M/s. WNS GLOBAL SERVICES PVT. LTD., MUMBAI V. ACIT Rg. - 10(2), MUMBAI

ITA 795/MUM/2006

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7865 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 09-02-2011
• Assessment Year: 2001-2002
• Appeal Filed On: 03-02-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALANIRAJ SE TH
• Keywords: Business income; Depreciation; Services rendered outside India; Question of law; Revenue expenditure; Capital expenditure
• Section: 14A; 10B; 32; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH G, MUMBAI BEFORE SHRI P.M.JAGTAP (A.M) & SHRI N.V.VASUDEVAN( J.M) ITA NO.795/MUM/2006(A.Y. 2001-02) ITA NO.796/MUM/2006(A.Y.2002-03) ITA NO.3791/MUM/2007(A.Y. 2003-04) WNS GLOBAL SERVICES PVT. LTD. (FORMERLY, WORLD NETWORK SERVICES PVT. LTD.) GATE 4, GODREJ & BOYCE COMPLEX, PIROJSHANAGAR, VIKROLI(W), MUMBAI 79. PAN:AAACW 2598L (APPELLANT) VS. THE ADDL. CIT, RANGE 10(2), MUMBAI. (RESPONDENT) ITA NO.3828/MUM/2007(A.Y. 2003-04) THE ADDL. CIT, RANGE 10(2), MUMBAI. (APPELLANT ) VS. WNS GLOBAL SERVICES PVT. LTD. (FORMERLY, WORLD NETWORK SERVICES PVT. LTD.) GATE 4, GODREJ & BOYCE COMPLEX, PIROJSHANAGAR, VIKROLI(W), MUMBAI 79. PAN:AAACW 2598L (RESPONDENT) ASSESSEE BY : S/SHRI P.J.PARDIWALA/NIRAJ SE TH REVENUE BY : S/SHRI A.K.NAYAK/JITE NDRA YADAV/ PAVAN VED ORDER PER N.V.VASUDEVAN, J.M, ITA NO.795/MUM/2006 & 296/MUM/2206: THESE ARE APPEALS BY THE ASSESSEE AGAINST THE COM MON ORDER DATED 24/11/05 OF CIT(A)-10, MUMBAI RELATING TO ASSESSME NT YEAR 2001-02 AND 2002-03. ITA NO.2622/MUM/2010(A.Y. 2006-07) 2 2. ITA NO.795/MUM/2006: GROUND NO.1 & 2 RAISED BY THE ASSESSEE IN THIS APPE AL READ AS FOLLOWS: 1. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) [CIT(A )] HAS LEGALLY ERRED IN CONFIRMING THAT THE INCOME FROM SUBLETTING OF PREMISES, FURNITURE, COMPUTERS ETC. IS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. 2. WITHOUT PREJUDICE TO GROUND NO.1, BASED ON THE F ACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CI T(A) HAS LEGALLY ERRED IN NOT ALLOWING DEDUCTION OF DEPRECIATION ON COMPUTERS WHILST COMPUTING THE INCOME FROM SUBLETTING ACTIVITY. 3. THE ASSESSEE IS A COMPANY AND IS ENGAGED IN TH E BUSINESS OF DATA PROCESSING AND TRANSMISSION OF DATA. THE ASSESSEE CARRIES ON ITS BUSINESS ACTIVITIES THROUGH ITS UNITS AT MUMBAI, SET UP DURI NG THE PREVIOUS YEAR 1996- 97, AND PUNE (HEREINAFTER REFERRED TO AS PUNE UNIT 1) SET UP DURING THE PREVIOUS YEAR 2000-01. THE ASSESSEE CLAIMED DEDUCT ION UNDER SECTION 10A OF THE INCOME TAX ACT, 1961 (THE ACT), IN RESPECT O F THE PROFITS FROM THE PUNE UNIT 1 AND DEDUCTION UNDER SECTION 