ITAT Upholds Deletions Under Sections 80IC and 10AA, Partially Allows Travel and Club Expense Disallowances

The ITAT Delhi upheld the deletion of disallowances under sections 80IC and 10AA, relying on the assessee's precedent. Disallowances on foreign travel and club expenses were partially allowed, reducing them to 10% and 20% respectively from higher percentages upheld earlier. The disallowance of deduction under section 10AA related to scrap sales was deleted following prior rulings. The section 14A disallowance was rejected based on the assessee's prior case law. Depreciation disallowance on software licenses was also dismissed, affirming the CIT(A)'s order. Overall, the ITAT granted relief to the assessee on most grounds, partly allowing some expense disallowances but rejecting Revenue's appeals on other issues.

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ISSUES:

1. Whether deduction under section 80IC of the Income Tax Act, 1961 can be allowed without allocating head office indirect expenses to eligible units.
2. Whether deduction under section 10AA of the Income Tax Act, 1961 requires allocation of head office expenses to the SEZ unit claiming exemption.
3. Whether disallowance under section 14A of the Income Tax Act, 1961 is justified in respect of expenses related to exempt income.
4. Whether foreign travelling expenses can be disallowed on an ad-hoc basis for not being wholly and exclusively incurred for business purposes.
5. Whether club membership expenses can be disallowed on an ad-hoc basis as personal expenses.
6. Whether depreciation on software license is allowable for deduction.
7. Whether income from sale of scrap by SEZ unit is eligible for deduction under section 10AA.
8. Whether inter-unit transfer pricing impacts the allowable deduction under sections 80IC and 10AA.

RULINGS / HOLDINGS:

1. Deduction under section 80IC cannot be restricted by disallowing allocation of head office indirect expenses to eligible units when such expenses are incurred for overall business growth; indirect expenses are not to be considered in computing profits "derived from industrial undertaking."
2. Deduction under section 10AA requires allocation of head office expenses to the SEZ unit on a turnover basis; failure to allocate results in distortion of profits and excess claim of deduction is disallowed.
3. Disallowance under section 14A was upheld only to the extent justified; however, in the present appeals, disallowances were deleted or reduced following coordinate bench decisions.
4. Foreign travelling expenses disallowance made on ad-hoc basis was restricted to 10% instead of 15% as upheld by CIT(A), recognizing lack of specific evidence to fully disallow.
5. Club expenses disallowance on ad-hoc basis was restricted to 20% instead of 33.33% as upheld by CIT(A), granting partial relief due to absence of conclusive proof.
6. Depreciation on software license was allowed as per the decision of the Special Bench of the ITAT, and no infirmity was found in the appellate order allowing such depreciation.
7. Income from sale of scrap by SEZ unit is not eligible for deduction under section 10AA where scrap is sold locally and not used in export activity; excess deduction claimed on this account was disallowed.
8. Inter-unit transfer pricing adjustments must be made on the basis of market rates; netting of higher and lower transfer prices is impermissible, and undue benefit arising from transfer at less than market price is added back to income.

RATIONALE:

1. The Court applied statutory provisions of sections 80IC, 10AA, 14A, and relevant rules under the Income Tax Act, 1961, interpreting "profits derived from industrial undertaking" to exclude indirect and head office expenses not directly attributable to the eligible units.
2. Precedents from coordinate benches and higher authorities, including decisions of the ITAT and Special Bench, were relied upon to determine the correct approach to allocation of expenses and allow deductions accordingly.
3. The Court recognized that head office expenses incurred for overall corporate management and growth, including salaries of CMD/MD and directors, depreciation, and exchange differences, must be apportioned fairly among units claiming deductions to avoid distortion of taxable income.
4. The Court distinguished factual differences from earlier High Court decisions, emphasizing that some prior rulings were fact-specific and did not establish binding legal propositions on allocation of head office expenses.
5. Ad-hoc disallowances without concrete evidence were moderated by the Court to more reasonable percentages, reflecting the need for a balanced approach when business and personal expenses are intertwined.
6. The Court followed the principle that income eligible for deduction under section 10AA must be directly connected to export activities of the SEZ unit, excluding local sales of scrap which do not qualify.
7. The Court held that inter-unit transfer pricing must reflect market realities and that the onus lies on the Assessing Officer to establish market rates; failure to do so results in acceptance of the assessee's valuation.
8. The Court dismissed Revenue appeals where tax effect was below the prescribed threshold as per CBDT Circular No.09/2024 dated 17.09.2024, reinforcing procedural compliance in appeal maintainability.

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