2002 (5) TMI 217 - AT - Income Tax

Tribunal decision: Exemptions denied, interest deduction allowed for software company.

The Tribunal partly allowed the appeals, upholding the denial of exemptions under sections 10A and 10B for a software company's STP unit and the ... Exemption, Free Trade Zone Issues Involved:1. Exemption and deductions under sections 10A, 10B, 80HHE, and 80-I of the Income Tax Act.2. Disallowance of expenditure on foreign travel and training fees.3. Treatment of interest income and miscellaneous receipts for deduction under section 80HHE.Issue 1: Exemption and Deductions under sections 10A, 10B, 80HHE, and 80-IThe assessee, a software company, claimed exemptions under sections 10A and 10B for its STP unit at Nagarjuna Hills, Hyderabad. The CIT(A) denied the exemption under section 10B as the unit was not approved by the Board appointed by the Central Government u/s 14 of the Industries (Development and Regulation) Act, 1951. The assessee argued that the Department of Electronics had the authority to grant such approval. However, the Tribunal upheld the CIT(A)'s decision, stating that the approval by the Board is mandatory for exemption under section 10B. The Tribunal also rejected the claim under section 10A, as the unit commenced operations before the stipulated date of 1-4-1994.Regarding the deduction under section 80-I for domestic sales, the Tribunal noted that the CIT(A) denied the claim on the grounds that software development does not qualify as manufacturing or production of an article or thing. The Tribunal disagreed, stating that software production qualifies as 'production' within the meaning of section 80-IA(2)(iv)(a), and thus, the assessee is entitled to the deduction.Issue 2: Disallowance of Expenditure on Foreign Travel and Training FeesThe CIT(A) confirmed the disallowance of Rs. 58,175 and Rs. 7,92,601 on foreign travel and training fees of Sri B.G.V. Krishna, son of the Managing Director. The Tribunal upheld this decision, noting that the expenditure was personal in nature and not connected to the business of the assessee. The Tribunal emphasized that there was no agreement or resolution at the time of financing the education, making it a personal benefit rather than a business expense.Issue 3: Treatment of Interest Income and Miscellaneous Receipts for Deduction under Section 80HHEThe CIT(A) held that interest earned on fixed deposits, interest on staff loans, and miscellaneous receipts were not income derived from the business of the assessee. The Tribunal agreed but allowed the alternative contention that interest payments made by the assessee should be deducted from these receipts before excluding them from business income for the purpose of computing relief under section 80HHE. This decision was based on the Tribunal's earlier ruling in the assessee's own case for assessment years 1994-95 and 1995-96.Conclusion:The appeals were partly allowed, with the Tribunal upholding the CIT(A)'s decisions on the exemption under sections 10A and 10B and the disallowance of foreign travel and training fees, but allowing the deduction of interest payments from interest receipts for the purpose of section 80HHE.