10B OF THE ACT, IN RESPECT OF THE PROFITS FROM THE MUMBAI UNIT. DURING THE PREVIOUS YEAR REL EVANT TO THE CAPTIONED ASSESSMENT YEAR, THE ASSESSEE HAD SET UP A SECOND S OFTWARE TECHNOLOGY PARK (STP) UNIT AT PUNE (HEREINAFTER REFERRED TO AS PUNE UNIT II). THE STP REGISTRATION WAS OBTAINED ON NOVEMBER 14, 2000. IT WAS READY TO COMMENCE OPERATIONS IN DECEMBER, 2000 BUT DID NOT UNDERTAKE ANY ACTIVITIES TILL MARCH, 31, 2001. TILL MARCH 31, 2001, THE PUNE UNI T II INCURRED A LOSS OF RS. 23,393,312/- ( AS COMPUTED UNDER THE PROVISIONS OF THE ACT) . THE ASSESSEE FILED THE ORIGINAL RETURN OF INCOME FOR TH E YEAR DECLARING LOSS OF RS.11,995,740/- AND CLAIMING REFUND OF RS. 4,887,64 4/-. IN THE RETURN OF INCOME, THE INCOME OF THE MUMBAI UNIT HAS BEEN CLAI MED AS EXEMPT FROM TAX UNDER SECTION 10B OF THE ACT AND THE PUNE UNIT I HAS BEEN CLAIMED AS EXEMPT FROM TAX UNDER SECTION 10A OF THE ACT AND TH E LOSS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION ARISIN G ON ACCOUNT OF THE PUNE ITA NO.2622/MUM/2010(A.Y. 2006-07) 3 UNIT II HAVE BEEN SET OFF AGAINST THE INTEREST INCO ME. THE BALANCE LOSS HAS BEEN CARRIED FORWARD TO THE SUBSEQUENT YEAR. 4. DURING THE PREVIOUS YEAR RELATING TO THE ASSESSM ENT YEAR 2001-2002, THE ASSESSEE HAD TAKEN THE PREMISES FOR PUNE I ON L EASE FOR ITS BUSINESS FROM SOFOTEL SOFTWARE SERVICES PVT. LTD.(SOFOTEL) IN DE CEMBER, 1998. THESE PREMISES ADMEASURING 46,800 SQ.FT. WAS SITUATED ON THE FIRST FLOOR OF THE COMMERCIAL OFFICE BUILDING LOCATED AT YERAWADA TALU KA IN THE DISTRICT OF PUNE. AS PER THE LEASE AGREEMENT, THE LEASE PERIOD WAS FROM 1 ST DECEMBER 1998 TO 30 TH NOVEMBER 2001 AND A MONTHLY LEASE RENTAL OF RS.13, 00,000 WAS PAYABLE BY THE ASSESSEE TO SOFOTEL. THE ASSESSEE A ND SOFOTEL ALSO ENTERED INTO A SEPARATE SERVICE AGREEMENT DATED DECEMBER 7 , 1998 FOR THE PROVISION OF SERVICES SUCH AS SECURITY ARRANGEMENT, GENERAL M AINTENANCE, REPAIRS, PROVISION OF WATER, ELECTRICITY, ETC. IN CONNECTION WITH THE LEASED PREMISES. AS PER THIS AGREEMENT A SUM OF RS. 12,00,000 IS PAY ABLE AS COMPENSATION BY THE APPELLANT TO SOFOTEL FOR THE PROVISION OF THE A BOVE SERVICES. HENCE, AN AGGREGATE AMOUNT OF RS. 25,00,000/)( RS. 13,00,000 + RS. 12,00,000) WAS PAYABLE BY THE ASSESSEE IN RESPECT OF THE LEASED P REMISES. 