Tribunal Allows Loss Carry Forward, Denies Interest Deduction

Efunds International (P) Limited. Versus Deputy Commissioner Of Income-Tax.

Efunds International (P) Limited. Versus Deputy Commissioner Of Income-Tax. - [2009] 310 ITR 54, ITD 120, 567, TTJ 120, 305, [2008] 25 SOT 306 (DELHI) Issues Involved:
1. Carry forward and set off of losses (including unabsorbed depreciation) from Assessment Year (AY) 1998-99.
2. Eligibility of deduction under Section 10A of the Income Tax Act, 1961 for interest income from housing loans to employees.
3. Eligibility of deduction under Section 10A of the Income Tax Act, 1961 for the SSC unit in Gurgaon.

Issue-wise Detailed Analysis:

1. Carry forward and set off of losses (including unabsorbed depreciation) from AY 1998-99:
The assessee argued that the CIT(A) erred in upholding the AO's decision that the losses from AY 1998-99 could not be carried forward and set off against profits of subsequent years. The AO observed that the losses pertained to two activities: Electronic Payment Service (EPS) and Software Development Centre (SDC) at Chennai. Since the SDC claimed Section 10A exemption in subsequent years, its losses could not be adjusted against profits of non-STP units. The AO also noted that the losses of AY 1998-99 were already adjusted in AY 2000-01, thus no further credit could be allowed.

The CIT(A) confirmed the AO's order, stating that the losses from the discontinued EPS business could not be carried forward as per the provisions existing at that time. The Tribunal, however, noted that the amendment to Section 72(1) by the Finance Act, 1999, w.e.f. 1st April 2000, allowed the carry forward of business losses even if the business was discontinued. The Tribunal concluded that the tax authorities were not justified in disallowing the carry forward and set off of the unabsorbed business loss and depreciation for AY 1998-99 against the profits of AY 2001-02. Hence, the orders of the tax authorities were set aside, and the issue was decided in favor of the assessee.

2. Eligibility of deduction under Section 10A of the Income Tax Act, 1961 for interest income from housing loans to employees:
The assessee claimed deduction under Section 10A for interest income from housing loans advanced to its employees, arguing that such income was directly linked to its business. The AO assessed this income under the head "Income from other sources" and denied the deduction, stating that the interest income had no connection with the export of computer software.

The CIT(A) upheld the AO's decision, stating that the interest income did not constitute business profits and was rightly assessed under "Income from other sources." The Tribunal agreed with the tax authorities, noting that the interest income from housing loans did not form part of the profits of the business of the undertaking as there was no nexus between the business activity and the interest income. Therefore, the interest income was not eligible for deduction under Section 10A, and the orders of the tax authorities were upheld.

3. Eligibility of deduction under Section 10A of the Income Tax Act, 1961 for the SSC unit in Gurgaon:
The AO denied the deduction under Section 10A for the SSC unit, arguing that the assessee had claimed deduction under Section 80HHE in earlier years and that the SSC unit was not a new industrial undertaking. The CIT(A) allowed the deduction, stating that the SSC unit became eligible for Section 10A deduction only after the amendment to the definition of computer software w.e.f. 1st April 2001. The CIT(A) also noted that the deduction could be claimed even if it was not claimed from the initial year of manufacture or production.

The Tribunal supported the CIT(A)'s decision, noting that the assessee had not claimed or was allowed any deduction under Section 80HHE in previous years. The Tribunal cited various decisions, including the jurisdictional High Court of Delhi, which held that an assessee could claim exemption under Section 10A if all conditions were met, even if the assessee had claimed deduction under Section 80HHE in earlier years. The matter was restored to the AO to allow the exemption under Section 10A if the assessee satisfied all the requisites as per the scheme of Section 10A.

Conclusion:
The assessee's appeal was partly allowed, permitting the carry forward and set off of losses from AY 1998-99. The interest income from housing loans was not eligible for deduction under Section 10A. The Revenue's appeal was allowed for statistical purposes, directing the AO to verify and allow the deduction under Section 10A for the SSC unit if all conditions were met.