M/s Mind Tree Ltd., Bangalore V. ACIT, Bangalore

ITA 407/BANG/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0663 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 22-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: CHYTHANYA K K
• Keywords: Business income; Depreciation; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 10AA; 80HHC; 10B

Judgement Text

PAGE 1 OF 16 ITA NOS.407 & 480/BA NG/2012 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.407/BANG/2012 (ASST. YEAR 2007-08) M/S MIND TREE LTD., (FORMERLY MIND TREE CONSULTING PRIVATE LTD.), GLOBAL VILLAGE, RVCE POST, MYLASANDRA, MYSORE ROAD, BANGALORE. PA NO.AABCM 8839 K VS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-12(1), BANGALORE. (APPELLANT) (RESPONDENT) ITA NO.480/BANG/2012 (ASST. YEAR 2007-08) THE ASST. COMMISSIONER OF INCOME TAX, LTU, BANGALORE VS M/S MIND TREE LTD., (FORMERLY MIND TREE CONSULTING PRIVATE LTD.), GLOBAL VILLAGE, RVCE POST, MYLASANDRA, MYSORE ROAD, BANGALORE. PA NO.AABCM 8839 K . (APPELLANT) (RESPONDENT) DATE OF HEARING : 03.01.2013 DATE OF PRONOUNCEMENT : 11.01.2013 APPELLANT BY : SHRI CHYTHANYA K K., ADVOCATE RESPONDENT BY : SHRI FARHAT HUSSAIN QURESHI, CIT -II PAGE 2 OF 16 ITA NOS.407 & 480/BA NG/2012 2 OR DER PER BENCH : ITA NO.407/12 AT THE INSTANCE OF THE ASSESSEE AND ITA NO.480/12 PREFERRED BY THE DEPARTMENT ARE DIRECTED A GAINST THE CIT(A)- IIIS ORDER DATED 9/1/2012. THE RELEVANT ASSESSMEN T YEAR IS 2007-08. 2. REVENUES APPEAL (ITA NO.480/12) . THE REVENUE HAS RAISED 10 GROUNDS OF APPEAL. GRO UND NOS.1, 9 AND 10 ARE GENERAL IN NATURE AND NO SPECIFIC ADJUDI CATION IS CALLED FOR AND HENCE THE SAME ARE DISMISSED. 2.1 THE SURVIVING GROUNDS SHALL BE CONSIDERED CHRO NOLOGICALLY. 3. GROUND NO.2 : THE CIT(A) ERRED IN HOLDING THE DISALLOWANCE OF PUR CHASE OF COMPUTER SOFTWARE AS REVENUE EXPENDITURE RELYING ON THE DECISION OF THE ITAT IN THE CASE OF IBM INDIA L TD. 105 ITR 1. 3.1 THE FACTS IN RELATION TO THE ABOVE GROUND ARE AS FOLLOWS:- IN THE PREVIOUS YEAR RELEVANT TO THE CONCERNED ASS ESSMENT YEAR, THE ASSESSEE HAD DEBITED A SUM OF RS.1,88,66,7 31/- TOWARDS PURCHASE OF COMPUTER SOFTWARE. THE ASSESSING OFFICER, WHILE COMPLETING THE ASSESSMENT, DISALLOWED SOFTWARE EXPENSES OF RS.1,88 ,66,731/- BY CONSIDERING IT AS CAPITAL EXPENDITURE AND ALLOWED D EPRECIATION AT THE RATE OF 60% AMOUNTING TO RS.1,13,20,038/-. HENCE, A SUM OF RS.75,46,693/- WAS DISALLOWED. THE RELEVANT FINDING OF THE ASSESSING OFFICER READS AS FOLLOWS:- PAGE 3 OF 16 ITA NOS.407 & 480/BA NG/2012 3 4.1 I HAVE CONSIDERED THE FACTS OF THE CASE, AS PE R ESTABLISHED LAW AND PROCEDURE, AN EXPENDITURE INCUR RED FOR THE PURCHASE OF SOFTWARE HAS TO BE NECESSARILY TREATED AS CAPITAL EXPENDITURE. FURTHER, THE SOFTW ARE HAS BEEN ADDED TO THE SCHEDULE OF DEPRECIATION WITH EFFECT FROM THE ASSESSMENT YEAR 2003-04 ONWARDS. T HE ASSESSEE IS HOWEVER ELIGIBLE FOR DEPRECIATION @ 60% ON SUCH CAPITALIZATION OF SOFTWARE PURCHASE/DEVELOPMEN T. CONSIDERING THE FACTS OF THE CASE, I FEEL IT IS APP ROPRIATE TO CAPITALIZE THIS EXPENDITURE. THE ASSESSEE IS HO WEVER ELIGIBLE FOR DEPRECIATION ON THIS. IN THIS MANNER, I COMPUTE THE DEPRECIATION AT RS.1,13,20,038/- AND BR ING TO TAX THE BALANCE OF RS.75,46,693/-. 