ITAT decision: Exclusion of unabsorbed depreciation, interest on excise duty, sales tax deferral, and product dev expenses

The ITAT upheld the CIT(A)'s decision to exclude set-off of unabsorbed depreciation of non-EOU units in computing exemption for 100% EOU units. It also affirmed the treatment of interest on excise duty liability as a deductible liability in computing book profits. The ITAT restored the issue of taxability of notional surplus on sales tax deferral loan for fresh adjudication. The treatment of product development expenses and software support fees as capital or revenue expenditure was also remanded for further verification. The Revenue's appeals were dismissed, and the assessee's appeals were allowed for statistical purposes.

---

---

Issues Involved:
1. Dichotomy of EOU and Non-EOU units and set-off of unabsorbed depreciation.
2. Interest provision on excise duty liability and its treatment in book profit u/s 115JB.
3. Taxability of notional surplus on settlement of sales tax deferral loan.
4. Disallowance of product development expenses as capital expenditure.
5. Treatment of software support and license user fees as revenue expenditure.

Summary:

Issue 1: Dichotomy of EOU and Non-EOU units and set-off of unabsorbed depreciation
The Revenue challenged the CIT(A)'s decision to delete the set-off of unabsorbed depreciation of Rs. 70,36,530 and increase the deduction allowable u/s 10B. The AO rejected the claim u/s 10B due to substantial carried forward losses and lack of separate books for EOU and non-EOU units. The CIT(A) allowed the claim, holding there is no scope for set-off of unabsorbed depreciation of non-EOU units in computing exemption for 100% EOU units. The ITAT upheld the CIT(A)'s decision, citing the Bombay High Court's ruling in CIT Vs. Black & Veatch Consulting Pvt. Ltd. and Karnataka High Court's ruling in CIT Vs. Yokogawa India Ltd., which supported the exclusion of 10A/10B unit profits before setting off brought forward losses of non-10A/10B units.

Issue 2: Interest provision on excise duty liability and its treatment in book profit u/s 115JB
The AO added the provision for interest on excise duty liability to the book profit u/s 115JB, treating it as a contingent liability. The CIT(A) reversed this, considering it an ascertained liability deductible while computing book profits. The ITAT upheld the CIT(A)'s decision, noting that the interest payable on excise duty was a crystallized liability pursuant to a demand raised by the Central Excise Department.

Issue 3: Taxability of notional surplus on settlement of sales tax deferral loan
The AO added the notional surplus of Rs. 70,69,074 arising from the prepayment of sales tax deferral loan to the total income u/s 41(1). The CIT(A) dismissed the ground as it was not pressed by the assessee. The ITAT admitted the additional ground raised by the assessee, restoring the issue to the AO for fresh adjudication in light of the Special Bench decision in Sulzer India Ltd., which held that such surplus is a capital receipt not chargeable to tax.

Issue 4: Disallowance of product development expenses as capital expenditure
The AO disallowed Rs. 13,95,263 claimed as revenue expenditure for product development, treating it as capital expenditure. The CIT(A) upheld the AO's decision. The ITAT restored the issue to the AO for fresh verification, following its earlier decision in the assessee's own case for A.Y. 2001-02.

Issue 5: Treatment of software support and license user fees as revenue expenditure
The AO treated Rs. 76,75,184 paid for software development as capital expenditure. The CIT(A) treated Rs. 59,39,334 as capital expenditure and allowed the rest as revenue expenditure. The ITAT held that the software expenses should be allowed as revenue expenditure, following the Bombay High Court's decision in CIT Vs. Raychem RPG Ltd.

Conclusion:
The ITAT dismissed the Revenue's appeals and allowed the assessee's appeals for statistical purposes, restoring certain issues to the AO for fresh adjudication.

---