2019 (11) TMI 144 - AT - Income Tax

Computation of deduction u/s 10A(4) - Not assessing the bank interest on short term export surplus deposits as Business income - HELD THAT - We are of the considered view that the interest earned on short term export surplus deposit has to be treated as Business income for the purposes of computation of deduction u/s 10A(4) of the Act. Ground No. 1 is accordingly allowed. Disallowance of legal and professional fee and foreign taxes - Allowable revenue expenses - HELD THAT - Expenses towards registration of stamp duty and legal expenses incurred in connection therewith have to be considered in the light of the provisions of section 37(1) of the Act. The Hon'ble Bombay High Court in the case of Cinecita Pvt Ltd 1982 (2) TMI 58 - BOMBAY HIGH COURT has held The impugned expenditure did not involve any element of premium in the amount claimed as expenditure. It was incurred only to draw up and get registered an effective and proper lease deed and would have remained the same irrespective of the period of lease as long as it was more than one year. Further, the period of lease itself could not be decisive of the question whether the asset was of enduring nature. On these facts, the impugned expenditure was revenue in nature. A similar view was taken in the case of Hoechst Pharmaceuticals Ltd 1977 (11) TMI 55 - BOMBAY HIGH COURT and in the case of Octavious Steel and Co. Ltd 1995 (4) TMI 11 - CALCUTTA HIGH COURT . Considering the nature of expenditure in the light of the judicial decisions, legal expenses have to be allowed u/s 37(1) of the Act. We order accordingly. In so far as the claim of expenditure of legal and professional fees the facts on record show that this amount was deducted by overseas customer while releasing payment against invoices raised by the assessee. The deduction was on account of turnover taxes. In our considered opinion, this deduction by overseas customer is not a tax on profit of business as such but on the applicable laws of those countries. The assessee is very much entitled to deduction in respect of such expenditure u/s 37(1) - assessee has recorded the sales on gross basis, i.e. invoiced amount has been taken as sales, therefore, any deduction from invoiced amount has to be allowed as deduction from business income of the assessee. Ground No. 2 is allowed.

Summary

Issues Involved:
1. Classification of bank interest on short-term export surplus deposits as 'Business income'.
2. Disallowance of legal and professional fee and foreign taxes under Section 37(1) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Classification of Bank Interest on Short-Term Export Surplus Deposits as 'Business Income':

The primary issue contested by the assessee was whether the interest earned on short-term export surplus deposits should be classified as 'Business income' for the purpose of computing deduction under Section 10A of the Income Tax Act, 1961. The assessee argued that, according to Section 10A(4), the interest income forms part of the profit from the business of the industrial undertaking and should be considered for deduction as the assessee is a 100% Export Oriented Unit (EOU).

The Tribunal reviewed various judicial precedents, including the Full Bench decision of the Karnataka High Court in Hewlett Packard Global Soft Ltd, which held that interest from Fixed Deposits qualifies as business income for deduction under Section 10A. The Tribunal also considered the Supreme Court's ruling in Yokogawa India Ltd, which clarified that the income of the Section 10A unit should be excluded before arriving at the gross total income of the assessee.

Based on these precedents, the Tribunal concluded that the interest earned on short-term export surplus deposits must be treated as 'Business income' for the purposes of computation of deduction under Section 10A(4) of the Act. Therefore, the assessee's appeal on this ground was allowed.

2. Disallowance of Legal and Professional Fee and Foreign Taxes under Section 37(1):

The second issue involved the disallowance of legal and professional fees amounting to ?1,93,250 and foreign taxes of ?51,384 claimed under Section 37(1) of the Act. The Assessing Officer disallowed these expenses, considering them as capital expenditure and not allowable under Section 37(1).

The Tribunal examined the nature of the legal and professional fees, which were incurred towards stamp duty and registration charges for the execution of a lease deed. Citing the Bombay High Court's decisions in Cinecita Pvt Ltd and Hoechst Pharmaceuticals Ltd, the Tribunal noted that such expenses, incurred to draw up and register a lease deed, are of a revenue nature and should be allowed under Section 37(1).

Regarding the foreign taxes deducted by the overseas customer, the Tribunal held that these deductions were not taxes on profit but were based on the applicable laws of those countries. Since the assessee recorded the sales on a gross basis, any deduction from the invoiced amount should be allowed as a deduction from the business income under Section 37(1).

Consequently, the Tribunal allowed the assessee's appeal on this ground as well.

Conclusion:

The Tribunal allowed the appeal of the assessee in ITA No. 6506/DEL/2016, concluding that the interest on short-term export surplus deposits should be treated as 'Business income' for Section 10A deductions and that the legal and professional fees and foreign taxes are allowable under Section 37(1) of the Income Tax Act. The order was pronounced in the open court on 04.10.2019.