3.2 ON FURTHER APPEAL, THE FIRST APPELLATE AUTHORI TY ALLOWED THE CLAIM OF THE ASSESSEE BY TREATING THE SAID EXPENSES AS REVENUE EXPENDITURE. THE RELEVANT FINDING OF THE CIT(A) READS AS FOLLOWS :- 6.3 I HAVE EXAMINED THE CLAIM OF THE APPELLANT. T HE SOFTWARE PURCHASED IS IN THE NATURE OF APPLICATION SOFTWARE, THE LICENSES FOR WHICH ENABLE THE HOLDER TO EXERCISE THE RIGHT TO USE THE SOFTWARE. HOWEVER, I ALSO FIND THAT WITH EFFECT FROM THE ASSESSMENT YEAR 2003- 04, COMPUTER SOFTWARE IS INCLUDIBLE IN THE BLOCK OF COMPUTERS FOR DEPRECIATION PURPOSES. THE APPLICATI ON SOFTWARE HAS THE FUNCTION OF INCREASING THE CAPACIT Y AND FUNCTIONALITY OF THE COMPUTER SYSTEM WHICH IS A CAPI TAL ASSET. IT IS THUS A PART OF THE COMPUTER SYSTEM APPARATUS. IT IS A TANGIBLE ASSET AND A GOODS AS HELD BY THE LD. SUPREME COURT IN THE CASE OF TATA CONSULTAN CY SERVICES V STATE OF ANDHRA PRADESH (2004) 271 ITR 4 01 (SC). THE HIGH COURT IN ARAWALI CONSTRUCTIONS CO. PVT. LTD. (2003) 259 ITR 30 (RAJASTHAN) FOUND THAT SOFTW ARE IS IN THE NATURE OF TECHNICAL KNOW-HOW AND REQUIRED TO BE TREATED AS CAPITAL EXPENDITURE. HOWEVER, IN THE PR ESENT CASE BEFORE US, THE LIFE OF THE LICENSE IS STATED T O BE FOR A LIMITED PERIOD OF A YEAR ONLY. THE PURCHASE OF THE PAGE 4 OF 16 ITA NOS.407 & 480/BA NG/2012 4 RENEWAL LICENSE DOES NOT BRING INTO EXISTENCE A NEW ASSET. I NOTE THAT IF DEPRECIATION IS TO BE ALLOWED ON THE LICENSE, IT HAS TO FAIRLY BE AT THE RATE OF 100% SINCE AFTER A YEAR THE SAME CEASES TO OPERATE. AS PER RULE 5(1), THE ADMISSIBLE DEPRECIATION HOWEVER WOULD BE LIMITED TO 60%. HENCE, IT APPEARS TO BE NOT ENVISAGED IN THE LAW TH AT SOFTWARE WHICH HAS A SHELF LIFE OF A YEAR OR LESS, S HALL BE SUBJECTED TO DEPRECIATION TO COVER ITS COST. IF SU CH SOFTWARE PURCHASES WITH LIMITED APPLICABILITY ARE NO T CHARGED TO REVENUE, THE RESULT WOULD THEREFORE BE ANOMALOUS. THE JURISDICTIONAL ITAT BANGALORE BENCH IN THE CASE OF IBM INDIA LTD. V CIT (2007) 105 ITR 1 H AS HELD AS FOLLOWS:- . 3.3 THE REVENUE BEING AGGRIEVED IS IN APPEAL BEFORE US. 3.4 THE LEARNED DR SUPPORTED THE ORDER OF THE ASSE SSING OFFICER WHEREAS THE LEARNED AR REITERATED THE SUBMISSIONS M ADE BEFORE THE INCOME TAX AUTHORITIES AND RELIED ON THE FINDING OF THE CI T(A). 3.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. ADMITTEDLY, IN THIS CASE, THE EXPENDITUR E IS NOT MADE FOR ACQUISITION OF NEW ASSET. IN OTHER WORDS, NO CAPIT AL ASSET WAS BROUGHT INTO EXISTENCE WHEN THE RENEWAL LICENSE FEE WAS PAID. T HE PAYMENT WAS MADE ONLY FOR ACQUIRING THE RIGHT TO USE THE SOFTWARE FOR A LIMITED PERIOD. THE PAYMENT WAS NOT MADE FOR THE PURPOSE OF ACQUIRING AN Y PROPERTY OR RIGHTS OF A PERMANENT CHARACTER. THE PAYMENT MADE WAS A NORMA L, RECURRING AND REGULAR WORKING EXPENSE OF THE ASSESSEE IN THE PROC ESS OF CARRYING ON ITS BUSINESS. THEREFORE, THERE WAS NO ENDURING BENEFIT OF LASTING CHARACTER WAS DERIVED FROM THE SAID EXPENSES AND THE PAYMENT WAS M ADE IN THE NORMAL PAGE 5 OF 16 ITA NOS.407 & 480/BA NG/2012 5 COURSE FOR THE PURPOSE OF EARNING PROFITS AND THE S AME CONSTITUTES REVENUE EXPENDITURE. 