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2008 (10) TMI 676 - ITAT BANGALORE

2008 (10) TMI 676 - ITAT BANGALORE - TMI - I.T.A. No. 94 and 95/Bang/08, I.T.A. No. 220 and 221/Bang/2008 - Dated:- 23-10-2008 - N. L. Kalra (Accountant Member) And K. Balan (Judicial Member) For the Appellant : Chaitanya For the Respondent : Swati S. Patil, K. P. Rao ORDER 1. The Revenue as well as the assessee has filed appeals against the order of learned CIT(A)-III, Bangalore dated 23rd November, 2007. 2. First we shall take up the appeals filed by the assessee. The grounds of appeal for bot .....

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(an inter carrier billing verification system) from Price Waterhouse Coopers Inc. being the receiver of the property, assets and undertaking of Magardi Inc. on behalf of Toranto-Dominion Bank, the secured lenders of Magardi Inc. The company had credit balance of ₹ 30.79 crores in the share premium account as on 31st March, 2002. The company wanted to adjust the cost of intangible asset against the share premium account. The company passed a resolution in accordance with section 189 of the .....

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claimed depreciation at the rate of 25% in the computation of income on the assets, which did not exist in the balance sheet. The Assessing Officer further noticed that from the accounts for the period ending 31st March, 2002, the purchase of intellectual property rights was grouped under 'miscellaneous expenditure' and were shown as such in the balance sheet. This was not shown as an asset in the statement of assets in the books. No depreciation was claimed for the purpose of computati .....

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are codes and licenses of OUTsmart, a Wireline Fraud Management System and INcharge, an intercarrier billing verification system from Pricewaterhouse Coopers, Inc. (being the receivers of the property, assets and undertaking of Magardi, Inc. on behalf of the Toranto-Dominion Bank, who are the secured lenders of Magardi, Inc.). The total cost of acquisition amounting to ₹ 15,89,56,637/- includes the purchase consideration, advisory, syndication fees and other costs. INcharge was only at a c .....

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tors. The management does not propose to develop and market OUTsmart as a stand alone product and this product will cease to exist. It was the intention of the Company at the time of acquisition that the cost of acquisition will be fully amortised during the year ended March, 31, 2002. The management now proposes to write off the above cost of acquisition of the intangible asset against the balance in the share premium account after obtaining the approval of the shareholders of the Company and s .....

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w of this, there is no reason to claim or allow depreciation on this asset. Depreciation is not allowable because the expenditure was grouped under the head 'miscellaneous expenses' in Schedule-L in the accounts for the accounting period ending on 31st March, 2002. The asset is not appearing in the balance sheet and therefore, the learned Assessing Officer disallowed the depreciation. 2.4 Before the learned CIT(A) it was contended that the assessee is entitled to depreciation irrespectiv .....

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in the books of accounts be decisive or conclusive in the matter. The cost of the asset was capitalized and the asset has not been sold, discarded, demolished or destroyed. It was therefore part of block of assets. In the audit report field vide Form 3CD, such asset has been included in the block of assets. The learned CIT(A) upheld the finding of the Assessing Officer after observing as under: 3.3.1 I find that the appellant's claim of the depreciation is u/s 31(1)(ii) of the Act. Such depr .....

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. In other words, the WDV of the said IP becomes NIL. Accordingly, there arises no question of allowing any depreciation on the NIL WDV. Therefore, owning and using the said IP, by the appellant, during the relevant period does not make any material difference to merit allowance of the depreciation in question. In such view of the matter, the AO is justified in denying the depreciation claim. Thus, this ground of appeal is dismissed." 2.5 Before us, the learned AR has filed two paper books .....

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share premium account was appearing on the liability side of the balance sheet. One option before the assessee was to show both value of the asset in the balance sheet and the quantum of share premium account as liability in the balance sheet. Another option was to reduce the debit side representing the cost of IPR from the share premium account and to show the balance in the share premium account in the balance sheet. The assessee has adopted the second option of disclosure. However, it should .....

