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2022 (11) TMI 723 - AT - Income TaxDeduction claimed u/s.10A - AO assessed income from course material under the head income from other sources and also denied deduction claimed u/s.10A on the ground that the receipts are not in the nature of profits gains derived from export unit - HELD THAT - There is no error in the reasons given by the AO and the Ld.CIT(A) to assess income from course material under the head income from other sources , because, it is nothing to do with main business activity of the assessee i.e. export of software products services from STP Units and thus, we confirm the action of the AO in assessing income from course material under the head income from other sources and also denial of deduction u/s.10A. This issue is also covered against the assessee by the decision of ITAT Chennai Benches, in the assessee s own case, for the AY 1996-97 where the Tribunal after considering relevant facts has rightly held that income derived from training fee and related course material, is not entitled for deduction u/s.10B of the Act. Therefore, consistent with view taken by the co-ordinate bench, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the assessee. As regards alternate claim of the assessee, the AO is directed to verify the claim and if found correct, the assessed net income under the head income from other sources . Rental income under the head income from other sources - AO has assessed rental income under the head income from other sources on the ground that said income is not in the nature of profits gains derived from export unit and thus, denied deduction claimed u/s.10A - HELD THAT - The issue needs to be set aside to the file of the AO for further verification. In case, the assessee derived rental income from lease of land building, then definitely said income is assessable under the head income from house property and consequent action needs to be followed. But, in case, rental income is derived from lease of plant machinery or equipment, then same needs to be assessed under the head income from other sources and consequent action needs to be followed. Further, if at all the assessee is in the business of letting out properties or plant machinery, then same needs to be assessed under the head income from business or profession as considered by the Ld.CIT(A) and consequent action needs to be followed like allowing expenses relatable to said income. Since, facts are not clear, we set aside the issue to the file of the AO and direct the AO to re-consider the issue in light of our discussion given hereinabove and decide the issue in accordance with law. Depreciation on non-compete fee - AO has disallowed depreciation on the ground that the non-compete fee/good will is not depreciable asset, eligible for depreciation u/s.32(i)(ii) nor the expenditure on acquisition of goodwill, is eligible item for deduction u/s.35D(2) - HELD THAT - Depreciation on non-compete fee whether it is an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act, is no longer res integra. CIT(A) allowed depreciation on non-compete fee by following the decision of ITAT in the assessee s own case for the AYs 2001-02 2002-03, where the Tribunal held that non-compete fee is an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act. The matter reached to the Hon ble Madras High Court and the jurisdictional High Court of Madras had considered an identical issue in the case of Pentasoft Technology Ltd. 2013 (11) TMI 1057 - MADRAS HIGH COURT and held that non-compete fee is in the nature of intangible asset in terms of sec. u/s.32(1)(ii) of the Act, and would be a capital asset entitled for depreciation. Thus the assessee is entitled for depreciation on non-compete fee and thus, we direct the AO to allow depreciation on non-compete fee as claimed by the assessee. Computation of deduction u/s 10A - exclusion of software development expenses and exchange fluctuation loss from export turnover but not from total turnover - HELD THAT - The issue of computation of deduction u/s.10A of the Act, in light of definition of export turnover and total turnover, has been resolved by the Hon ble Supreme Court in the case of HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT where it was held that expenses deducted from export turnover needs to be deducted from total turnover - AO CIT(A) is erred in not excluded expenses deducted from export turnover from total turnover and thus, we direct the AO to exclude expenditure incurred towards software development and foreign exchange loss from total turnover also. Depreciation on IPR - HELD THAT - As in the assessee s own case for the AY 2002-03 where the Tribunal after considering relevant facts held that IPR is eligible for depreciation u/s.32(1)(i) of the Act. Therefore, consistent with view taken by the co- ordinate Bench, we are of the considered view that there is no error in the reasons given by CIT(A) to delete additions made towards disallowance of depreciation on IPR and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue. Nature of expenditure - expenditure on purchase of software - Revenue expenditure or capital expenditure - HELD THAT - Although, the assessee has purchased software to replace with existing software in a computer system, but same does not give any enduring benefit, because the life of software is very short. Therefore, the same cannot be considered as capital in nature. We find that the jurisdictional high Court of Madras in the case of Southern Roadways Ltd., 2006 (10) TMI 82 - MADRAS HIGH COURT has considered an identical issue and held that there is an enduring benefit, it does not result in acquisition of any capital asset and merely enhanced the productivity or efficiency of the system and thus, it cannot be considered as capital in nature. CIT(A) after considering relevant facts and also by following the decision in the case of Southern Roadways Ltd., (supra) has rightly deleted the additions made by the AO. Unexplained credit - assessee could not furnish full details in respect of balance payable to M/s.Penta Media Graphics Ltd. - CIT(A) allowed relief to the assessee on the basis of reconciliation filed by the assessee along with ledger account of M/s.Penta Media Graphics Ltd., in the books of the assessee and vice-versa - HELD THAT - Although, the assessee has filed reconciliation and further evidences first time before the Ld.CIT(A), the Ld.CIT(A) has allowed relief to the assessee without confronting those evidences to the AO for his rebuttal. No doubt, the assessee has filed details of ledger account along with confirmation from the party and explained the credit.CIT(A) should have confronted those evidences to the AO for his comments before allowing the relief to the assessee - Issue needs to go back to the file of the AO to verify additional evidences filed by the assessee including confirmations from the party and reconciliation of difference between the ledger account of party in the books of accounts of the assessee and in the books of creditors. In case, the assessee is able to explain credit with necessary evidences, then the AO is directed to delete additions made towards credits in the name of M/s.Penta Media Graphics Ltd. Additions towards creditors in absence of confirmation form the party - CIT(A) deleted the additions made by the AO on the basis of subsequent payment made by the assessee to the creditors - HELD THAT - We find that confirmation of settlement of credit subsequently from creditors were already produced before the Ld.CIT(A). Notices by the AO being returned/unserved cannot be the reason to hold the credit, is not genuine. Creditors are carried over from FY 2001-02 and are not credits/appearing for the first time during the year. Therefore, we are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to delete the additions towards credits in the name of M/s.RS Co. Inc. and M/s.Pentafour Software Solution Inc., and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue. Allocation of disallowance of expenses among STP Units and non-STP Units in the ratio of 90% and 10% on the basis of income of the assessee - allocation of disallowance on said expenses is whether it should be on the basis of income or turnover - AO has disallowed certain liabilities u/s.43B as per Tax Audit Report and allocated said disallowances to STP Units and non-STP Units on the basis of income derived by the assessee - HELD THAT - In our considered view, turnover would be the appropriate ratio for allocation of expenses to STP Units non-STP Units instead of income. Because, income of STP Units non-STP Units may depend upon various factors including fixed overhead expenses and other parameters. Therefore, we are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to allocate disallowance of expenses u/s.43B of the Act, to STP Units non-STP Units on the basis of export turnover and domestic turnover and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.