3.5.1 THE ASSESSING OFFICER HAD TREATED THE SAID E XPENSES AS CAPITAL IN NATURE ON THE BASIS THAT THE COMPUTER SOFTWARE HAS BEEN BROUGHT WITHIN THE BLOCK OF ASSETS IN THE ASSESSMENT YEAR 2003-04. IN ORDER TO DECIDE WHETHER THE SAID EXPENDITURE IS A CAPITAL EXPENDITU RE OR NOT, ONE HAS TO LOOK INTO THE FOLLOWING ELEMENTS, NAMELY, I) ENDURING BEN EFIT OF THE ASSET; (II) TENURE OF THE SOFTWARE LICENSE; (III) WHETHER AN AS SET IS ACQUIRED FOR EARNING INCOME OR NOT; AND (IV) THE VALUE OF THE ASSET OR T HE MODE OF PAYMENT IS NOT THE ESSENTIAL CRITERIA. IN THE INSTANT CASE, THE A SSESSEE HAD WHEREVER THE COMPUTER SOFTWARE LICENSE HAS AN ENDURING BENEFIT, HAD TREATED THE SAME AS CAPITAL EXPENDITURE AND CAPITALIZED IN THE BOOKS OF ACCOUNTS. IN THE CONCERNED YEAR, AN AMOUNT OF RS.15,81,96,506/- WAS C APITALIZED ON ACCOUNT OF PURCHASE OF COMPUTER SYSTEMS INCLUDING COMPUTER SOFTWARE. 3.5.2 THE HONBLE HIGH COURT OF KARNATAKA IN THE C ASE OF CIT AND ANOTHER V TOYOTA KIRLOSKAR MOTORS PVT. LTD. REPORTED IN 349 ITR 65 HAD HELD THAT WHEN THE LIFE OF A COMPUTER SOFTWARE IS LESS THAN T WO YEARS AND THE RIGHT TO USE IT IS FOR A LIMITED PERIOD, THE FE E PAID FOR THE ACQUISITION OF THE RIGHT IS ALLOWABLE AS REVENUE EXPENDITURE AND I F THE SOFTWARE IS LICENSED FOR A PARTICULAR PERIOD, FRESH LICENSE FEE IS TO BE PAID FOR UTILIZING IT FOR SUBSEQUENT YEARS. THEREFORE, WITHOUT RENEWING THE L ICENSE OR WITHOUT PAYING THE FEE FOR SUCH RENEWAL, IT IS NOT POSSIBLE TO USE THE SOFTWARE. IN SUCH CIRCUMSTANCES, THE FEE PAID FOR OBTAINING THE SOFTWARE AND THE LICENCE FOR RENEWING IT WAS REVENUE EXPENDITURE. IN THE INSTANT CASE, THE LICENSE PAGE 6 OF 16 ITA NOS.407 & 480/BA NG/2012 6 FEES PAID WAS FOR RENEWAL OF THE USAGE OF SOFTWARE AND FOR A LIMITED PERIOD FOR LESS THAN TWO YEARS. HENCE, FOLLOWING THE RATI O LAID DOWN BY THE JURISDICTIONAL HIGH COURT CITED SUPRA, THE ASSESSEE IS ENTITLED TO CLAIM THE SOFTWARE EXPENSES OF RS.1,88,66,731/- AS A REVENUE EXPENDITURE. 3.5.3 MOREOVER, IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05, THE TRIBUNAL HAD ALLOWED THE CLAIM OF THE ASSESSEE ON AN IDENTICAL CLAIM. THE RELEVANT FINDING OF THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NOS.1328 & 1347/BANG/2011 DATED 31.10.2012 READS AS FOLLOWS:- 15. AFTER HEARING BOTH THE PARTIES, WE FIND THA T THE SPECIAL BENCH OF THE TRIBUNAL AT DELHI IN THE CASE OF AMWAY INDIA ENTERPRISES REPORTED IN 2011-TIOL-710- HC-DEL-IT HAS LAID DOWN THE TESTS/GUIDELINES FOR CONSIDERING THE NATURE OF EXPENSES ON COMPUTER SOFTWARE. WE FIND THAT THE LEARNED CIT(A) AFTER CONSIDERING THE ASSESSEES CONTENTIONS HAS OBSERVED THAT THE EXPENSES ON SOFTWARE IS BASICALLY APPLICATION SOFTWARE AND THAT TOO FOR A PERIOD OF 12 MONTHS ON LY. THE LEARNED CIT(A) HAS ALSO CONSIDERED THE ABOVE DECISIONS TO HOLD THAT EXPENSES OF OPERATING SOFTW ARE IS REVENUE IN NATURE. AS THE LEARNED CIT(A) HAS RIGHT LY ALLOWED THE RELIEF TO THE ASSESSEE, WE DO NOT SEE A NY REASON TO INTERFERE WITH THE ORDER OF LEARNED CIT(A ) ON THIS ISSUE. THIS GROUND OF APPEAL BY THE REVENUE I S REJECTED. 