Caritor (India) Pvt. Ltd. V. Deputy Commissioner of Income-Tax Circle 11(2), Bangalore

ITA/1125/2008

AI Insights

The case involves M/s. Caritor (India) Pvt. Ltd., the appellant, contesting the decisions of the Income Tax Appellate Tribunal (ITAT) Bangalore regarding the nature of certain expenditures and the applicability of tax benefits under Section 10-A of the Income Tax Act, 1961. The appellant challenged the ITAT's decision which categorized pre-commencement rent and registration fees as capital expenditures and excluded certain telecommunication expenses from export turnover. Additionally, the dispute included the non-availability of tax holiday benefits on interest income. The High Court's judgment addressed these issues, setting aside the ITAT's findings on the first and third questions and remitting the second question back to the Tribunal.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 814167 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 13-10-2014
• Assessment Year: misc
• Other Referred Cases: M/s.Sasken Communication Technologies Ltd. vs. The Deputy Commissioner of Income tax, Commissioner of Income Tax, Bangalore & another vs. M/s.Motorola India Electronics Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: CHYTHANYA
• Keywords: Capital expenditure; Export Turnover; Interest income; Tax holiday; Telecommunication expenses
• Section: 10(a); 260-A

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 13th DAY OF OCTOBER 2014 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MR.JUSTICE B.MANOHAR I.T.A.NO.1125/2008 BETWEEN: M/S. CARITOR (INDIA) PVT. LTD., 17 & 17/1, 3RD FLOOR, SOUTH END ROAD, BASAVANAGUDI, BANGALORE (REPRESENTED BY ITS DIRECTOR, SRI.SRIKANTH RAO, AGED ABOUT 48 YEARS S/O S. RAMACHANDRAN RAO) …APPELLANT (BY SRI. CHYTHANYA K.K., ADVOCATE) AND: THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 11(2), BANGALORE. ...RESPONDENT (BY SRI. K.V.ARAVIND, ADVOCATE) THIS APPEAL IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 31- 07-2008 PASSED IN ITA NO.20/BNG/2008, FOR THE ASSESSMENT YEAR 2004-2005, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE - 2 - THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.20/BNG/2008, DATED 31-07-2008 IN THE INTEREST OF JUSTICE. THIS APPEAL COMING ON FOR HEARING THIS DAY, KUMAR J, DELIVERED THE FOLLOWING:- JUDGMENT The assessee has preferred this appeal against the order passed by the Tribunal. At the time of admission, three substantial question of law has been raised. They are as under: 1. “Whether on the facts and in the circumstances of the case, the Honourable Tribunal was right in law in holding that the rent paid to the landlord and registration expenses of Chennai unit are in the nature of capital expenditure? 2. Whether on the facts and in the circumstances of the case, the Honourable Tribunal was right in law in holding that the telecommunication expenses are to be excluded from the export turnover when such expenses were not part of negotiated price and hence did not originally form part of negotiated price and hence did not originally form part of export turnover? - 3 - 3. Whether on the facts and in the circumstances of the case, the Honourable Tribunal was right in law in holding that the benefit of tax holiday under Section 10-A is not available in respect of interest income although the same formed part of business income of the appellant?” 2. Insofar as the 1st substantial question of law is concerned, it is regarding the expenditure pertaining to the setting up of 5th unit at Chennai on 03.11.2003 amounting to Rs.10,25,000/- on office rent and Rs.2,500/- on STPI registration fees. The said amounts were disallowed as they are incurred prior to the setting up of the unit on the ground that they partake the nature of capital expenditure. The said finding has been affirmed both by the 1st and 2nd Appellate Authorities. 3. The admitted facts are; the assessee company is doing international transaction. They are already in the business of software development and in fact they have four units at four different places. The 5th unit at Chennai was set up in a rented premises. After - 4 - taking the premises on rent for two months, they were involved in making interior infrastructure. It is only after two months, they were able to commence the unit. The rent paid subsequent to the period is allowed as revenue expenditure. However, the rent of two months prior to the commencement of the unit is disallowed, on the ground that it constitute the capital expenditure and Rs.2,500/- is disallowed on the ground that the same being registration fees. If the assessee has taken the premises on rent, merely because the date on which the premises is taken on rent, is unable to carry on the business, would in law, make no difference and the rent paid would not become the capital expenditure if two months is taken to commence the business of the unit. The finding recorded by the three authorities that two months prior to the commencement of the unit constitutes the capital expenditure is unsustainable. Similarly, the payment of registration fees constitutes capital expenditure is unsustainable and therefore,the findings recorded by the three authorities are hereby set aside and the 1st substantial - 5 - question of law is answered in favour of the assessee and against the revenue. 4. Insofar as the 2nd substantial question of law is concerned, this Court in a similar circumstances in the case of M/s.Sasken Communication Techonologies Ltd., vs. The Deputy Commissioner of Income tax in ITA Nos.40-42/14 & other connected matters, decided on 16.09.2014, had remanded the matter to the Tribunal to record the findings on merits as well as on the alternative grounds. Following the said judgment, the findings recorded on the 2nd substantial question of law by the authorities, are hereby set aside and the matter is remitted back to the Tribunal for fresh consideration and in accordance with law. 5. Insofar as the 3rd substantial question of law is concerned, the similar question were arose for consideration before this Court in the case of the Commissioner of Income Tax, Bangalore & another vs. M/s.Motorola India Electronics Pvt. Ltd., - 6 - reported in 2014-TIOL-87-HC-KAR-IT, where this Court at paragraph-8 has held as under:- “In the instant case, the assessee is a 100% EOU, which has exported software and earned income. A portion of that income is included EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permisable in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business undertaking. Though it does not par take the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of ‘Income from Profit and Gains’ incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. - 7 - Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in ITA 428/2007 is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and against the revenue.” 6. Therefore, the finding of the authorities below are contrary to the said law and the same is unsustainable and accordingly, the said finding is set aside. The benefit of tax holiday under Section 10-A of the Act is available even in respect of interest on income. Accordingly, the 3rd substantial question of law is answered in favour of the assessee and against the revenue. Ordered accordingly. Sd/- JUDGE Sd/- JUDGE Srl. "