2020 (5) TMI 14 - AT - Income Tax

Deduction u/s 80-IC - disallowance of deduction profits derived from manufacture or production of any article or thing - profits and gains derived by the business of the undertaking that was set up in the State of Himachal Pradesh - assessee is a company engaged in telecommunication software development and trading in telecommunication hardware required mainly to run their software that are being supplied to the prospective consumers - HELD THAT - No conclusive to hold that there were two segments or verticals and is contrary to the Agreements under which the Assessee had to perform certain obligations to BSNL in the form of supply of software, hardware, installation and maintenance thereof. As we have already seen, the agreement with ZTE is very clear that the supply of software and hardware necessary to support the software supply, installation commissioning as well as rendering support services were to be done on a turnkey basis. Though the services agreement is separately entered into by the assessee, it has a direct nexus and connection with the agreement for supply of software. In these circumstances, the decisions cited by the ld. counsel for assessee, clearly supports the case of the assessee. We are therefore of the view that the claim made by the assessee for deduction u/s. 80IC of the Act ought to have been allowed by the AO/CIT(A) and they fell into an error in not allowing the said claim u/s. 80IC of the Act on service charges.- Decided in favour of assessee. Deduction on account of bad debts written off - HELD THAT - AO never doubted that the sum written off as bad debts was already included as income of assessee in the earlier previous years. There is no condition laid down in section 36(1)(vii) that the sum which is written off as bad debts should have suffered tax and if that income is claimed as exempt or deduction is claimed, then deduction on account of bad debts written off should not be allowed. We are also satisfied that the assessee has established that the sum written off as bad debts was in fact offered to tax in the earlier previous years as income and included while computing total income. The requirement of establishing that the debt has become bad and irrecoverable is no longer necessary after the decision of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT - We are therefore of the view that none of the reasons assigned by the revenue authorities to deny the benefit of deduction on account of bad debts written off are sustainable. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction under Section 80-IC of the Income-tax Act, 1961.
2. Disallowance of bad debts written off.

Issue-wise Detailed Analysis:

1. Deduction under Section 80-IC of the Income-tax Act, 1961:

The primary grievance of the assessee was the denial of the benefit of deduction under Section 80-IC. The assessee, engaged in telecommunication software development and trading in telecommunication hardware, claimed a deduction of ?4,93,84,285 for AY 2014-15. The AO denied the claim, computing the gross total income at a negative figure, and excluded other income and service charges from the eligible turnover.

The assessee contended that service charges should be included in the deduction calculation, arguing that services like installation, training, and support were integral to the software and hardware supplied. The CIT(A) upheld the AO’s decision, concluding that income from services was not derived from manufacturing activities and thus not eligible for the deduction.

Upon appeal, the Tribunal considered the agreements between the assessee and ZTE Telecom India Pvt. Ltd., which involved a turnkey solution requiring the supply of software, hardware, and related services. The Tribunal found that the services were interlinked with the supply of software and hardware, thus forming part of the profits derived from manufacturing. Citing various judicial precedents, the Tribunal concluded that the service income should be included in the deduction calculation under Section 80-IC.

2. Disallowance of Bad Debts Written Off:

The assessee claimed a deduction for bad debts written off amounting to ?7,47,94,151. The AO denied the deduction, arguing that the debts had been claimed as deductions under Section 80-IC in earlier years and thus did not satisfy the conditions of Section 36(2). The CIT(A) upheld the AO’s decision, stating that the debts had not suffered tax and the assessee failed to prove the debts had become bad.

The Tribunal, however, found that the AO did not dispute that the debts had been included in the income of earlier years. It emphasized that there is no requirement under Section 36(1)(vii) for the debts to have suffered tax, only that they must have been included in the income. The Tribunal also referenced the Supreme Court’s decision in TRF Ltd. vs. CIT, which held that writing off the debt in the books is sufficient for claiming the deduction. Consequently, the Tribunal directed that the deduction for bad debts be allowed.

Conclusion:

The Tribunal allowed the appeal, granting the deduction under Section 80-IC for service charges and the deduction for bad debts written off. The decision emphasized the interlinked nature of services with the manufacturing activities and clarified the conditions under Section 36(1)(vii) for bad debts.