3.5.4 IN THE LIGHT OF THE ABOVE, WE HOLD THAT THE CIT(A) WAS JUSTIFIED IN TREATING THE EXPENSES OF RS.1,88,66,731/- AS REV ENUE EXPENDITURE. THEREFORE, GROUND NO.2 RAISED IN REVENUES APPEAL I S REJECTED. PAGE 7 OF 16 ITA NOS.407 & 480/BA NG/2012 7 GROUND NO.3 : 4. THE ABOVE GROUND READS AS FOLLOWS :- THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSIN G OFFICER TO REDUCE TRAVEL EXPENSES, PROFESSIONAL CHARGES AND BRANCH OFFICE EXPENSES AND OTHER EXPENSES FROM THE TOTAL T URNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTIO N 10B RELYING ON THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF M/S TATA ELXSI IN ITA NO.70/2009. HOWEVER, THE ABOVE DECISION HAS NOT YET BEEN ACCEPTED AND THE ISSUE HAS NOT REACHED FINALITY. 4.1 THE AFORESAID GROUND IS NOT MAINTAINABLE FOR T HE REASON THAT THE ASSESSING OFFICER HAS NOT EXCLUDED TRAVELLING E XPENSES, PROFESSIONAL CHARGES AND BRANCH OFFICE EXPENSES AND OTHER EXPENS ES FROM THE EXPORT TURNOVER. HENCE, THE SAME IS REJECTED. 5. EXCLUSION OF TELECOMMUNICATION EXPENSES FROM THE TOTAL TURNOVER GROUND NO. 7 : THE CIT(A) ERRED IN DIRECTING THAT WHAT IS REDUCED FROM THE EXPORT TURNOVER SHOULD BE REDUCED FROM THE TOTA L TURNOVER ALSO. GROUND NO.8 : THE CIT(A) ERRED IN FOLLOWING THE HIGH COURT ORDER AND CREATED A NEW LAW RATHER THAN INTERPRETING THE EXIS TING STATUTE. 5.1 THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTI ON 10B OF THE ACT AMOUNTING TO RS.83,20,34,709/-. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT, RECOMPUTED THE DEDUCTION UNDER SECTION 10B OF PAGE 8 OF 16 ITA NOS.407 & 480/BA NG/2012 8 THE ACT BY EXCLUDING THE EXPENSES UNDER THE HEAD CO MMUNICATION CHARGES INCURRED IN FOREIGN CURRENCY TO THE TUNE OF RS.12,20 ,772/- FROM THE EXPORT TURNOVER FOR MAKING A CORRESPONDING DEDUCTION IN TH E TOTAL TURNOVER. AS A RESULT OF THE RE-COMPUTATION OF DEDUCTION UNDER SE CTION 10B OF THE ACT, THE SAME WAS REDUCED TO RS.83,18,49,254/- AS AGAINST TH E ASSESSEES CLAIM OF RS.83,20,34,709/-. 5.2 AGGRIEVED BY THE RE-COMPUTATION OF DEDUCTION, T HE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY. 5.3 BEFORE THE FIRST APPELLATE AUTHORITY IT WAS SUB MITTED THAT THE EXPENSES OF RS.12,20,772/- BEING TELECOMMUNICATION CHARGES INCURRED IN FOREIGN EXCHANGE OUGHT NOT TO HAVE BEEN REDUCED FRO M THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. ALTERNATIVELY, IT WAS SUBMITTED, IF THE SAME IS REDUCED FROM THE EXPO RT TURNOVER NECESSARILY THE CORRESPONDING FIGURE SHOULD ALSO BE REDUCED FRO M THE TOTAL TURNOVER IN THE DENOMINATOR. 5.4 THE CIT(A) ACCEPTED THE ALTERNATIVE CLAIM OF T HE ASSESSEE BY FOLLOWING THE JUDGMENT OF THE JURISDICTIONAL HIGH C OURT IN THE CASE OF CIT AND ANOTHER V TATA ELXSI LTD. REPORTED IN 349 ITR 9 8 (KAR.). 5.5 THE REVENUE BEING AGGRIEVED IS IN APPEAL BEFOR E US. 5.6 THE LEARNED DR SUPPORTED THE ORDER OF THE ASSE SSING OFFICER WHEREAS THE LEARNED AR SUBMITTED THAT THE ISSUE IN QUESTION IS SQUARELY PAGE 9 OF 16 ITA NOS.407 & 480/BA NG/2012 9 COVERED BY THE JURISDICTIONAL HIGH COURTS RULING IN THE CASE OF CIT AND ANOTHER V TATA ELXSI LTD. REPORTED IN 349 ITR 98 (K AR.). 