TaxTMI 
TaxTMI 
2023 (4) TMI 889
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent period in respect of the non-compete fees and hence, the relevant expenditure by way of non-compete fees should have been spread over the period of the benefit in view of the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT [225 ITR 802 (SC)]. 2. The CIT(A) erred in deleting the disallowance of Rs.22,08,494/- being the employees' stock option expenses claimed by the assessee without appreciating the fact that no such option was exercised by the assessee during the relevant previous year. 3. (a)The C1T(A) erred in directing the A.O. to grant the assessee deduction u/s. 80HHE in respect of "profit of the business" without setting off of the brought forward business loss relying on the decisions of the Mumbai ITAT in case of Unichem Laboratories Limited and Cabot India Limited, which, in turn, were based on the decision of the Hon'ble Bombay High Court in the case of Shirke Construction Equipment Limited, without appreciating the fact that the decision of the Hon'ble Bombay High Court in the case of Shirke Construction Equipment Limited has been overruled by the Hon'ble Supreme Court in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icable irrespective of whether the concerned personnel were in the U.S. or in India and was meant to recoup the losses of the assessee till new appointments to the posts of the outgoing personnel were made and was not in any way related to the nature of the impugned international transactions. 7. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside on such above grounds and the order of the A.O. restored." 3. The Assessee is a company engaged in the business of development and marketing of software having units at SEEPZ, Noida, Ashok Plaza and Monali, Chandigarh. The Assesse is the wholly owned subsidiary of Zensar Technologies Inc, USA. The assessee provides technical services outside India in connection with development and production of computer software. The assessee filed the return of income for A.Y. 2004-05 on 28/10/2004 declaring a total income at Nil after setting off brought forward business losses from previous years of Rs.2,36,35,058/- against business income and after adjusting the deduction claimed under section 80HHE of the Income Tax Act, 1961 (in short, "the Act") against other income of Rs.1,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d needs to be amortised over the period of non competing. Accordingly, the Assessing Officer allowed a sum of Rs.18,78,000/- as computed below and disallowed the balance of Rs.43,90,000/-. (i) Rs.12,68,000/- for 2 months - Rs. 2,11,330/- (ii) Rs.50 lakhs for 8 months - Rs.16,66,670/- Rs.18,78,000/- 5.2 The Ld.CIT(A) deleted the disallowance by relying on the decision o the coordinate bench in Assessee's own case for A.Y. 1989-90 and on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd 124 ITR 1 (SC). 6. The Ld.DR before us submitted that the Ld.CIT(A) has merely relied on the order of the Tribunal of earlier years without discussing the facts for the current year. The Ld.DR further submitted that the Assessing Officer has amortised the expenditure based on the agreements entered into and that this fact has not been considered or discussed by the Ld.CIT(A). The Ld.DR in this regard has placed reliance on the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd vs CIT (1997) 225 ITR 802(SC). 7. The Ld.AR submitted that the period of non-competing is only o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on Civil Appeal Nos. 6366-6368 of 2003 and the borrowed amount. 12) The next question which arises for consideration is as to whether the assessee was estoppel from claiming deduction for the entire interest paid in the year in which it was paid merely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of accounts is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of accounts. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at it is here the High Court has gone wrong and this approach resulted in wrong application of Matching Concept. It is emphasized once again that as per the terms of issue, the interest could be paid in two modes. As per one mode, interest was payable every year and in that case it was to be paid on six monthly basis @ 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well and there is no dispute about the same. However, in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of Civil Appeal Nos. 6366-6368 of 2003 and five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of Section 36(1)(iii) read with Section 43(ii) of the Act were satisfied or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ral principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of 2 (1997) 4 SCC 666 Civil Appeal Nos. 6366-6368 of 2003 and business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: "15.. The Tribunal, however, held that since t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-6368 of 2003 and period. 18) What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures. 19) In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A) in deleting the disallowance of non-competence fees. This ground of the revenue is dismissed accordingly. 10. ESOP EXPENSES (GROUND No.2): 11. The Assessee has debited an amount of Rs.22.08 lakhs towards Employee Stock Option Expenses (ESOP) in the P&L Account. The Assessing Officer disallowed the same for the reason that the no option has been exercised during the year and that the Assessee did not provide any plausible reason for claiming the expenses as a deduction. The Ld.CIT(A) deducted the disallowance by relying on the decision of the Ld.CIT(A) in assessee's own case for A.Y. 2002-03. The Ld.CIT(A) further held that the Employee Stock Option expenses is an allowable deduction as the same is an ascertained liability. 12. Before us, the Ld.DR supported the order of the Assessing Officer and submitted that the Ld.CIT(A) is not correct in deleting the disallowance. 