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penditure on replacement of machinery is not to be treated as revenue or capital on the basis of the treatment given in the books of account or in the balance sheet. The claim has to be determined only by the provisions of the Act and not by the accounting practice of the assessee. The learned AR thereafter drew our attention to the scheme of computation of total income as provided in the From ITR 6. Depreciation debited to profit and loss account has to be added to the book profit and thereafte .....

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sfies all the conditions for the grant of depreciation allowance. The learned AR drew our attention to the decision of the Hon'ble Gujrat High Court in the case of Zaverchand Laxmichand and Co. vs. CIT 55 ITR 486 in which the Hon'ble High Court held that depreciation calculated for the purpose of dividend should not be confused with depreciation permissible under the artificial and statutory rules contained in IT Act. The learned AR submitted that neither the Assessing Officer nor the le .....

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which the written down value has been defined. The block of asset is to be the aggregate of the written down value of all the assets falling within that block of assets as reduced by the moneys payable in respect of any asset, which is sold or discarded or demolished or destroyed during the previous year together with the amount of the scrap value, in any. For ascertaining WDV of the asset, one has to consider the actual cost of the asset in respect of an asset, which is acquired during the pre .....

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ed AR submitted that the Assessing Officer allowed depreciation in the first year of acquisition i.e. asst.year relevant to the previous year 2002-02. For the asst.year 2003-04, the opening WDV should be taken as the closing WDV as on 31st March, 2002 as reduced by the depreciation for the previous year 2001-02. Such opening should be increased by actual cost of IPRs acquired during the previous year 2002-03. In the case of the assessee, there has been no movements of aforesaid block during the .....

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only in the cases where the assets were sold, discarded, demolished or destroyed. The learned AR refereed to the decision of Chennai Bench in the case of Alankar Business Corporation Ltd. vs. DCIT 298 ITR 18 (AT) vide which, the sums on account of breakages were not held to be reduced from the written down value because the breakages were never claimed and allowed in income tax assessments. The learned AR referred to Explanation 5 to section 32(1), according to which, the depreciation is to be a .....

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port of his submission that depreciation should be allowed irrespective of any entries passed in the books of account:- • Kedarnath Jute Manufacturing Co. Ltd. vs CIT (1971) 82 ITR 363 (SC) • Godhra Electricity Co. Ltd. vs CIT (1997) 225 ITR 746 • CIT vs Nedungadi Bank Ltd. (Ker.) (2003) 264 ITR 545 (Ker.) • CIT vs Shoorji Vallabhdas and Co. (1962) 46 ITR 144 • CIT vs India Discount Co.Ltd. (1970) 75 ITR 191 • K C P Ltd. vs CIT (2000) 245 ITR 421 • Sinclair Mur .....

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he acts specified as under:- • to reduce the work in any material form including the storing of it in any medium by electronic means • to issue copies of the work to the public, next to make any adoption of the work next to sale or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. It was therefore submitted that the IPR purchased from Magardi through Waterhousecoopers Inc is a copyright and is covered u/s 32 of the I T Act. The lea .....

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of the Annual Report for the finance year 2002-03. 2.7 On the other hand, the learned DR supported the orders of the authorities below. It was submitted by him that depreciation is allowable in case the asset is owned by the assessee. When the asset has been written off by debiting the share premium account, then such an asset is not appearing in the balance sheet; hence, there is no such asset on which depreciation is allowable. The assessee has not claimed depreciation in the asst. year 2002- .....

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t. Hence, it is a colourable transaction, as the share premium recovered from the party has been paid back in the form of cost of IPR. 2.8 The learned AR in his counter reply submitted that the IPR is not software. He drew our attention to para 2.1 of the assessment order. The Assessing Officer has mentioned that the assessee has acquired intellectual property comprising software codes and licences of outsmart and incharge. The learned AR therefore submitted that the assessee has not acquired so .....

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on accounts gives the details of share premium account collected. From these details, the learned AR submitted that no share premium has been received from Magardi, the concerned firm, from which IPR has been purchased. It was therefore submitted that the transaction cannot be termed as 'colourable transaction'. 2.9 We have heard both the parties. In the paper book filed by the learned AR, from page nos. 46 to 57 contains the copy of proof of purchase of IPRs. The assessee company reques .....

