2021 (3) TMI 530 - HC - Income Tax

Computation of deduction under Section 10B - excluding telecommunication and other expenses incurred in foreign currency both from export turnover and total turnover? - HELD THAT - As decided in HCL TECHNOLOGIES LTD. 2018 (5) TMI 357 - SUPREME COURT if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. Even in the common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover - Decided in favour of assessee.

Issues Involved:
1. Eligibility of exchange fluctuation gains for deduction under Section 80HHE.
2. Eligibility of exchange fluctuation gains for deduction under Section 10B.
3. Consideration of losses from Mumbai, Bangalore, and Hyderabad units in computing Section 80HHE.
4. Calculation of total turnover for Section 80HHE.
5. Classification of software expenses as revenue expenditure.
6. Exemption under Section 10B and disallowance under Section 14A.

Issue-wise Detailed Analysis:

1. Eligibility of Exchange Fluctuation Gains for Deduction under Section 80HHE:
The Assessing Officer (AO) determined that the exchange fluctuation gains related to the export of computer software should not be included in the eligible profit for the purpose of Section 80HHE. Following the assessment orders for the years 1999-00 and 2001-02, the AO treated these gains as taxable under "income from other sources" rather than allowing them for deduction under Section 80HHE.

2. Eligibility of Exchange Fluctuation Gains for Deduction under Section 10B:
Similarly, for Section 10B, the AO found that exchange fluctuation gains related to the export of computer software should be taxed separately as they were not derived from software exports. This decision was based on the assessment years 1999-00 and 2000-01, which were analogous to the present assessment year.

3. Consideration of Losses from Mumbai, Bangalore, and Hyderabad Units in Computing Section 80HHE:
The AO held that losses from the Mumbai, Bangalore, and Hyderabad units should be deducted while computing the eligible profit of the business under Section 80HHE. This decision was consistent with the assessment year 1999-00.

4. Calculation of Total Turnover for Section 80HHE:
The assessee considered only the total turnover of the Chennai unit and excluded the turnover of the Hyderabad, Bangalore, and Mumbai units while calculating deductions under Section 80HHE. The AO, following the order for the assessment year 1999-00, excluded the Hyderabad unit from the total turnover as it was not engaged in software development but in providing software training.

5. Classification of Software Expenses as Revenue Expenditure:
The AO disallowed the software expenses amounting to ?2,93,98,239/- incurred by the Chennai Unit-I & II and Bangalore, treating them as capital expenditure but allowed depreciation at the rate of 25% on the same. This decision was based on the assessment orders for the years 1999-00 and 2000-01.

6. Exemption under Section 10B and Disallowance under Section 14A:
The Commissioner of Income Tax (CIT) found a mistake in the computation of the deduction under Section 10B, leading to a higher exemption being granted than the assessee was entitled to. Additionally, the CIT noted that the AO failed to disallow expenditure under Section 14A concerning dividend income exempted under Section 10(33). The CIT directed the AO to quantify the exemption under Section 10B and Section 14A after providing an opportunity to the assessee. The assessee's appeal to the CIT (Appeals) was partly allowed, and both the assessee and Revenue appealed to the Income Tax Appellate Tribunal (ITAT), which partly allowed the Revenue's appeal and dismissed the assessee's appeal.

Judgment:
The High Court dismissed the Revenue's appeal, agreeing with the respondent's reliance on relevant case laws. The Court cited decisions from the Supreme Court and its own past judgments, emphasizing that expenses excluded from export turnover must also be excluded from total turnover to avoid illogical results. The Court concluded that the question of law was decided against the Revenue and in favor of the assessee, dismissing the appeal without costs.

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