2018 (9) TMI 957 - AT - Income Tax

Disallowance of set off of loss of MEPZ (10M) unit against income of taxable unit - loss suffered by the assessee in the unit eligible for deduction u/s 10AA - Held that - Keeping in view the fact that section 10AA makes the assessee eligible for deduction in the same manner, the deduction prescribed u/s 10A and 10B and it cannot be treated in the nature of exemption and as such, the loss suffered by the assessee in the unit eligible for deduction u/s 10AA can be set off against the normal business income. So far as question of amendment of section 10A is concerned, the Hon ble Supreme Court in Allied Motors (P.) Ltd. vs. CIT 1997 (3) TMI 9 - SUPREME COURT and CIT vs. Gold Coin Health Food (P.) Ltd. (2008 (8) TMI 5 - SUPREME COURT) has decided the identical issue by holding that, when the amendment is curative in nature it has to be read from its inception. So, we are of the considered view that the amendment of section 10A by way of inserting explanation is only declaratory in nature having retrospective effect. We are of the considered view that the CIT (A) has taken valid, legal and plausible view that the deduction is to be allowed from the total income of the unit and not from the total income of the assessee under Chapter IV of the Act and not at the stage of total income under Chapter VI of the Act. So, ground no.1 is determined against the Revenue. Depreciation @ 60% on computer software - Held that - CIT (A) has granted the relief in accordance with the settled principles of law by holding that, the E-TDS software, E-scan, antivirus attachment control, ME&S Software upgrade are clearly in the nature of routine software for the purpose of antiviral control and for upgrading the existing software and held the same to be revenue in nature and on the balance amount of ₹ 16,45,000/- directed the AO to allow the depreciation @ 60%. Assessee has not preferred to challenge the findings given by the ld. CIT (A) by filing cross appeal. No illegality or perversity in the findings of CIT (A), ground is determined against the Revenue.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of set off of loss of MEPZ (10M) unit against income of taxable units.
2. Deletion of addition on account of proportionate allocation of head office expenses to MEPZ (10M) unit.
3. Deletion of addition on account of proportionate allocation of bank and loan processing charges to MEPZ (10M) unit.
4. Deletion of addition on account of allocation of bad debts written off to MEPZ (10M) unit.
5. Deletion of addition on account of price difference in respect of goods transferred to MEPZ (10AA) unit from other units.
6. Deletion of addition by treating part of expenses as revenue expenditure instead of capital expenditure.

Issue-wise Detailed Analysis:

GROUND NO.1:
The primary issue was whether the assessee is entitled to set off the loss of ?3,90,35,968/- from its MEPZ Unit, eligible for deduction under section 10AA, against the income from other units. The Assessing Officer (AO) disallowed this set-off, but the CIT (A) allowed it, relying on several judicial precedents and CBDT Circular No.7/DV/2013 dated 16.07.2013. The Tribunal upheld the CIT (A)'s decision, referencing the Supreme Court's judgment in CIT vs. Yokogawa India Ltd., which clarified that deductions under Section 10A should be made before computing the gross total income of the eligible undertaking, not at the stage of total income computation. The Tribunal concluded that the loss suffered by the unit eligible for deduction under section 10AA can be set off against the normal business income, thus deciding the issue against the Revenue.

GROUNDS NO.2, 3, 4 & 5:
These grounds pertained to the additions made by the AO on account of proportionate allocation of head office expenses, bank and loan processing charges, bad debts written off, and price difference for goods transferred to the MEPZ unit. Since these grounds were offshoots of Ground No.1, the Tribunal found that the CIT (A) had rightly decided these issues in favor of the assessee by following the same rationale applied in Ground No.1. Therefore, these grounds were also determined against the Revenue.

GROUND NO.6:
The final issue was regarding the treatment of expenses for acquiring computer software. The AO treated these expenses as capital in nature and allowed depreciation at 60%, leading to an addition of ?17,44,330/-. The CIT (A) partially upheld this view, treating certain software expenses as capital and others as revenue. Specifically, expenses for ERP implementation and Oracle DAV module were capitalized, whereas E-TDS software, E-scan, antivirus attachment control, and ME&S Software upgrade were treated as revenue expenses. The Tribunal agreed with the CIT (A)'s findings, noting that the assessee had not filed a cross-appeal against this decision. Consequently, this ground was also determined against the Revenue.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT (A)'s order in its entirety. The key takeaway is the affirmation of the principle that losses from units eligible for deductions under section 10AA can be set off against other business income, and the nuanced treatment of software expenses based on their nature and usage.