13. The Ld.AR submitted that it is a settled issue that the ESOP expenses are an allowable expenditure and in this regard relied on the following decisions:- 1. PCIT vs New Delhi Television Ltd 398 ITR 57 (Del) 2. C IT vs PVP Ventures Ltd (2012) 211 Taxman 554 (Madras) 3. CIT ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rsed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability. C. Fringe Benefit . . . Act 2005, with effect from April 1, 2006. Memorandum explaining the provisions of the Finance Bill, 2005 highlights the details of the fringe benefits tax. It provides that : 'Fringe benefits as outlined in section 115WB, mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment'. Charging section 115WA of this Chapter provides that : 'In addition to the Income-tax charged under this Act, there shall be charged for every assessment year . . .'fringe benefit tax in respect of fringe benefits provided or deemed to have been provided by an employee to his employees during the previous year'. Section 115WB gives meaning to the expression 'fringe benefits'. Sub-section (1) provides that for the purposes of this Chapter, 'fringe benefits means any consideration for employment as provided under clauses (a) to (d). Clause (d), whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... quantification of such liability at that stage. The very point incurring the liability enables the assessee to claim deduction under mercantile system of accounting. \ have noticed the mandate of the Hon'ble Supreme Court in Bharat Earth Movers [2000] 245 ITR 428 tl if a business liability has definitely arisen in an accounting year, then the deduction should be allowed that year itself notwithstanding the fact that such liability is incapable of proper quantification at that stage and is dischargeable at a future date. It follows that the deduction for an expense is allowable on incurring of liability and the same cannot be disturbed simply because of some difficulty in the proper quantification. A line of distinction needs to be drawn between a situation in which a liability is not incurred and situation in which the liability is incurred but its quantification is not possible at the material time. Whereas in the first case, there cannot be any question of allowing deduction, in the second case, deduction has to be allowed for a sum determined on some rational basis representing the amount of liability incurred." 5. Having regard to the above discussion, especially ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that no deduction u/s 80HHE can be allowed to the assessee in the absence of the amount of income of that nature qualifying for computing deduction u/s 80HHE. Further, the set off of unabsorbed depreciation of Rs.26,27,443/- is also disallowed in view of the fact that the entire unabsorbed depreciation has been already set off in the preceding year." The Ld.CIT(A) allowed the claim of deduction under section 80HHE by relying on the decision of the CIT(A) in Assessee's own case for A.Y. 2003- 04. Aggrieved, the Revenue is contending the issue before the Tribunal. 18. The Ld.DR submitted that the Assessee is not entitled for deduction under section 80HHE since the business income of the assessee is NIL after adjusting the brought forward losses. In this regard, the Ld.DR placed reliance on the decision of the Hon'ble Supreme Court in the case of IPCA Laboratories vs DCIT reported in 266 ITR 521 (SC). 19. The Ld.AR on the other hand submitted that the issue is covered by the decision of the co-ordinate bench in Assessee's own case for A.Y. 2002-03 where it has been held that - 6.1. We find that in the assessment order dated 29/12/2004 u/s.143(3) of the Act, the ld. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ITR 521, in support of the contentions of the ld. CIT. We find there are two stages of computation of deduction u/s.80HHE of the Act. The first stage is the profits eligible for deduction u/s.80HHE has to be computed in the following formula:- Profits of the business x export turnover Total Turnover Total turnover 6.3. As stated supra, profits of the business is to be computed as per Section 29 of the Act which in turn stipulates that business income shall be computed in accordance with the provisions contained in Section 30- 43D of the Act. The second phase is the said deduction so computed above is to be restricted to the extent of gross total income as the same is to be allowed from gross total income. In the facts before the Hon'ble Madhya Pradesh High Court, in the second stage of computation, the gross total income was nil and therefore, no deduction u/s.80HHE of the Act was allowed. In the facts before the Hon'ble Supreme Court in Ipca Laboratories referred to supra, the loss from export of trading goods was higher than the profits of self-manufactured goods resulting into net negative income. The Hon'ble Supreme Court was not concerned with brought forward bu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at the ld. DR vehemently placed reliance on the decision of Hon'ble Jurisdictional High Court in the case of Rohan Dyes and Intermediates Ltd., vs. CIT reported in 142 Taxman 503. In this case, the first issue which arose before the Hon'ble Court was similar to that as arose in the case of Ipca Laboratories Ltd., referred to supra coupled with further issue that if the combined net profit from the self-manufactured export and the trading export was the loss, then the deduction in respect of export incentives was to be allowed without setting off such net loss. We find that in this case also, the issue as arising in the present case of the assessee before us i.e. the computation of profit eligible for deduction by setting off brought forward business loss, did not arise for consideration and therefore, the decision rendered in Rohan Dyes and Intermediates Ltd., also becomes factually distinguishable with that of the assessee case. Accordingly, we hold that the ld. CIT grossly held in holding with the profits of the business for the year under consideration has to be reduced by the brought forward losses from earlier year for the purpose of computing profit eligible deduction u/s.80H....