5.7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. AS RIGHTLY POINTED OUT BY THE LEARNED AR, THE IMPUGNED ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT O F THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE CITED SUPRA. THE RELEVANT FINDING OF THE HONBLE HIGH COURT READS AS FOLLOWS:- ..SECTION 10A IS ENACTED AS AN INCENTIVE TO EXP ORTERS TO ENABLE THEIR PRODUCTS TO BE COMPETITIVE IN THE G LOBAL MARKET AND CONSEQUENTLY EARN PRECIOUS FOREIGN EXCHAN GE FOR THE COUNTRY. THIS ASPECT HAS TO BE BORNE IN MIN D. WHILE COMPUTING THE CONSIDERATION RECEIVED FROM SUC H EXPORT TURNOVER, THE EXPENSES INCURRED TOWARDS FREI GHT, TELECOMMUNICATION CHARGES, OR INSURANCE ATTRIBUTABL E 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 SERVIC ES OUTSIDE INDIA SHOULD NOT BE INCLUDED. HOWEVER, THE WORD TOTAL TURNOVER IS NOT DEFINED FOR THE PURPOSE OF TH IS SECTION. IT IS BECAUSE OF THIS OMISSION TO DEFINE TOTAL TURNOVER, THE WORD TOTAL TURNOVER FALLS FOR INTERPRETATION BY THIS COURT; ..IN SECTION 10A, NOT ONLY THE WORD TOTAL TURNOVE R IS NOT DEFINED, THERE IS NO CLUE REGARDING WHAT IS TO BE EXCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER. HOW EVER, WHILE INTERPRETING THE PROVISIONS OF SECTION 80HHC, THE COURTS HAVE LAID DOWN VARIOUS PRINCIPLES, WHICH ARE INDEPENDENT OF THE STATUTORY PROVISIONS. THERE SHOU LD BE UNIFORMITY IN THE INGREDIENTS OF BOTH THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA, SINCE OTHERWISE IT WOULD PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10A I S A PAGE 10 OF 16 ITA NOS.407 & 480/B ANG/2012 10 BENEFICIAL SECTION WHICH INTENDS TO PROVIDE INCENTI VES TO PROMOTE EXPORTS. IN THE CASE OF COMBINED BUSINESS OF AN ASSESSEE, HAVING EXPORT BUSINESS AND DOMESTIC BUSIN ESS, THE LEGISLATURE INTENDED TO HAVE A FORMULA TO ASCER TAIN THE PROFITS FROM EXPORT BUSINESS BY APPORTIONING THE TOTAL PROFITS OF THE BUSINESS ON THE BASIS OF TURNO VERS. APPORTIONMENT OF PROFITS ON THE BASIS OF TURNOVER W AS ACCEPTED AS A METHOD OF ARRIVING AT EXPORT PROFITS. IN THE CASE OF SECTION 80HHC, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS INCOME OF THE ASSES SEE, WHEREAS IN SECTION 10-A, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS OF THE UNDERTAKING. EVEN IN THE CASE OF BUSINESS OF AN UNDERTAKING, IT MAY IN CLUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN OTHER WOR DS, EXPORT TURNOVER AND DOMESTIC TURNOVER. TO THE EXTE NT OF EXPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWEE N THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA. IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIV ED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD A LSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DENOMINATOR. TH E REASON BEING THE TOTAL TURNOVER INCLUDES EXPORT TUR NOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERA TOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE , THOUGH THERE IS NO DEFINITION OF THE TERM TOTAL TU RNOVER IN SECTION 10A, THERE IS NOTHING IN THE SAID SECTIO N TO MANDATE THAT, WHAT IS EXCLUDED