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ian dollars. 2.10 The Hon'ble jurisdictional High Court while allowing the company petition vide order dated 28th January, 2003 has referred in para 3 as under.- "The company during May 2001 acquired an intellectual property right in software product OUTsmart which was a wireline fraud management system and Incharge which is an inter-carrier billing verification product from a company called Magardi, Inc., from PricewaterHouseCoopers, INC, who were the receivers of the property, assets .....

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ve started offering both wireline and wireless services. Therefore, it has become essential to come in line with this global change and hence the company decided to offer an integrated product for EMS and has decided to merge OUT smart with Ranger, thus consolidating both wireline and wireless operations respectively. The company intends to market the integrated product under the brand name of Ranger. Consequently, the brand name OUTsmart will cease to exist. However, there being no buyers for I .....

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espect of licence of Outsmart, Incharge and NMS was negotiated. The Hon'ble High Court was not required to give a decision in respect of cost of user licence for Incharge. Hence, the licence, which has not been used for the purpose of business during the year under reference, cannot be considered for the purpose of allowing depreciation. 2.11 The assessee company has also paid Canadian Dollars of 891031.92 towards purchase of IPR from Pricewaterhousecoopers Inc., who are the receivers of M/s .....

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ajority of the intellectual property rights are today founded in the eight enactments - (1) The Trademarks Act; (2) The Patents Act; (3) Copyright Act; (4) The Designs Act; (5) Geographical Indication of Goods (Registration and Protection) Act; (6) The Protection of Plant Varieties and Farmers Rights Act; (7) The biological Diversity Act; (8) The Semi-conductor Integrated Circuits Lay Out Design Act. Different kinds of intellectual property can be commercially exploited in different ways. Howeve .....

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an dollars has been paid. Without ascertaining the nature, it is not possible to give a finding that such IPR is an intangible asset as mentioned in section 32 of the IT Act for the purpose of allowing depreciation. Hence, on this issue, the matter is restored back on the file of the Assessing Officer. The Assessing Officer will ascertain the nature of IPR and if it is covered in the definition of intangible assets as contained in section 32, then the Assessing Officer will allow depreciation pr .....

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The learned CIT(A) has also not recorded a finding in respect of the use of the intangible assets. We have also gone through the relevant pages of the Annual Report. The facts contain in the Annual Report are definitely required to be considered for giving a finding as to whether the intangible assets have been used or not. At page 6 of the Annual Report, the Chairman in his letter to the shareholders has mentioned as under:- "Having comprehended the nuances of software products business, w .....

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ite covers a wide variety of problem faced by the carriers in this area. The evolution of the suite will continue in the years to come through the addition of more products that are complementary to Ranger and IN charge". 2.13 Page 29 of the Annual Report contains additional information to shareholders. In para 2.1.1.1 of additional information to shareholders. It is mentioned as under.- "2.1.1.1 Telecom Software Products - Subex 's defined space of operation for products is Revenu .....

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ce providers". 2.14 In notes on accounts, it has been mentioned as under at page 48 of the Annual Report:- "During 2001-2002, the Company acquired the intellectual property comprising software codes and licenses of OUTsmart, a Wireline Fraud Management System and INcharge, an intercarrier billing verification system from Pricewaterhouse Coopers, Inc. (being the receivers of the property, assets and undertaking of Magardi, Inc. on behalf of Toranto Dominion Bank, who are the secured len .....

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the approval of the shareholders of the Company for write off of the above cost of acquisition of the intangible asset against the balance in the Share Premium account, an application for confirming the write off was preferred to the Honourable High Court of Karnataka under the provisions of section 78 and 100 of the Companies Act, 1856. The Honourable High Court of Karnataka approved the said write off vide their confirmation order dated January 28, 2003 and the order, which was received by th .....

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have also gone through a letter dated May 29, 2001 from Pricewaterhousecoopers Inc addressed to the assessee. This is with reference to acquisition of the assets of Magardi Inc. This letter contains the details of assets and the purchase price. This also refers to the steps taken to transfer the purchased assets. Such steps mentioned are assignment of trademark, assignment of copyright, assignment of all material contracts of the customers, assignment of equipment leases and assignment of DSI Ma .....