5. SINCE THE ENTIRE PREMISES WAS NOT IMMEDIATELY RE QUIRED BY THE ASSESSEE, AN AREA MEASURING 11805 SQ. FT. OF THE PR EMISES INCLUDING SOME COMPUTERS WAS TEMPORARILY SUBLET TO COGNIZANT TECHN OLOGY SOLUTIONS INDIA LTD. (CTS) FOR THE PERIOD SEPTEMBER 2000 TO NOVEMBE R, 2001. THE ASSESSEE RECEIVED SUBLETTING INCOME OF RS.13,509,921 FOR THE PERIOD ENDING MARCH 2001. THE ASSESSEE OFFERED THE NET INCOME FROM SUB LETTING ACTIVITY OF RS.3,118,760 (I.E. RENTAL INCOME OF RS.13,509,921 L ESS EXPENDITURE INCURRED FOR EARNING SUCH INCOME RS. 10,391,161) AS BUSINESS INCOME OF PUNE 1. THE ASSESSEE DID NOT CLAIM DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT OF THE RENTAL INCOME RECEIVED FROM SUB-LETTING THOUGH THE SAME WAS CLAIMED AS INCOME FROM BUSINESS. THE EXPENSES INCLUDE PROPORT IONATE ELECTRICITY CHARGES, RENTAL CHARGES PAID BY THE ASSESSEE TO SOF OTEL AND DEPRECIATION ON ITA NO.2622/MUM/2010(A.Y. 2006-07) 4 COMPUTERS LEASED WITH THE PREMISES BY THE ASSESSEE TO CTS. THE INCOME FROM SUBLETTING INCOME WHICH WAS CLAIMED BY THE ASS ESSEE AS INCOME FROM BUSINESS WAS ARRIVED AT BY THE ASSESSEE AS FOLLOWS: AMOUNT RS. SUBLETTING INCOME RECEIVED 13,509,921 ELECTRICITY CHARGES 661,607 RENTAL CHARGES 3,783,748 DEPRECIATION ON COMPUTERS 5,945 ,806 ------------- 10,391,16 ----------------- NET SUBLETTING INCOME 3,118,760 ========== 6. AS PER THE MOU BETWEEN THE ASSESSEE AND CTS, THE ASSESSEE HAD AGREED TO PROVIDE ONE HUNDRED AND SEVENTY WORKSTAT IONS, I.E. COMPUTERS TO CTS ALONGWITH THE PREMISES WITH A SPECIFIC CLAUSE T O PROVIDE ADDITIONAL WORK-STATIONS IF REQUIRED. THE SUB-LETTING RECEIPT S OF RS. 13,509,921 ALSO INCLUDE THE RENTAL CHARGES FOR THE USE OF THE COMPU TERS. COPIES OF DEBIT NOTES RAISED BY THE ASSESSEE ON CTS FOR THE PERIOD SEPTEMBER 2000 TO MARCH, 2001 WERE ENCLOSED AND IT WAS SUBMITTED THAT DEPRECIATION OF RS. 5,945,806 ON COMPUTERS IS DIRECTLY RELATED TO THE E ARNING OF SUB-LETTING INCOME AND HENCE SHOULD BE ALLOWED AS DEDUCTION FRO M SUCH INCOME UNDER SECTION 32 OF THE ACT. 7. THE AO HOWEVER DID NOT ALLOW THE CLAIM OF THE AS SESSEE. HE HELD THAT FROM A PLAIN READING OF THE MOU, THE INTENTION OF T HE PARTIES INVOLVED IN THE SAID DOCUMENT WAS CLEAR THAT THE ASSESSEE HAD ALLOW ED THE SECOND PARTY (CTS) TO ENJOY PART OF THE PREMISES UPON PAYMENT OF COMPREHENSIVE MONTHLY RENT ON THE LEAVE AND LICENCE BASIS. BY DOING SO, THE ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY IN THE SAID PREMI SES. HE HELD THAT THE ITA NO.2622/MUM/2010(A.Y. 2006-07) 5 CHARACTER OF THE INCOME IS SUCH THAT IT FALLS UNDER THE HEAD INCOME FROM SUBLETTING THE PROPERTY AND THEREFORE IT HAS TO BE CHARGED TO TAX ONLY AS `INCOME FROM OTHER SOURCES SINCE THE ASSESSEE COMPA NY IS NOT OWNER OF LEASE PREMISES AND HENCE THE INCOME CANNOT BE BROUG HT TO TAX UNDER THE HEAD INCOME FROM BUSINESS OR INCOME FROM HOUSE PROP ERTY IN THE HANDS OF RECIPIENT OF THE INCOME. 8. THE AO FURTHER HELD THAT THE EVIDENCE IN THE FO RM OF TDS CERTIFICATES ISSUED BY M/S. CTS SHOWED THE NATURE OF PAYMENT AS RENT. THE SAID EVIDENCES CANNOT BE IGNORED WHILE DETERMINING THE R ENT INCOME IS ASSESSABLE UNDER WHICH HEAD AS PER SECTION 14 OF THE IT ACT. T HEREFORE, IT CAN BE SAID THAT IT IS AN INCOME BY WAY OF RENT, WHICH WAS EARN ED BY THE ASSESSEE COMPANY BY EXERCISING THE RIGHT OF SUBLETTING THE P REMISES. HENCE, THE AO CONCLUDED THAT SUBLETTING INCOME WAS CHARGEABLE TO TAX AS INCOME FROM OTHER SOURCES U/S.56(1) OF THE INCOME TAX ACT. 9. ON THE CLAIM OF THE ASSESSEE FOR ALLOWING DEPRE CIATION ON COMPUTERS LEASED OUT TO CTS, THE AO HELD THAT THERE WAS NO MA TERIAL ON RECORD WHICH SHOWED THAT THE ASSESSEE HAD GIVEN COMPUTERS ON HIR E BASIS TO M/S. CTS ALONG WITH BILLS AND VOUCHERS OF THE PURCHASE OF CO MPUTERS AND DELIVERY CHALLAN AND CONFIRMATION FROM M/S. CTS IN RESPECT O F PROVIDING OF COMPUTERS BY THE ASSESSEE PURSUANT TO MOU BY WHICH THE PREMISES WAS SUB-LET TO CTS. THE AO THEREFORE HELD THAT THE DEP RECIATION OF RS. 59,45,806/- ON THE COMPUTER WAS DIRECTLY RELATED TO THE EARNING OF SUBLETTING INCOME. HE ALSO HELD THAT THERE WAS NO MATERIAL ON THE RECORD, WHICH SHOWED ACTUAL USER OF THE COMPUTERS. HE ALSO HELD THAT THE ASSESSEE HAS NOT SUBMITTED ANY BREAKUP IN RESPECT OF SUBLETTING AND SERVICE INCOME EARNED BY PROVIDING AMENITIES. ITA NO.2622/MUM/2010(A.Y. 2006-07) 6 10. THE AO THEREAFTER ON PERUSAL OF THE PROFIT & LOSS A/C. NOTICED THAT THE ASSESSEE HAD DEBITED VARIOUS EXPENSES FROM THE RENT INCOME, WHICH ARE NOT DEDUCTABLE EXPENSES UNDER THE INCOME FROM OTHER SO URCES. ACCORDING TO HIM THE DEDUCTIONS TO BE ALLOWED AGAINST INCOME FROM OTHER SOURCES WERE THOSE EXPENSES, WHICH ARE ALLOWABLE U/S. 57(III) OF THE I.T. ACT, VIZ.,: ANY OTHER EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENSES WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME. ACCORDING TO HIM, THE TEST OF ALLOWABILITY U/S. 57( III) WAS THAT THE EXPENDITURE MUST BE FOR THE PURPOSE OF MAKING OR EARNING THE IN COME. HE WAS OF THE VIEW THAT IN THE CASE OF ASSESSEE, NONE OF THE EXP ENDITURE CLAIMED AS DEDUCTION BY THE ASSESSEE AGAINST RENTAL INCOME AN D SERVICE INCOME COULD BE SAID TO HAVE BEEN INCURRED FOR THE PURPOSE OF WH OLLY OR EXCLUSIVELY EARNING OR MAKING THE RENTAL AND SERVICE INCOME EXC EPT CERTAIN EXPENSES. ON PERUSAL OF THE PROFIT & LOSS A/C., THE AO FOUND THAT THERE WERE ONLY FOUR KINDS OF EXPENDITURE, WHICH HAD CLOSE NEXUS WITH EA RNING THE RENTAL AND SERVICE INCOME. THE COMPARATIVE EXPENDITURE INCURR ED ON THE SUBLETTED AREA OF 11,805 SQ. FT. WAS CALCULATED BY THE AO AS FOL LOWS: NATURE OF EXPENDITURE EXPENDITURE ON 46,800 SQ. FT. EXPENDITURE ON SUB- LETTED AREA OF 11,805 SQ. FT. RENT 3,00,00,000 75,67,308 ELECTRICITY CHARGES 48,74,171 12,29,4 78 WATER CHARGES 53,887 13,592 SECURITY CHARGES 4,96,006 1,25,11 4 TOTAL 89,35,492 IN VIEW OF THE ABOVE DISCUSSION, THE AO ALLOWED THE AFORESAID EXPENSES TOTALLING TO RS.89,35,492/- AS ADMISSIBLE EXPENSES U/S. 57(III) OF THE INCOME TAX ACT AND THE SAME SHALL BE DEDUCTED WHILE COMPUT ING INCOME U/S. 56(1) OF THE ACT. ITA NO.2622/MUM/2010(A.Y. 2006-07) 7 11. WE MAY CLARIFY HERE THAT THE EXPENDITURE CLAIM ED BY THE ASSESSEE WAS ONLY FROM THE PERIOD OF LEASE SEPTEMBER, 2000 TILL MARCH, 2001. THE AO HOWEVER ALLOWED EXPENDITURE PROPORTIONATELY FOR THE WHOLE PERIOD. THE AO DISALLOWED DEPRECIATION. THUS THE DIFFERENCE BETWE EN THE CLAIM AS MADE BY THE ASSESSEE FOR DEDUCTION AGAINST INCOME FROM SUB- LETTING IS BASICALLY BECAUSE OF NOT ALLOWING DEPRECIATION AND THE AO HAV ING ALLOWED EXPENDITURE FOR THE WHOLE OF THE PREVIOUS YEAR INSTEAD OF ALLOW ING PROPORTIONATE DEDUCTION FOR THE PERIOD SEPTEMBER, 2000 TO MARCH, 2001. 12. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED THE ORDER OF THE AO OBSERVING AS FOLLOWING: I HAVE GONE THROUGH THE CONTENTION OF THE APPELLAN T AS WELL AS THAT OF THE AO. IT IS NOT IN DISPUTE THAT THE APPELLANT C OMPANY HAD OBTAINED PREMISES ON LEASE WHICH ADMEASURED 46800 SQ. FT. I T IS NOT IN DISPUTE THAT THE APPELLANT COMPANY HAD NO BUSINESS REQUIREM ENT FOR SUCH A HUGE AREA AND THEREFORE AS THE SAME COULD NOT BE E XPLOITED FOR THE PURPOSE OF ITS BUSINESS IT HAD LEASED IT TO CTS. M AY IT BE TRUE THAT THE APPELLANT MAY HAVE ALSO PROVIDED THE COMPUTERS TOTA LLING TO 170 AS CLAIMED BUT THE SOLE OBJECTIVE IN THE INSTANT CASE WAS NOT TO DO THE BUSINESS OF SERVICE PROVIDER AS HAS BEEN CLAIMED BU T SUCH SERVICES WERE PROVIDED AS INCIDENTAL TO THE SUBLETTING OF PR EMISES AND THEREFORE IT CANNOT BE SAID THAT THE APPELLANT HAD EXPLOITED THE COMMERCIAL ASSETS FOR THE PURPOSE OF THE BUSINESS . IT IS TH E INTENT OF THE ASSESSEE WHICH IS MORE IMPORTANT THAN TO THE NOMENCLATURE US ED FOR THE PURPOSE OF EARNING INCOME. FURTHER IT CAN ALSO BE SEEN THAT THE LESSEE HAD ALWAYS TREATED SUCH PAYMENT AS RENT AND NOT AS COMPENSATION FOR PROVIDING WORKSTATION AS HAS BEEN CLAIMED BY THE AP PELLANT THE FACT THAT CAN BE VERIFIED FROM THE TDS DEDUCTED BY THE S AID CTS U/S. 194-I. THUS CONSIDERING THE FACTS OF THE CASE AS ALSO REL YING ON THE JUDGMENT OF THE APEX COURT IN THE CASE OF SHAMBHU I NVESTMENT 263 ITR 142, I AM IN AGREEMENT WITH THE AO THAT INCOME FROM LEASE OF PREMISES WAS TAXABLE UNDER THE HEAD INCOME FROM OTH ER SOURCES AND CONSEQUENTLY