FROM THE NUMERATOR T HAT IS EXPORT TURNOVER WOULD NEVERTHELESS FORM PART OF THE DENOMINATOR. WHEN THE STATUTE PRESCRIBED A FORMULA AND IN THE SAID FORMULA, EXPORT TURNOVER IS DEFINED, AND WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE VERY SAME MEANING GIVEN TO THE EXPORT TURNOVER BY THE LEGISLATURE IS TO BE ADOPTED WHILE UNDERSTANDING TH E MEANING OF THE TOTAL TURNOVER, WHEN THE TOTAL TURNO VER INCLUDES EXPORT TURNOVER. IF WHAT IS EXCLUDED IN COMPUTING THE EXPORT TURNOVER IS INCLUDED WHILE ARR IVING AT THE TOTAL TURNOVER, WHEN THE EXPORT TURNOVER IS A COMPONENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION PAGE 11 OF 16 ITA NOS.407 & 480/B ANG/2012 11 WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISSIBLE. THUS, THERE IS NO ERROR COMMITTED B Y THE TRIBUNAL IN FOLLOWING THE JUDGEMENTS RENDERED IN TH E CONTEXT OF SECTION 80HHC IN INTERPRETING SECTION 10 A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE AND THE SAME. 5.7.1 IN THE LIGHT OF THE ABOVE JUDGMENT OF THE HO NBLE HIGH COURT OF KARNATAKA, GROUND NOS.7 AND 8 ARE DISMISSED. SET OFF OF CARRIED FORWARD LOSSES AND UNABSORBED DEPRECIATION PRIOR TO ALLOWING DEDUCTION UNDER SECTION 10B (GROUND NOS.4, 5 & 6) 6. THE BRIEF FACTS IN RELATION TO THE ABOVE ISSUE ARE AS FOLLOWS:- IN THE ASSESSMENT COMPLETED, THE ASSESSING OFFICE R HELD THAT THE SET OFF OF CARRY FORWARD BUSINESS LOSS AND UNABS ORBED DEPRECIATION HAS TO BE GIVEN PRIOR TO ALLOWING OF DEDUCTION UNDER SE CTION 10B OF THE ACT. ACCORDINGLY, HE HAD EXHAUSTED THE CARRY FORWARD BUSIN ESS LOSS AND UNABSORBED DEPRECIATION IN THE PRECEDING ASSESSMENT YEAR LEAVING NOTHING FOR THE CURRENT ASSESSMENT YEAR. THEREFORE, THE ASS ESSING OFFICER HAD DENIED THE BENEFIT OF SET OFF OF BROUGHT FORWARD BU SINESS LOSS AND BROUGHT FORWARD DEPRECIATION. 6.1 IT WAS SUBMITTED BEFORE THE FIRST APPELLATE A UTHORITY THAT THE ASSESSEE HAS CARRY FORWARD BUSINESS LOSS AND UNABSOR BED DEPRECIATION TO THE SUBSEQUENT YEAR FOR SET OFF. IT IS, FURTHER, SU BMITTED THAT THE STAND OF THE ASSESSEE HAS BEEN ACCEPTED BY THE JURISDICTIONA L BANGALORE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05. ACCORDING TO THE PAGE 12 OF 16 ITA NOS.407 & 480/B ANG/2012 12 ASSESSEE, IT HAS GOT THE CARRY FORWARD BUSINESS LOSS AND UNABSORBED DEPRECIATION OF RS.6,90,44,977/- FROM THE PRECEDING ASSESSMENT YEAR TO THE CURRENT YEAR AND SOUGHT TO SET OFF THE SAME AGAINST THE INCOME OF THE CURRENT ASSESSMENT YEAR. 6.2 THE FIRST APPELLATE AUTHORITY BY FOLLOWING THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF YO KOGOWA INDIA LTD. REPORTED IN 341 ITR 385, ALLOWED THE APPEAL OF THE ASSESSEE. IT WAS HELD THAT 10A DEDUCTION IS TO BE ALLOWED PRIOR TO SETTIN G OFF OF THE BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION . 6.