2010 (12) TMI 850 - AT - Income Tax

Deduction u/s 80HHE - Disallowance - the recovery of salary air fare incentive and service charges reversal of provision of bad and doubtful debts and scrap sale - The sale of special import license - The phrase profit derived from has been defined in sub section 3 as the profit of business in the ratio of export turnover to total turnover - held that - all these items of income have to be taken into account while computing the profit of business under the head profit and gains of business or profession while computing deduction under section 80HHG. - Decided in favor of assessee. Business income or income from other sources - Assessee received interest and rental income from three companies and treated as a business income - Merely because the properties had been let out with some facilities income cannot be assessed as business income - Interest income had arisen from fixed deposits interests on loan to employees and interest on income-tax refund. Such items of income in our view has to be assessed as income from other sources - Accordingly interest income and the rental income has been treated as income from other sources Addition of expenses attributable to the earning of exempt dividend income under clause (f) of the Explanation 1 to section 115JB(2) - The dispute is regarding addition of the expenditure relatable to the exempt dividend income under clause (f) of Explanation 1 to section 115JB(2). The AO had attributed a sum of Rs. 13, 35, 850/- relating to the dividend income and therefore while computing the book profit he added the same under clause (f). We have already considered the issue of attribution of expenses relating to dividend income while dealing with the earlier ground and are held that only a sum of Rs. 25, 000/- will be considered against dividend income. We therefore modify the order of CIT(A) and hold that a sum of Rs. 25, 000/- shall be added under clause (f) while computing the book profit.

Issues Involved:
1. Exclusion of certain items of income while computing deduction under section 80HHE.
2. Disallowance of expenses attributable to dividend income.
3. Disallowance of employer's contribution to provident fund.
4. Addition of expenses attributable to exempt dividend income while computing book profit under section 115JB.
5. Exclusion of turnover relating to software technology parks from export turnover.
6. Treatment of interest and rental income as income from other sources.
7. Addition of expenses attributable to earning exempt dividend income under section 115JB.

Issue-wise Detailed Analysis:

1. Exclusion of Certain Items of Income While Computing Deduction Under Section 80HHE:
The revenue disputed the inclusion of salary recovery, air fare incentive and service charges, reversal of provision for doubtful debts, scrap sale, and sale of special import license in the profit of business for deduction under section 80HHE. The CIT(A) included these items as part of business profit, considering them integral to business activities or incidental to business. The tribunal upheld CIT(A)'s decision, agreeing that these items should be considered while computing business profit under "profit and gains of business or profession" for section 80HHE deduction.

2. Disallowance of Expenses Attributable to Dividend Income:
The AO disallowed Rs.13,35,850/- as expenses attributable to tax-free dividend income, estimating administrative expenses at 5% of the dividend income. CIT(A) deleted this disallowance, noting no borrowings were used for investments. The tribunal partially upheld this, restricting the disallowance to Rs.25,000/- for administrative expenses related to dividend income from other companies, aligning with reasonable estimation principles from the Godrej Boyce Manufacturing Co. Ltd. case.

3. Disallowance of Employer's Contribution to Provident Fund:
The AO disallowed Rs.87,740/- for late payment of employer's provident fund contribution. CIT(A) allowed the claim, citing amended section 43B provisions, which allow such claims if paid before the return filing due date. The tribunal upheld CIT(A)'s decision, referencing the Supreme Court's retrospective application ruling in Alom Extrusion Ltd.

4. Addition of Expenses Attributable to Exempt Dividend Income While Computing Book Profit Under Section 115JB:
The AO added Rs.13,35,850/- to book profit under section 115JB, attributing it to exempt dividend income. CIT(A) deleted this addition but the tribunal modified this, holding that Rs.25,000/- should be added under clause (f) of Explanation 1 to section 115JB(2), consistent with their earlier ruling on administrative expenses.

5. Exclusion of Turnover Relating to Software Technology Parks from Export Turnover:
The AO excluded turnovers from SEEPZ, Noida, and Ashoka Plaza units from export turnover for section 80HHE deduction. CIT(A) upheld this exclusion, noting these units were fully exempt under section 10B. The tribunal agreed, stating that export turnover for section 80HHE should only include turnover from the computer software business, excluding other unit turnovers if separate accounts are maintained. The issue was remanded to AO for fresh examination.

6. Treatment of Interest and Rental Income as Income from Other Sources:
The AO treated interest income from fixed deposits, loans to employees, and income tax refunds, along with rental income, as income from other sources. CIT(A) agreed. The tribunal upheld this, distinguishing the case from precedents cited by the assessee, and noting no organized activity for commercial exploitation of the property was demonstrated.

7. Addition of Expenses Attributable to Earning Exempt Dividend Income Under Section 115JB:
The tribunal reiterated its earlier decision on attributing Rs.25,000/- as expenses related to exempt dividend income under clause (f) of Explanation 1 to section 115JB(2), dismissing the assessee's ground.

Conclusion:
Both appeals were partly allowed, with the tribunal upholding CIT(A)'s decisions on most issues but modifying the disallowance related to dividend income and remanding the turnover exclusion issue for fresh AO examination. The decision was pronounced on 15.12.2010.

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