ONLY SUCH EXPENSES WHICH ARE DIRECTLY EXPENDED FOR THE PURPOSE OF EARNING SUCH INCOME WOULD ONLY BE ALLOWE D TO BE DEDUCTED HAS BEEN DONE BY THE AO IN BOTH THE YEARS. THE APP ELLANT HAS ALTERNATIVELY SUBMITTED THAT DEPRECIATION ON COMPUT ER SYSTEM SHOULD BE ALLOWED AS SUCH COMPUTERS WERE USED TO PROVIDE T HE SERVICES. IN ITA NO.2622/MUM/2010(A.Y. 2006-07) 8 THIS REGARD THE AO HAS CATEGORICALLY FOUND THAT THE APPELLANT HAD NOT PROVIDED ANY DOCUMENTARY EVIDENCE TO SHOW THAT SUCH COMPUTER SYSTEM WAS ACTUALLY USED FOR EARNING SUCH INCOME AND THEREFORE, IN ABSENCE OF SUCH DETAILS HE HAD DISALLOWED THE APPEL LANTS CLAIM. THE APPELLANT, DURING THE APPELLATE PROCEEDINGS ALSO HA S NOT PROVIDED ANY SUCH DETAILS BARRING RELYING ON THE TERMS OF MOU AN D THEREFORE IN ABSENCE OF ANY SUCH DETAILS I AM NOT INCLINED TO AC CEPT THE ARGUMENTS OF THE APPELLANT AND AS SUCH THE APPELLANTS CLAIM FOR DEPRECIATION IS ALSO REJECTED IN BOTH THE YEARS. 13. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESS EE HAS RAISED GROUND NO.1 & 2 BEFORE THE TRIBUNAL. 14. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSE L FOR THE ASSESSEE AND THE LD. D.R. THE LD. COUNSEL FOR THE ASSESSEE AT T HE OUTSET CLARIFIED THAT IN RESPECT OF THE INCOME FROM SUBLETTING NO DEDUCTION UNDER SECTION 10A HAS BEEN CLAIMED BY THE ASSESSEE. THIS IS FACTUALLY CO RRECT AS CAN BE SEEN FROM THE P&L ACCOUNT AT PAGE 26 OF THE PAPER BOOK AND FO RM NO.56F, WHICH IS THE FORM OF CERTIFICATE GIVEN BY THE AUDITOR REGARD ING THE CLAIM UNDER SECTION 10A OF THE ACT, A COPY OF WHICH IS AT PAGE 74 TO 78 OF THE PAPER BOOK. IT IS CLEAR FROM THE CERTIFICATE AS WELL AND P&L ACCOUNT THAT THE EXPORT TURNOVER CLAIMED BY THE ASSESSEE WAS BASED ON THE INCOME FRO M SERVICES CHARGES RECEIVED OF RS.10,39,57,288/- AND DOES NOT INCLUDE THE INCOME FROM SUBLETTING. 15. THE LD. COUNSEL FOR THE ASSESSEE FURTHER DREW O UR ATTENTION TO THE AGREEMENT BY WHICH THE ASSESSEE SUBLET THE PREMISES TO CTS. HE HIGHLIGHTED THE FACT THAT THE LETTERING WAS OF WORK STATIONS WHICH IS CONDUCIVE FOR USE BY A PERSON ENGAGED IN THE BUSINE SS OF DEVELOPING COMPUTER SOFTWARE. HE ALSO TOOK US THROUGH VARIOUS CLAUSES OF THE AGREEMENT TO EMPHASIZE THE FACT THAT THE LEASE IN Q UESTION WAS OF A BUSINESS ASSET AND, THEREFORE, THE INCOME FROM LETTING HAS TO BE TREATED AS BUSINESS ITA NO.2622/MUM/2010(A.Y. 2006-07) 9 INCOME. IN THIS REGARD HE ALSO SUBMITTED THAT THE ASSESSEE WAS ALSO IN THE BUSINESS OF IT ENABLED SERVICES AND IT WAS ONLY PAR T OF THE INFRASTRUCTURE WHICH THE ASSESSEE POSSESSED WHICH WAS LET OUT TO C TS. THE LD. COUNSEL FOR THE ASSEESSEE ALSO POINTED OUT