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the IT Act. Since the asset has been acquired from a country outside India on the basis of consideration expressed in Canadian dollars and therefore, the AO will have to consider the provisions of section 43A of the IT Act while ascertaining the cost for the purpose of depreciation. 2.16 The learned CIT(A) has disallowed depreciation on the ground that the asset was written of in the books of account. Intangible asset is a separate block of asset as it is clear from section 32(1) of the IT Act. .....

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g within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased. Actual cost has been defined in section 43(1) of the IT Act. Actual cost means, the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or a .....

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premium account, then it cannot be said that cost to that extent has been met directly or indirectly by any other person or authority. We have gone through the share premium details as available in the paper book. The share premium has not been received from the party from whom intangible assets have been purchased. Hence, it cannot be said that the transaction to write of the cost of the intangible asset from share premium account was a sham transaction. We agree with the submission of the lea .....

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Tribunal after considering the purchase agreement noticed that consideration was for the purchase of property comprising of land piece and building's super structure cost. Hence, the depreciation was allowed on that portion, which could have been attributable to the building. The treatment given by the assessee in its books of account was not accepted. The revenue in that case argued that the treatment given by the assessee cannot be accepted and the facts are to be found on the basis of the .....

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set was written of from the books of account. 2.18 Since the asset is an intangible asset, therefore, the rate of depreciation will be applicable as applicable to intangible assets. Rate of depreciation of software will not be applicable. 3. The next issue before us is in respect of WDV on which depreciation is to be allowed. 3.1 The assessee has not claimed depreciation for the asst. year 2002-03 in respect of the intangible asset. The learned DR has argued that depreciation should be allowed a .....

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asset acquired before the previous year is the actual cost to the assessee less depreciation actually allowed. The word 'actually allowed' has been considered by the Hon'ble Apex Court in the case of CIT v Mahendra Mills 243 ITR 56. The Hon'ble Apex Court observed that 'actually allowed' does not mean 'notionally allowed'. If the assessee has not claimed deduction of depreciation in any past year, it cannot be said that it was notionally allowed to him. Hence, if .....

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he Finance Act, 2001 with effect from 1/4/2002 to section 43(6) of the I T Act. As per this Explanation, depreciation is to be treated as allowed in case the assessee was not required to compute his total income for the purpose of the Income Tax Act for any previous year or years preceding the previous year relevant to the asst. year under consideration. Both these Explanations make it clear that in case the assessee has not filed the return or has not computed the income, then depreciation is t .....

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e para 5 of the decision observed as under:- "5. Regarding the question No. (2), quoted above, it may be noted that the High Court has relied upon the judgment of this Court in CIT v Mahendra Mills (2000) 159 CTR (SC) 381: (2000) 243 ITR 56 (SC) in which it has been held that the assessee has an option to claim depreciation. However, S.34(1) of the IT Act, 1961 (for short, '1961 Act') has been omitted w.e.f. 1st April, 1988. Therefore, we are remanding the matter to the High Court a .....

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April, 1988. The High Court is also requested to consider whether the judgment of the Court in the case of Mahindra Mills (supra) would apply to the assessment years under consideration. In this connection, the High Court is also requested to take into account the scope of Expln. 5 to s. 32(1) of the 1961 Act, made by the Finance Act, 2001". 3.3 Hence, the Assessing Officer will have to apply his mind in respect of WDV on which the depreciation is to be allowed. Since this issue has not be .....

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ued that if the same is to be reduced from the export turnover, then the same should be reduced from the total turnover. 4.1 On the above referred issue we have heard both the parties. Export turnover has been defined in Explanation 2(iv) of section 10A. The thrust of the argument of the learned AR is that in case the telecommunication charges relatable to the delivery of computer software outside India is included in the consideration in respect of export, then the same can be excluded. If the .....

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es relatable to delivery were not part of consideration while fixing the sale price. No material has been brought on record that the delivery charges were to be borne by the person importing the computer software. Hence, telecommunication expenses relatable to the delivery of computer software were to be reduced from the export turnover. 4.2 It has been held by this Bench in a number of cases that if any part of expenses are to be excluded from export turnover, then the same should be excluded f .....