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. IT IS A SETTLED POSITION OF LAW THAT TH E CLAIM OF DEDUCTION UNDER SECTION 10B IS TO BE GRANTED PRIOR TO SETTING OFF O F BROUGHT FORWARD BUSINESS LOSS AND UNABSORBED DEPRECIATION. THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V YOKOGOWA INDIA LTD. (SUP RA) HAD HELD AS FOLLOWS:- .SIMILARLY, AS PER SECTION 72(2), UNABSORBED BUS INESS LOSS IS TO BE FIRST SET OFF AND THEREAFTER UNABSORB ED DEPRECIATION TREATED AS CURRENT YEARS DEPRECIATION UNDER SECTION 32(2) IS TO BE SET OFF. AS DEDUCTION UNDER SECTION 10A HAS TO BE EXCLUDED FROM THE TOTAL INCOM E OF THE ASSESSEE THE QUESTION OF UNABSORBED BUSINESS LO SS BEING SET OFF AGAINST SUCH PROFIT AND GAINS OF THE UNDERTAKING WOULD NOT ARISE. IN THAT VIEW OF THE M ATTER, THE APPROACH OF THE ASSESSING AUTHORITY WAS QUITE CONTRARY TO THE AFORESAID STATUTORY PROVISIONS AND TH E APPELLATE COMMISSIONER AS WELL AS THE TRIBUNAL WERE FULLY JUSTIFIED IN SETTING ASIDE THE SAID ASSESSMENT ORDE R AND GRANTING THE BENEFIT OF SECTION 10A TO THE ASSESSEE . PAGE 13 OF 16 ITA NOS.407 & 480/B ANG/2012 13 6.4 IN THE LIGHT OF THE ABOVE JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT, DEDUCTION UNDER SECTION 10B OF THE ACT SHOULD BE GRANTED BEFORE BEGINNING THE PROCESS OF COMPUTATION OF TOTA L INCOME UNDER CHAPTER IV AND THE QUESTION OF SETTING OFF OF BROUGHT FORWA RD AND UNABSORBED DEPRECIATION BEFORE GRANTING OF DEDUCTION UNDER SEC TION 10B OF THE ACT DOES NOT ARISE. 6.5 IN GROUND 5, IT IS STATED THAT THERE IS NO BRO UGHT FORWARD DEPRECIATION. AS STATED EARLIER, THE ASSESSEE HAS VOUCHED A SUM OF RS. 5,92,08,228/- IS AVAILABLE AS BROUGHT FORWARD D EPRECIATION FOR THE RELEVANT ASSESSMENT YEAR. THE ASSESSEE HAD FILED A COMPREHENSIVE STATEMENT OF AVAILABLE UNABSORBED DEPRECIATION, WHI CH IS ENCLOSED IN THIS ORDER AS ANNEXURE-1. THE ASSESSING OFFICER IS, THE REFORE, DIRECTED TO VERIFY THE CORRECTNESS AND THE AUTHENTICITY OF THE CL AIM OF THE ASSESSEE OF AVAILABILITY OF BROUGHT FORWARD DEPRECIATION AS CLAI MED IN ANNEXURE-1 BY THE ASSESSEE AND TO TAKE APPROPRIATE DECISION IN ACCORD ANCE WITH LAW. WE MAKE IT CLEAR THAT THE ASSESSEE WOULD BE ENTITLED TO CAR RY FORWARD OF UNABSORBED DEPRECIATION PERTAINING TO PAST YEARS ONLY IF IT IS A LLOWED TO BE CARRIED FORWARD IN EACH OF THE RESPECTIVE YEARS. IT IS ORDE RED ACCORDINGLY. IN THE RESULT, GROUND NOS.4 AND 6 ARE DISMISSED AND GROUND NO.5 IS ALLOWED FOR STATISTICAL PURPOSES. ASSESSEES APPEAL (ITA NO.428/BANG/2012) 7. ORIGINALLY, THE GROUNDS RAISED BY THE ASSESSEE WE RE ELABORATE AND ARGUMENTATIVE AND, HENCE, GROUNDS WERE REVISED AND FOUR CONCISE GROUNDS WERE FILED SUBSEQUENTLY. IN THE COURSE OF H EARING OF THE APPEAL, THE PAGE 14 OF 16 ITA NOS.407 & 480/B ANG/2012 14 LEARNED AR DID NOT PRESS GROUND NOS.3 AND 4 AND, HE NCE, THE SAME ARE DISMISSED AS NOT PRESSED. THE SURVIVING GROUNDS, N AMELY, GROUND NOS. 1 AND 2 READS AS FOLLOWS:- GROUND NO.1 : THE LEARNED CIT(A) IS NOT JUSTIFIED IN UPHOLDING OF THE ACTION OF THE LEARNED DCIT IN REDUCING CERTAIN EXPENSES (EXPE NDITURE INCURRED IN FOREIGN CURRENCY AND COMMUNICATION EXPEN SES) FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF D EDUCTION UNDER SECTION 10B OF THE IT ACT. GROUND NO.2 : THE LEARNED CIT(A) IS NOT JUSTIFIED IN UPHOLDING OF THE ACTION OF THE LEARNED DCIT IN REDUCING CERTAIN EXPENSES (EXPE NDITURE INCURRED IN FOREIGN CURRENCY AND COMMUNICATION EXPEN SES) FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF D EDUCTION UNDER SECTION 10AA OF THE IT ACT. 7.1 THE FACTS RELATING TO THE FIRST GROUND, IN BRI EF, ARE AS FOLLOWS:- THE ASSESSEE IS A COMPANY ENGAGED IN SOFTWARE DEVE LOPMENT AND ALLIED SERVICES. FOR THE CONCERNED ASSESSMENT YEAR 2007-08, A RETURN OF INCOME WAS FILED ON 31/10/2007 DECLARING A TOTAL INCOME OF RS.1,63,73,610/- AFTER CLAIMING DEDUCTION UNDER SEC TION 10B AMOUNTING TO RS.83,20,34,709/-. WHILE COMPLETING THE ASSESSMENT , THE ASSESSING OFFICER RE-COMPUTED THE DEDUCTION UNDER SECTION 10B OF THE ACT BY EXCLUDING FROM THE EXPORT TURNOVER A SUM OF RS.12,20,772/- BEING T ELECOMMUNICATION EXPENSES INCURRED IN FOREIGN EXCHANGE. THE ASSES SING OFFICER, HOWEVER, DID NOT REDUCE THE SAME EXPENSES FROM THE TOTAL TUR NOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. PAGE 15 OF 16 ITA NOS.407 & 480/B ANG/2012 15 7.2 ON APPEAL, IT WAS POINTED OUT BY THE ASSESSEE T HAT THE EXPENSES OF RS.12,20,772/- OUGHT NOT TO HAVE BEEN REDUCED FR OM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. ALTERNATIVELY IT WAS PLEADED THAT IF THE ABOVE SAID EXPENSES ARE RED UCED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER. 7.3 THE CIT(A) ACCEPTED THE ALTERNATIVE CONTENTION OF THE ASSESSEE BY FOLLOWING THE JUDGMENT OF THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF CIT AND ANOTHER V TATA ELXSI LTD. RE PORTED IN 349 ITR 98 (KAR.). 7.4 THE ASSESSEE, BEING AGGRIEVED FOR NOT ACCEPTIN G HIS CONTENTION THE NON-EXCLUSION OF THE ABOVE EXPENDITURE FROM THE EXPORT TURNOVER IS NOT IN ACCORDANCE WITH LAW, IS IN APPEAL BEFORE US. 7.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. WE FIND THAT THE ALTERNATIVE PLEA OF TH E ASSESSEE THAT WHEN EXPENSES IF EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER IS COVERED BY THE J UDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE CITED SUPRA A ND THE CIT(A), BY FOLLOWING THE ABOVE SAID JUDGMENT, HAS GRANTED RELIEF TO THE ASSESSEE. IN VIEW OF THE SAME, WE UPHOLD THE ORDER OF THE CIT(A). HOWEVER, WE MAKE IT CLEAR THAT IT IS OPEN TO THE ASSESSEE TO AGITATE THE CASE ON MERI TS OF THE ABOVE GROUND BEFORE THE APPROPRIATE AUTHORITIES AS AND WHEN NEED ARISES, IF ANY. IN THE RESULT, GROUND NO.1 RAISED BY THE ASSESSEE IS DISMIS SED. PAGE 16 OF 16 ITA NOS.407 & 480/B ANG/2012 16 8. GROUND NO.2 : THE ABOVE GROUND IS CONNECTED WITH GROUND NO.5 RAISED IN DEPARTMENTS APPEAL (ITA NO.480/BANG/2012 ). FOR THE REASONS MENTIONED IN PARA 6.5 (SUPRA), WE RESTORE THIS ISSU E TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE AS TO WHETHER THE ASSE SSEE IS ENTITLED TO CARRY FORWARD UNABSORBED DEPRECIATION FOR THE PAST YE ARS AND SET OFF OF THE SAME WHILE COMPUTING THE TOTAL INCOME OF THE IM PUGNED ASSESSMENT YEAR. IT IS ORDERED ACCORDINGLY. IN THE RESULT, GROUND NO .2 IS ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, BOTH THE DEPARTMENTS AND ASSESS EES APPEALS ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH DAY OF JANUARY, 2013. SD/- SD/- (JASON P BOAZ) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNE D. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE.