2021 (3) TMI 1182 - HC - Income Tax

HC Overturns Tribunal: License Fee Capitalized, Exempts u/s 10A, Dismisses Unrealized Forex Loss Appeal.

Pr. Commissioner of Income Tax – 4, New Delhi Versus HCL Comnet Systems & Services Ltd.

The HC overturned the Tribunal's interpretation of Section 14A(1) of the Income Tax Act, emphasizing that the sole precondition is the expenditure related ... Disallowance u/s 14A - correctness of claim of the Respondent in respect of such expenditure in relation to income which does not form part of the total income under this Act - HELD THAT:- Issues as covered by the judgement of the coordinate Bench of this Court rendered in Joint Investments (P.) Ltd. vs. Commissioner of Income-tax [2015 (3) TMI 155 - DELHI HIGH COURT] Nature of expenditure - license fee paid to the Department of telecommunication by the assessee - revenue or capital expenditure - HELD THAT:- This issue covered by the judgement of the coordinate Bench of this Court in Commissioner of Income-tax vs. Bharti Hexacom Ltd., [2013 (12) TMI 1115 - DELHI HIGH COURT] Exemption under section 10A - whether to be computed after excluding telecommunication expenses and foreign currency expenditure from the export turnover? - HELD THAT:- Issue covered by the judgement of the Supreme Court rendered in Commissioner of Income-tax, Central - III vs. HCL Technologies Ltd. [2018 (5) TMI 357 - SUPREME COURT] Disallowance of unrealized foreign exchange loss on account of reinstatement of assets and liabilities - whether this is a notional loss and not allowable to be set off against the taxable income in view of the CBDT’s instruction no. 3 of 2010 dated 23.03.2010? - HELD THAT:- the power invested in this Court under Section 260A of the Act is to adjudicate upon the substantial question(s) of law. The revenue, having not laid an edifice concerning the purported non-fulfilment of any of the conditions, stipulated by the Supreme Court in Woodward Governor India P. Ltd. [2009 (4) TMI 4 - SUPREME COURT] cannot, for the first time, without even taking a ground in the instant appeal, argue before us that the loss which accrued to the assessee on account of the foreign currency fluctuation cannot be claimed by it as a business loss. Issues involved:1. Interpretation of Section 14A(1) of the Income Tax Act, 1961.2. Interpretation of Circular No. 5 of 2014 of the CBDT regarding Section 14A of the Act.3. Justification of the correctness of expenditure in relation to income not forming part of total income.4. Determination of the nature of license fee paid to the Department of Telecommunication.5. Computation of exemption under section 10A of the Act after excluding specific expenses from export turnover.6. Disallowance of unrealized foreign exchange loss and applicability of CBDT instruction no. 3 of 2010.Analysis:1. The appeal raised questions regarding the interpretation of Section 14A(1) of the Income Tax Act. The court referred to previous judgments and concluded that the Tribunal had erred in its interpretation, stating that the only precondition for invoking Section 14A is the 'expenditure incurred in relation to such income which does not form part of the total income under this Act.'2. The issue of interpreting Circular No. 5 of 2014 of the CBDT was also raised. The court found that the Tribunal had erred in its interpretation, and the Circular clarifies the true scope and meaning of Section 14A of the Act.3. The correctness of expenditure in relation to income not forming part of the total income was questioned. The court noted the revenue's contentions and referred to previous judgments to determine that the conditions stipulated in Woodward Governor India (P.) Ltd. were fulfilled, thus justifying the correctness of the expenditure.4. The nature of the license fee paid to the Department of Telecommunication was disputed. The court found that the Tribunal had erred in deciding the true nature of the expenditure, stating that it was a capital expenditure and relied on previous judgments to support this conclusion.5. The computation of exemption under section 10A of the Act after excluding specific expenses from export turnover was challenged. The court referred to a Supreme Court judgment and concluded that the issue was covered by existing legal precedents.6. The disallowance of unrealized foreign exchange loss and the applicability of CBDT instruction no. 3 of 2010 were also contested. The court considered arguments from both parties and found that the revenue had not laid a foundation for arguing against the claimed loss, leading to the dismissal of the appeal.