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... As stated above, Section 80AB was inserted in the year 1981 to get over a judgment of this Court in Cloth Traders (P) Ltd. (supra). The Circular dated 22.09.1980 issued by the CBDT makes it clear that the reason for introduction of Section 80AB of the Act was for the deductions under Part C of Chapter VI-A of the Act to be made on the net income of the eligible business and not on the total profits from the eligible business. A plain reading of Section 80AB of the Act shows that the provision pertains to determination of the quantum of deductible income in the 'gross total income'. Section 80AB cannot be read to be curtailing the width of Section 80-IA. It is relevant to take note of Section 80A(1) which stipulates that in computation of the 'total income' of an assessee, deductions specified in Section 80C to Section 80U of the Act shall be allowed from his 'gross total income'. Sub-section (2) of Section 80A of the Act provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the 'gross total income' of the Assessee. We are in agreement with the Appellate Authority that Section 80AB of the Act which deals with determination of deductions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n quantified under Section 80-IA is Rs.492,78,60,973/-. To make it clear, the said amount represents the net profit made by the Assessee from the 'eligible business' covered under sub-section (4), i.e., from the Assessee's business unit involved in generation of power. The claim of the Assessee is that in computing its 'total income', deductions available to it have to be set-off against the 'gross total income', while the Revenue contends that it is only the 'business income' which has to be taken into account for the purpose of setting-off the deductions under Sections 80-IA and 80-IB of the Act. To illustrate, the 'gross total income' of the Assessee for the assessment year 2002-03 is less than the quantum of deduction determined under Section 80-IA of the Act. The Assessee contends that income from all other heads including 'income from other sources', in addition to 'business income', have to be taken into account for the purpose of allowing the deductions available to the Assessee, subject to the ceiling of 'gross total income'. The Appellate Authority was of the view that there is no limitation on deduction admissible under Section 80-IA of the Act to income under the head '....
X X X X Extracts X X X X
X X X X Extracts X X X X
....business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." It was held in Synco Industries (supra) that for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, the Court concluded that Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Hon'ble Supreme Court in Reliance Energy (supra) is clearly applicable to Assessee's case also and accordingly the assessee has correctly claimed the deduction under section 80HHE from gross total income. Further, we notice that the co-ordinate bench in Assessee's own case has allowed the issue in favour of the Assessee considering the decision of the Apex Court. We, therefore, uphold the decision of the CIT(A) to allow the deduction under section 80HHE and this ground of the Revenue is dismissed. 22. Depreciation on Software Expenses (Ground No.4) 23. The Assessee contended before the Ld.CIT(A) that the Assessing Officer did not allow depreciation on the WDV of Software expenses which were treated as capital in nature for A.Y. 2002-03. The Assessee submitted the below working of depreciation in this regard. Disallowance of software expenses in Rs. Assessment year 2002-03 66,02,000 Less : Depreciation granted vide order u/s 143(3) for assessment year 2002-03 39,61,200 Less : Depreciation granted vide order u/s 143(3) For AY 2003-04 15,84,480 Less: Depreciation @60% thereon 6,33,792 The Ld.CIT(A) after considering t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of 10A units for 10A deduction Profits of business without considering the adjustments on account of depreciation in respect of 10A units for 10A deduction Profits and Gains from Business Profession Profit before Tax Less: Section 10A Benefit NET PROFITS AFTER 10A BENEFIT Add : Depreciation as per Schedule XIV of the Companies Act (excluding STPI, ERP and Software WIP Depreciation) Add: Depreciation as per Schedule XIV of the Companies Act (including STPI and excluding ERP Soft-Ware WIP depreciation) Less: Depreciation u/s 32 of the Income Tax Act (excluding STPI) Add : Disallowables Less : Allowables & Exempt Income Less: Items considered Separately Add : Disallowance as per 143(3) order dated 28.12.2008 (Note 1) 158,662,527 130,695,380 27,967,147 (i.e. Rs.67,322,664 46,928,338 + Rs. 20,934,326) Depreciation pertaining to STPI units) 158,662,527 146,8141,99 11,848,328 (Annexure 46,928,338 9 to computation of ROI enclosed)(excluding STPI and Software WIP Depreciation) Business Income as per 143(3) order dated 28.12.2008 48,640,751 48,640,751 29. The Ld.CIT(A) after considering th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ofit due to the depreciation adjustment, i.e. adding back book depreciation & deduction of depreciation as per section 32 will be exempt under section 10A since there is no dispute that the Assessee is entitled to claim exemption under section 10A. Accordingly when the adjusted profit is also eligible for exemption under section 10A there is no question of making any addition towards the adjustment made to depreciation. We accordingly uphold the view taken by the CIT(A) in deleting the addition made in this regard. This ground of the Revenue is dismissed. 32. Transfer Pricing Adjustment (Grounds Nos. 6(a) to 6(c)) 33. The TPO during the course of TP proceedings noticed that TP adjustment has been made on account of secondment of employees by Assessee to its AE. On the query raised by the TPO in this regard, the Assessee submitted that the Assessee sends personnel for specific projects and once the project is completed, the personnel return to India to join back Assessee's company. The Assessee further submitted that this is a normal practice in software industry. The Assessee also submitted that during the year under consideration 35 persons were sent to Zensas US and out of ....