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order dated 16th Nov., 2007. • D E Block India Software (P) Ltd. ITA No. 983 and 984/Hyd/2006 order dated 31st January, 2007. Following the decisions of this Bench, it is held that whatever is excluded from the export turnover is to be excluded from the total turnover. 5. The 3rd grievance of the assessee is that the learned CIT(A) has erred in upholding the adjustment made by the Assessing Officer of computing deduction u/s 10A by setting of loss of the business not eligible for relief u/ .....

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f eligible unit in accordance with section 70 of the Act. The learned CIT(A) was of the opinion that the decision of the jurisdictional High Court in the case of Himatshingike Seide Ltd. 286 ITR 255 is applicable and therefore, the contention of the learned AR was rejected. 5.3 Before us, the learned AR drew our attention to CBDT Circular No. 14 (252 ITR (St.) 65) in which it has been mentioned that relief u/s 10A should be given undertaking-wise. In the case of Himatshingike Seide Ltd. 286 ITR .....

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the following decisions:- • ACIT v Webspectrum P. Ltd. in ITA No. 382/Bang/2006 • ACIT v Yokogawa India Ltd. 111 TTJ 548 • I Gate Global Solutions Ltd. v ACIT 112 TTJ 1002 • ITO v SCT Software Solutions (India) Pvt Ltd. in ITA No. 1017/Bang/04 vide order dated 19th June, 2006. • Lason India P. Ltd. v ITO 301 ITR 306 (AT), Chennai. 5.4 On the other hand, the learned DR supported the orders of the authorities below. 5.5 We have heard both the parties. This Bench in the cas .....

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under section 10A cannot be setoff to ascertain the profits and gains derived by an undertaking from the export of computer software. Hence, business losses of other units will not be setoff against the profits of the undertaking engaged in export of computer software for the purposes of determining the allowable deduction under section 10A of the IT Act. Profits and gains of the software services divisions will be exempt under section 10A without setting off the loss of other division or the s .....

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s is of non-STP unit, then it cannot be adjusted against the profit for the purpose of computing deduction. The Assessing Officer himself has not deducted carry forward loss of 2001-02 because the Assessing Officer has allowed deduction u/s 10A on profit of ₹ 11,48,73,662/- while the profit adjustment of carry forward loss is ₹ 10,44,12,508/-. If the carry forward loss cannot be set off of non-STP unit, then naturally the loss for the year under assessment also cannot be set off. Hen .....

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Alternatively, it was argued that the amount that needs to be reduced from profits for computing relief u/s 10A is the net amount and not the gross amount. 6.1 The Assessing Officer noticed from the Schedule-M to the financial account that a sum of ₹ 17,27,385/- was shown as rent receipt. The assessee was required to clarify the receipt of rent. It was submitted that the assessee was having a branch office at Canada for development of software product. The assessee entered into a non-cance .....

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ent received; hence, the rental income is not separately assessed. The assessee's representative claimed that the excess rent paid should be treated as loss and should be allowed to be carried forward. As the assessee has not made any claim in the return of income, the claim of the assessee at this stage is not entertained. 6.2 The learned CIT(A) observed that the assessee has included an amount of ₹ 17,27,385/- in the profits eligible for the deduction u/s 10A on the ground that the s .....

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ned CIT(A) held that the lease income is assessable as income from other sources. 6.3 Before us, it was submitted that the very purpose of entering into rental agreement in Canada was to carry on activity of software development. The appellant's STP undertaking did not carry on any other business. The lease renal receipt from its Canadian Branch is part and parcel of its business receipts and is an activity inextricably associated with its business of export of computer software. The assesse .....

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TJ 778 (Bang.) • ITC Hotels v DCIT 107 TTJ 955 (Bang.) • ACIT v Motorola India Electronics (P) Ltd. 112 TTJ 562 (Bang.) • Inter Classic Jewellery (I) (P) Ltd. v ITO 114 TTJ 402 (Mum.) • CITv Eltek 565 (P) L td 300 ITR 6 (Del.) • Mercator Lines Ltd. v DCIT 17 SOT 54 • Cybertech Systems and Software Ltd. v ACIT 7 SOT 230 (Mum.) • Shiva Shankar Granites P. Ltd. v ITO 81 ITD 106 • Nirma Industries Limited v DCIT 155 CTR 330 • CIT v Alfa Laval (India) L td .....

