of ?1,29,82,852 from the export turnover, which was upheld by the CIT(A). The assessee contended that these expenses were not attributable to the delivery of computer software outside India and were incurred in Indian rupees. The Tribunal found that these issues were covered by previous decisions in the assessee's favor, concluding that the assessee was engaged in software development, not technical services. Consequently, the Tribunal allowed the assessee's claims and dismissed the revenue's appeal.

2. Disallowance under Section 14A of the Income Tax Act:

Disallowance of Expenditure for Earning Exempt Income:
The AO disallowed ?2,43,50,989 under Section 14A read with Rule 8D, which was upheld by the CIT(A). The assessee argued that no expenditure was incurred for earning the exempt dividend income and that the AO had erroneously included investments yielding taxable income in the disallowance calculation. The Tribunal admitted additional evidence from the assessee regarding the involvement of managerial personnel in investment activities and directed the AO to verify this claim without resorting to Rule 8D. Additionally, the Tribunal ruled that disallowance under Section 14A should not be included in the computation of book profits under Section 115JB, following previous decisions in similar cases.

3. Disallowance of Fringe Benefit Tax under Section 115JB of the Income Tax Act:

The Tribunal addressed whether Fringe Benefit Tax (FBT) should be disallowed while computing book profits under Section 115JB. The CBDT Circular No. 8/2005 clarified that FBT is an allowable deduction in the computation of book profit under Section 115JB. Accordingly, the Tribunal directed the AO to grant this deduction.

4. Chargeability of Interest under Section 234C of the Income Tax Act:

The assessee contended that interest under Section 234C should be charged on the returned income, not the assessed income. The Tribunal found that the provisions of the Act are clear in this regard and directed that interest under Section 234C should be charged only on the returned income.

Conclusion:

The Tribunal allowed the appeal of the assessee for statistical purposes and dismissed the appeal of the revenue, providing detailed directions on each issue based on previous case laws and statutory provisions. The order was pronounced on February 8, 2017, in Chennai.