Tax Appeals Partially Allowed; Revenue's Appeal Dismissed; Order of June 30, 2017

The assessee's appeals for Assessment Years 2003-04 and 2005-06 were partly allowed for statistical purposes. The Revenue's appeal for Assessment Year 2003-04 was dismissed, while the assessee's appeal for Assessment Year 2004-05 was also dismissed. The order was pronounced on June 30, 2017.

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Issues Involved:
1. Disallowance of depreciation on fixed assets.
2. Restriction of deduction under Sections 10A and 10B of the Income Tax Act.
3. Exclusion of unrealized sale proceeds from deductions under Sections 10A and 10B.
4. Disallowance of interest on deposits and staff loans for deductions under Sections 10A and 10B.
5. Disallowance of cost of software as capital expenditure.
6. Setoff of loss while computing deduction under Section 10A.
7. Carry forward and setoff of losses in subsequent assessment years.
8. Non-adjudication of grounds by CIT(A).
9. Deletion of disallowance of software consumable expenses as revenue expenditure.
10. Revision of reassessment order under Section 263 of the Act.

Detailed Analysis:

1. Disallowance of Depreciation on Fixed Assets:
The assessee did not claim depreciation on fixed assets for Assessment Years 2001-02 and 2002-03, relying on certain judicial pronouncements. However, the Assessing Officer (AO) calculated and allowed depreciation, stating it was mandatory from Assessment Year 2002-03 onwards. This decision was upheld by the CIT(A). The assessee’s appeal was dismissed, following the Coordinate Bench's decision in ITA.No.4180/2005 and the judgment of the Bombay High Court in Indian Rayon Corporation Ltd. v. CIT [261 ITR 98].

2. Restriction of Deduction under Sections 10A and 10B:
The AO excluded unrealized sale proceeds from deductions under Sections 10A and 10B. The CIT(A) upheld this action. The Coordinate Bench had previously ruled that the assessee could file for rectification under Section 155(13) when export proceeds are realized. This finding was applied to the current year, and the grounds were partly allowed for statistical purposes.

3. Exclusion of Unrealized Sale Proceeds:
The Coordinate Bench ruled that deductions under Sections 10A/10B are available only for sale proceeds received in convertible foreign exchange within six months from the end of the previous year or as extended by the competent authority. The disallowance was upheld, but the assessee could file a rectification application under Section 154 if proceeds are received later.

4. Disallowance of Interest on Deposits and Staff Loans:
The AO excluded interest on fixed deposits and staff loans from deductions under Sections 10A/10B, stating they were not derived from the business undertaking. The CIT(A) sustained this action. The Coordinate Bench, following the Supreme Court decision in Pandyan Chemicals (262 ITR 278), ruled against the assessee, stating such interest is not income derived from the undertaking.

5. Disallowance of Cost of Software:
The AO treated the cost of software as capital expenditure. The CIT(A) upheld this decision. The assessee contended that the cost was for trading purposes. The matter was remanded to the AO for verification. If the software was for sale, it should be allowed as a purchase cost, not capital expenditure.

6. Setoff of Loss while Computing Deduction under Section 10A:
The issue was decided by the Supreme Court in CIT v. Yokogawa India Ltd. [391 ITR 274], stating that deduction under Section 10A should be granted before setoff of losses. The AO was directed to follow this decision.

7. Carry Forward and Setoff of Losses in Subsequent Years:
This issue was deemed consequential. The AO was directed to allow carry forward and setoff of losses in accordance with the law.

8. Non-Adjudication of Grounds by CIT(A):
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

9. Deletion of Disallowance of Software Consumable Expenses:
The CIT(A) treated software consumable expenses as revenue expenditure. The Coordinate Bench upheld this decision, following the Special Bench of the Delhi Tribunal in Amway India Enterprise and the Delhi High Court in CIT v. Amway India Enterprises (346 ITR 341).

10. Revision of Reassessment Order under Section 263:
The Commissioner issued a show cause notice to revise the reassessment order on two grounds: setoff of unabsorbed depreciation beyond eight years and non-disallowance of deduction under Section 10A while computing book profits under Section 115JB. The ITAT found that the specific issue of unabsorbed depreciation was not part of the original assessment or appellate proceedings. The Commissioner’s action under Section 263 was justified, and the AO was directed to re-examine the issues, including the assessee’s contention regarding deduction under Section 80HHE if not under Section 10A.

Conclusion:
The assessee’s appeals for Assessment Years 2003-04 and 2005-06 were partly allowed for statistical purposes. The Revenue’s appeal for Assessment Year 2003-04 was dismissed. The assessee’s appeal for Assessment Year 2004-05 was dismissed. The order was pronounced in the open court on June 30, 2017.

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