Issues Involved:
1. Assessment of income from sale of course material. 2. Assessment of rental income. 3. Depreciation on non-compete fee. 4. Exclusion of software development expenses and exchange fluctuation loss from export turnover but not from total turnover. 5. Depreciation on Intellectual Property Rights (IPR). 6. Expenditure on purchase of software treated as revenue expenditure. 7. Unexplained credit in the name of M/s. Penta Media Graphics Ltd. 8. Additions towards credits in respect of M/s. RS & Co. Inc. and M/s. Pentafour Software Solution Inc. 9. Allocation of disallowance of expenses among STP Units and non-STP Units. Detailed Analysis: 1. Assessment of Income from Sale of Course Material: The first issue concerns whether income from the sale of course material should be assessed under 'income from other sources' or 'profits & gains of business.' The Tribunal upheld the AO's decision to assess this income under 'income from other sources' and denied the deduction claimed under section 10A of the Act, citing that the income from course material is not related to the main business activity of exporting software products and services from STP Units. This decision was also consistent with the Tribunal's earlier ruling in the assessee's case for AY 1996-97. 2. Assessment of Rental Income: The second issue pertains to the classification of rental income. The AO assessed it under 'income from other sources,' while the Ld.CIT(A) assessed it under 'income from business' but denied the deduction under section 10A. The Tribunal found that the nature of the rental income (whether from land & building or plant & machinery) was unclear and remanded the issue back to the AO for further verification. The AO was directed to assess the rental income under 'income from house property' if it was derived from land & building, or under 'income from other sources' if derived from plant & machinery. 3. Depreciation on Non-Compete Fee: The third issue is whether non-compete fees qualify as an intangible asset eligible for depreciation under section 32(1)(ii) of the Act. The Tribunal upheld the Ld.CIT(A)'s decision to allow depreciation on non-compete fees, following the jurisdictional High Court's ruling in Pentasoft Technology Ltd., which recognized non-compete fees as an intangible asset. 4. Exclusion of Software Development Expenses and Exchange Fluctuation Loss: The fourth issue involves the exclusion of software development expenses and exchange fluctuation loss from export turnover but not from total turnover. The Tribunal directed the AO to exclude these expenses from the total turnover as well, in line with the Supreme Court's decision in HCL Technologies Ltd., which mandates that expenses deducted from export turnover should also be deducted from total turnover. 5. Depreciation on Intellectual Property Rights (IPR): The fifth issue concerns the eligibility of IPR for depreciation under section 32(1)(i) of the Act. The Tribunal upheld the Ld.CIT(A)'s decision to allow depreciation on IPR, consistent with its earlier ruling in the assessee's case for AY 2002-03. 6. Expenditure on Purchase of Software Treated as Revenue Expenditure: The sixth issue is whether the expenditure on software purchase should be treated as capital or revenue expenditure. The Tribunal upheld the Ld.CIT(A)'s decision to treat it as revenue expenditure, citing the jurisdictional High Court's ruling in Southern Roadways Ltd., which held that such expenditure enhances productivity or efficiency without resulting in the acquisition of a capital asset. 7. Unexplained Credit in the Name of M/s. Penta Media Graphics Ltd.: The seventh issue involves unexplained credit in the name of M/s. Penta Media Graphics Ltd. The Tribunal remanded the issue back to the AO for verification of additional evidence provided by the assessee, including reconciliation and confirmation from the creditor. 8. Additions towards Credits in Respect of M/s. RS & Co. Inc. and M/s. Pentafour Software Solution Inc.: The eighth issue pertains to additions towards credits in the absence of confirmation from the parties. The Tribunal upheld the Ld.CIT(A)'s decision to delete the additions, noting that the assessee had provided sufficient evidence of subsequent payments to the creditors. 9. Allocation of Disallowance of Expenses among STP Units and Non-STP Units: The ninth issue concerns the allocation of disallowance of expenses under section 43B of the Act. The Tribunal upheld the Ld.CIT(A)'s decision to allocate the disallowance based on turnover rather than income, as turnover is a more appropriate basis for allocation. Conclusion: The appeal filed by the assessee was partly allowed, and the appeal filed by the Revenue was partly allowed for statistical purposes. The Tribunal directed the AO to reconsider specific issues with additional verification and in accordance with the law.
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