TMI Blog2010 (2) TMI 744X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down various tests to determine whether the expenditure involved is capital or revenue. - Matter remanded back to AO to decide the issue accordingly. - ITA Nos. 205 and 206/Coch/2006, ITA Nos. 174 and 175/Coch/06 and 563/Coch/2007, - - - Dated:- 5-2-2010 - George George K., A. Mohan Alankamony, JJ. Kaushik Mukherjee for the Appellant Swati S. Patil and V.S. Sreelekha for the Respondent ORDER George George K., J 1. These are five appeals - (i) two appeals preferred by the assessee company which are directed against the orders of the Ld. CIT(A)-IV, Kochi for the assessment years (AYs) 2001-02 and 02-03 and (ii) three appeals instituted by the Revenue which are directed against the findings of the CIT(A)-IV and II, Kochi, for the AYs 2001-02, 02-03 and 03-04 respectively. I. A.Ys 2001-02 and 02-03 - ITA NOS: 205 and 206/COCH/06: 2. The assessee company (the assessee in short) has raised more or less identical grounds for both the AYs which are reformulated, for the sake of convenience and clarity, in concise manner as under: The CIT(A) erred in confirming the stand of the AO: (i) in treating the interest on bank deposits and other a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO that the assessee had treated interest on bank deposits of Rs. 12.42 lakhs as business income and claimed exemption u/s 10-A of the Act and set off of unabsorbed depreciation. A notice u/s 148 of the Act was served on the assessee, calling for furnishing of a return of income. After due consideration of the contentions of the assessee and also taking cue from the various judicial pronouncements as cited in the impugned order, the AO had negated the assessee's claim and added Rs.2961043/-being interest on deposits and other interests and, accordingly assessed as income from 'Other Sources'. Likewise, for the AY 2002-03, for a similar reasoning, interest of Rs.6743344/- was assessed as income from other sources and, thus, took a stand that these amounts were not part of profits and gains derived from the industrial undertakings qualifying for exemption u/s 10-A of the Act. (ii) with regard to disallowance of Rs.343326/- and Rs.545640/- respectively, being contributions to LIC to meet the gratuity liability for the AYs under dispute, the AO's reasoning was that no approval for such fund had been obtained from the appropriate authority and, hence, he had resorted to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. S.40A(9) prohibits allowance of any contribution to a fund except where such sum is paid for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of s.36. the sub-clause (iv) and (v) of s. 36(1) refers only to recognized provident fund and approved gratuity and superannuation funds. In short, provision of a sum payable to a gratuity fund not approved by the CIT is hit by s.40A(7). Similarly, payment made to an unapproved gratuity fund is not allowable u/s 40A(9). In view of the above, the amount claimed by the appellant is not allowable u/s 40A(7) and 40A(9). Since there are specific sections dealing with contributions/provisions in respect of gratuity fund s. 37(1) would not apply. As the expenditure claimed by the appellant is not an allowable expenditure under the Act the question of the amount getting allowed u/s 43B does not arise..........." (iii) and (iv) With regard to the confirming of expenditure incurred on software amounting to Rs.163000/- (sic) Rs.170000/- (for the AY 2001-02) and allowability of depreciation, the finding of the CIT(A) was that- "6.2.:...............As per the depreciation table, as applicable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m as the very issue was NOT in existence for the AY 2001-02. Therefore, the finding of the CIT (A) has no legal sanctity and the AO shall take no cognizance of the same. 6.3.2. For the AY 2002-03, the claim of the assessee of Rs.1.66 lakhs to CSEZ being a disputed contractual liability, the CIT(A)'s observation was that "the amount of Rs.1.66 lakhs is not an ascertained liability. As the appellant is disputing the liability which is not a statutory liability, the claim gets crystallized only in the year in which the dispute gets finally settled. The disallowance was confirmed. " 7. Disenchanted with the findings of the Ld. CIT (A) for the AYs 01-02 and 02-03, the assessee has come up with the present appeals. During the course of hearing, the Ld. A R reiterated more or less what has been urged before the first appellate authority. in furtherance, the submissions made by the Ld. A R are summarized as under: (i) during the FYs 2000-01 and 01-02, the assessee had earned interest incomes of Rs. 2961043 and Rs. 6743344/- respectively. The amounts pertain to interest earned on surplus funds invested with banks and on deposits made under contractual and statutory obligations a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant income has to be 'business income' of the undertaking. Once it is established that the income is a business income of the undertaking, it is no longer necessary to bifurcate the same for finding out the actual amount of profit arising on account of the manufacture of the goods/articles/computer software; (viii) the issue under consideration is the interest earned