2015 (1) TMI 1445 - AT - Income Tax

Tribunal clarifies business expense deductions, emphasizes accurate assessment

M/s. Eka Software Solutions Pvt. Ltd. Versus Deputy Commissioner of Income-tax, Circle 11 (3), Bangalore.

The tribunal remanded the disallowance of business service charges to the assessing officer for proper verification, emphasizing the need to allow ... Deduction u/s 10A - disallowance of business expenditure/marketing service charges - reduction of tele-communication charges from the export turnover - disallowance u/s 40(a)(i) - HELD THAT:- We find that the assessee has furnished the copies of the agreement between the assessee and its AE for rendering of marketing services and the invoices raised by the AE before the AO but the AO has not verified the genuineness or reasonableness of the same but has only made the disallowance on a proportionate basis of the increase in revenue to sales. This, in our view, is not sustainable in view of the decision of the Hon’ble Delhi High Court in the case of EKL Appliances [2012 (4) TMI 346 - DELHI HIGH COURT ] We also find that the assessee has made the same plea before the CIT(A) and has also filed the above details and documents but the CIT(A) also has neither called for a remand report nor has verified the genuineness or reasonableness of the payment made by the assessee to its AE but has only confirmed the addition made by the AO by further holding that the said payment is chargeable to tax in India and since the assessee has failed to deduct tax at source, the disallowance u/s 40(a)(i) is called for. This, in our view, is not justified without verification of facts. In view of the same, we deem it fit and proper to remand the issues to the file of the AO for de novo consideration of the issue as regards the genuineness and also the reasonableness of the expenditure claimed by the assessee. It is made clear that the AO cannot make disallowance on the ground that the assessee has not generated revenue in proportion to the expenditure. This ground of appeal is accordingly allowed for statistical purposes. Exclusion of tele-communication expenses from the export turnover for the purpose of deduction u/s 10A - We find that the alternate prayer of the assessee is covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] which has been followed by the CIT(A) in directing the AO to exclude the same from the total turnover also for the purpose of computation of deduction us 10A. Therefore, we see no reason to interfere with the order of the CIT(A) on this issue. This ground of appeal is rejected. Deduction u/s 10A should be granted on ‘the profits and gains as are derived by an undertaking from the export of articles or things or computer software’ as assessed by the AO - We find that the AO is bound to first compute the income from export of articles or things or computer software, as the case may be, and thereafter allow the deduction u/s 10A in accordance with law. Therefore, the AO is directed to grant the deduction u/s 10A in accordance with law. Interest u/s 234B and 234C are consequential in nature and therefore the AO is directed to give consequential relief to the assessee, if any. Issues Involved:- Disallowance of business service charges- Disallowance of tele-communication charges for deduction u/s 10A and 10AA- Computation of deduction u/s 10A on the basis of assessed income- Levy of interest u/ss.234B and 234CDetailed Analysis:1. Disallowance of Business Service Charges:The appellant contested the disallowance of business service charges paid to a related party, arguing that the expenditure was legitimate and incurred for business purposes. The appellant cited legal precedents to support their claim that the expenditure should be allowed if incurred wholly and exclusively for business purposes. The tribunal found that the authorities had not properly verified the genuineness and reasonableness of the transaction, leading to an unsustainable disallowance. The tribunal remanded the issue to the assessing officer for a fresh consideration based on the principles of allowing business expenditures.2. Disallowance of Tele-communication Charges for Deduction u/s 10A and 10AA:The appellant disagreed with the reduction of tele-communication charges from the export turnover, contending that these expenses were essential for exporting software. Despite the appellant's objection, the tribunal upheld the decision based on a precedent set by the High Court. The tribunal found no reason to interfere with the CIT(A)'s order regarding this issue.3. Computation of Deduction u/s 10A on the Basis of Assessed Income:The appellant argued that the deduction u/s 10A should be granted based on the assessed income rather than the returned income. The tribunal agreed with the appellant's stance, directing the assessing officer to calculate the deduction u/s 10A in accordance with the law based on the income derived from export activities.4. Levy of Interest u/ss.234B and 234C:The grounds related to interest levied u/ss.234B and 234C were deemed consequential, and the assessing officer was directed to provide any necessary relief to the appellant. The tribunal partially allowed the appeal for statistical purposes, emphasizing the need for a proper assessment of business expenditures and deductions under the Income-tax Act.This detailed analysis of the judgment highlights the key issues addressed by the tribunal and the legal arguments presented by the appellant in challenging the disallowances and computations made by the tax authorities.