ITAT allows partial appeal, directs AO to permit deduction under section 10A. Recalculation of disallowance under section 14A.

The ITAT allowed the appeal in part, directing the AO to permit the deduction under section 10A for Units II and III. Additionally, the AO was instructed to recalculate the disallowance under section 14A based on materials provided by the assessee. The decision was rendered on 21.1.2015.

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Issues Involved:
1. Disallowance of claim of deduction under section 10A for Unit II and Unit III.
2. Disallowance of expenses under section 14A.

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Deduction under Section 10A for Unit II and Unit III:

The assessee, engaged in IT and IT-enabled services, claimed deduction under section 10A for Unit II and Unit III but not for Unit I and Unit IV. The AO disallowed the claim, stating that Unit II and III were not independent units but expansions of an existing unit. This conclusion was based on a letter from the Director of Software Technology Parks of India (STPI) which indicated that the units were not separate but expanded locations of the initial unit.

The CIT(A) upheld the AO's decision. However, upon appeal, the ITAT found that the AO had not thoroughly examined whether Units II and III were independent units or merely expansions. The ITAT directed the AO to re-examine the matter in light of the principles laid down in the case of Patni Computers Ltd. and the evidence provided by the assessee.

In the re-examination, the AO observed that Units II and III were set up with fresh investments, maintained separate books of accounts, and had different customers and employees. The AO, in a remand report, concluded that the units fulfilled all conditions under section 10A, including not being formed by splitting up or reconstruction of an existing business.

The ITAT reviewed the correspondence with the Director of STPI and the AO's remand report, concluding that the assessee was eligible for the deduction under section 10A for Units II and III. The ITAT directed the AO to allow the deduction.

2. Disallowance of Expenses under Section 14A:

The assessee contested the disallowance of expenses under section 14A, arguing that the total expenditure claimed was Rs. 13 lakhs, yet the AO disallowed about Rs. 16 lakhs. The assessee also contended that Rule 8D was not applicable for the assessment year in question.

The ITAT directed the AO to compute the disallowance under section 14A in accordance with the directions issued in the assessee's own case in an earlier order dated 31-1-2012. The AO was instructed to consider all materials placed by the assessee while computing the disallowance.

Conclusion:

The appeal was allowed in part. The ITAT directed the AO to allow the deduction under section 10A for Units II and III and to recompute the disallowance under section 14A based on the materials provided by the assessee. The order was pronounced in the open court on 21.1.2015.

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