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mpex (P) Ltd. 259 ITR 403 (Madras). 6.5 We have heard both the parties. Before the AO it was stated that the company does not carry on any activity other than the development of software. The expenditure laid out for getting the property on rent is for the purpose of business. It is not the case of the assessee that taking the property on lease and thereafter subletting it is the business of the assessee. The Hon'ble jurisdictional High Court in the case of Producin P. Ltd. (supra) has held .....

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export is to be allowed as deduction from the total income of the assessee. 10A(4) refers to the profits of the business of the undertaking. In the instant case, the business of the undertaking is the software development. Hence, we have to see what is the profit of the business of the undertaking. It is not the profit of the business of the assessee. The Hon'ble jurisdictional High Court has referred to the decision of the Apex Court in the case of Narian Swadeshi Weaving Mills v Commission .....

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e is nexus between the interest earned and business activity of the assessee, the interest income would not be assessable as income from other sources but would be taxable under the head 'income from business and profession'. 6.7 Section 28(i) says the profit and gains of any business or profession is to be taxed under the head 'profit and gains of business or profession' in respect of the business carried on by the assessee. In this case, the assessee is carrying on the business .....

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id for the purpose of the business. However, the receipt is not arising from the business carried on by the assessee. Such benefit is also not arising from the business of the assessee. 6.8 The Hon'ble Apex Court in the case of CIT v Dr. V P Gopinathan 248 ITR 449 had an occasion to consider the allowability of interest on loan taken from the bank against the interest received on Fixed Deposits. The loans were taken on the security of the amount so deposited. The Hon'ble Apex Court held .....

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nterest income has no nexus with the export and therefore is not eligible for deduction u/s 80HHC. The Hon'ble jurisdictional High Court considered the case of Producin P. Ltd. and observed that in that case, the deposit amount was towards export transaction. Taking the property on lease is not an export transaction but is a transaction of taking the premises on lease for the purpose of business. 6.10 The A. P. High Court in the case of Ambica Tobacco P. Ltd. v CIT 172 ITR 343 held that inco .....

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ble under the head 'income from other sources' while the rent paid for such building is an allowable expenditure u/s 37 of the IT Act. 7. The last grievance of the assessee is as under- The learned CIT(A) has erred in law and in fact in dismissing the claim of the Appellant in respect of adjustment of the foreign tax credit on the basis that the same was alternative ground and the same is redundant, merely because the relief was granted in respect of another ground without going into the .....

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ow we will take up the appeal of the revenue. The first grievance of the revenue is that the learned CIT(A) has erred in deleting the addition on account of provision of warranty at ₹ 7,95,731/-. 8.1 The learned CIT(A) has allowed the provision for warranty as an ascertained liability for the purpose of computing income as per his finding as under:- "4.3 The ARs were heard. The written submissions were duly considered. The decisions relied on by the AO and the appellant were carefully .....

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hat of Wipro GE (supra). Therefore, respectfully applying the ratio of decision of the Tribunal, in the order under ITA Nos.322 to 328/B.2001 - AY 91-92 to 97-98 (81 TTJ 455) I direct the AO to allow the provision for warranty of ₹ 795731 as trading expenses. Accordingly, this ground of appeal is allowed". 8.2 We have heard both the parties on the above-referred issue. The issue under reference before us stands covered by the decision of Hon'ble jurisdictional High Court in the ca .....

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served as under in respect of the above question of law:- "It is rightly submitted by the learned counsel for the assessee that the substantial question no.16 framed in ITA No. 342/2003 does not arise as the same is answered in favour of the assessee in ITA Nos.432-434/2002 referred to supra regarding the provision made for warranty. The submission made in this regard is correct and therefore the substantial question no.16 regarding warranty made by the assessee and claiming deduction from .....

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