from investment of surplus funds and s.10A does not define the term 'profits of the business'. Had the intention been to exclude certain types of income from the purview of the term 'profits of the business', the provisions would have specifically mentioned it. Gratuity Fund: (ix) During the years under dispute, remitted contributions towards a gratuity fund operated by the LIC. The assessee had filed a letter with the jurisdictional CIT for approving the said fund and the approval is yet to be received and, prays that that the AO be directed to allow deduction in respect of such contributions on receipt of approval of the CIT; Expenses on application software: (x) The assessee had debited certain expenses incurred towards purchase of application software to P and L account. Such software wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned orders under dispute be sustained. 8. We have duly considered the rival submissions, perused the relevant records and also the legal pronouncements on which the rival parties have placed their stout reliance to drive home their points. (i) With regard to the assessee's claim of treating the interest income as 'income from profits and gains of business or profession', we would like to point out that the Hon'ble High Court of Kerala [jurisdictional High Court at that relevant time] in the case of CIT vs. G.Sathish Nair reported in 264 ITR 377 had held that "even in a case where margin money was deposited with a bank for opening letter of credit for the purpose of importing raw materials, the interest received on such deposits has to be assessed under the head "other sources". Concurring with the finding of the Hon'ble Court referred supra, we are in total agreement with the authorities below in treating such income as 'income from other sources". We draw strength from the latest finding of the Hon'ble I.T.A.T, Delhi 'C Bench in Global Vantedge P. Ltd. vs. DCIT (and vice versa) reported in (2010) 1 ITR (Trib) 326 wherein the Hon'ble Tribunal has held that 'interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not synonymous with the words 'everlasting' or 'perpetual'. The AO had arrived at such a conclusion seeking sanctuary of various court judgments, however, without citing such judicial pronouncements. 8.2. However, the assessee came up with a number of judicial precedents to back its claim of revenue expenditure. 8.2.1. While dealing with issue for the AY 2001-02, the Ld. CIT(A) had made a mistake by mentioning the amount under dispute as Rs. 163000/- as against Rs. 170000/-, but also directed the AO to grant depreciation only at 25% instead of 60% allowed by the AO for both the assessment years under dispute. The stand of the CIT(A) has been strongly objected to by the assessee on the sole ground that reducing the rate of depreciation on computer software from 60% to 25% has resulted in enhancement of income and that such an enhancement of income can be resorted to only after issuance of a Notice to the assessee as required under the provisions of s.251(2) of the Act. This fact has not precisely been observed by the Ld. CIT(A). 8.2.2. In taking into account the facts and circumstances of the issue and in the interest of justice, we are of the considered view that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT vs. Lakshmi Machine Works 290 ITR 667 (SC) followed. To counter it, the assessee has come up with forceful arguments which are summarized as under: (a) as per s.10A(4) of the Act, for the purpose of computing the deduction u/s 10A, the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same portion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking; Explanation 2 to the section defines the term 'export turnover' to mean 'the consideration in respect of export by the undertaking of articles or things or computer software received or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. " The provisions of section 80HHC of the Act wherein the term 'tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded in the profit and loss account and consequently became entitled to deduction. Thus, duty and sales tax does not form part of the "total turnover", which was the denominator in the formula contained in section 80HHC(3)." 9.1.1. Yet an another ruling - CIT vs. Catapharma (India) P. Ltd. reported in (2007) 292 ITR 641 - the Hon'ble Supreme Court was very emphatic in its resolve that "While calculating the deduction under section 80HHC (3)(b) of the Income-tax Act, 1961, for computing the 'total turnover' of exports out of India of trading goods, excise duty and sale-tax are not to be included." 9.1.2. With due respects in concurring with the finding of the Hon'ble Court referred supra, we are in total agreement with the stand of the Ld. CIT (A) for the AYs. 2001-02 and 2002-03. It is ordered accordingly. 10. For the AY 2003-04, the other ground agitated by the Revenue is with regard to the action of the Ld. CIT (A) in directing the AO to treat the interest on bank deposits and other advances as income from "business". 10.1. The Ld. CIT (A)'s observations, as culled out from the impugned order under dispute, are that - "2................The AO has relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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