THAT THE ASSESSEE CO NTINUED TO CARRY ON ITS BUSINESS OF IT ENABLED SERVICES WITH THE REMAINING INFRASTRUCTURE. OUR ATTENTION WAS DRAWN TO THE PROVISIONS OF SECTION 56 (2)(II) & (III) OF THE INCOME TAX ACT 1961(THE ACT) TO HIGHLIGHT THE FACT THAT IN COME FROM LETTING OF MACHINERY AND FURNITURE WILL BE INCOME FROM OTHER S OURCES ONLY IF THE SAME IS NOT CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. 16. WITH REGARD TO THE DISALLOWANCE OF CLAIM FOR DE PRECIATION LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE COURSE OF AS SESSMENT PROCEEDINGS THE AO DID NOT CALL FOR ANY DETAILS WITH REGARD TO THE USE OF THE COMPUTERS BY THE SUB-LESSEE AND THEREFORE, THERE WAS NO OCCASION FOR THE ASSESSEE TO HAVE FILED THE NECESSARY DETAILS. IN THIS REGARD IT WAS SUBMI TTED BY HIM THAT THE TERMS OF THE LEASE AGREEMENT WERE CLEAR WITH REGARD TO LE ASE OF THE COMPUTERS. HE ALSO SUBMITTED THAT AS PER TERMS OF THE LEASE DEED 170 WORK STATIONS HAD BEEN PROVIDED BY THE LESSEE AND LESSEE HAD PAID @ R S. 18,040 PER WORK STATION. THE DEBIT NOTE RAISED BY THE ASSESSEE ON CTS IN THIS REGARD WAS ALSO BROUGHT TO OUR NOTICE. IT WAS SUBMITTED BY T HE LD. COUNSEL FOR THE ASSESSEE THAT IN ANY EVENT DEDUCTION ON ACCOUNT OF DEPRECIATION CANNOT BE DENIED TO THE ASSESSEE AND THE SAME SHOULD BE ALLOW ED UNDER SECTION57(II) OR (III) OF THE ACT. IT WAS THE SUBMISSION THAT THE L EASE IN QUESTION CANNOT BE SAID TO BE A SIMPLE LETTING OUT OF PROPERTY BUT WAS A CASE OF EXPLOITATION OF A COMMERCIAL ASSET AND THE SAME SHOULD BE ASSESSED UN DER THE HEAD INCOME FROM BUSINESS. IT WAS ALSO SUBMITTED THAT THE FACT THAT TDS HAS BEEN DEDUCTED BY CTS UNDER SECTION 194-I OF THE ACT, TRE ATING THE PAYMENT TO THE ASSESSEE AS A RENT, WILL NOT CHANGE THE CHARACTER O F THE RECEIPT IN HANDS OF THE ASSESSEE AND THE SAME WILL CONTINUE TO BE INCOM E FROM BUSINESS. ITA NO.2622/MUM/2010(A.Y. 2006-07) 10 17. THE LD. D.R ON THE OTHER HAND, SUBMITTED THAT B ASIC FACTS WITH REGARD TO LEASE OF COMPUTERS, HAS BEEN DISPUTED BY THE AO. IT WAS SUBMITTED BY HIM THAT IT WAS A SIMPLE CASE OF SUB-LETTING AND IN THIS REGARD RELIED ON THE OBSERVATIONS OF AO IN PARA 5.7 AND 5.8 OF HIS ORDER . IT WAS ALSO ARGUED BY HIM THAT THE MAIN BUSINESS OF THE ASSESSEE WAS IT E NABLED SERVICES AND NOT LETTING BUILDINGS AND DERIVE RENT. IN THIS REGARD HE REITERATED THE STAND OF THE AO IN RELYING ON THE DECISIONS OF THE HONBLE S UPREME COURT IN THE CASE OF SHAMBU INVESTMENTS (SUPRA). 18. WE HAVE CONSIDERED THE RIVAL SUBMISSION. THE I SSUE THAT NEEDS TO BE CONSIDERED IS AS TO WHETHER THE RECEIPTS BY THE ASS ESSEE FROM CTS UNDER THE MOU DATED 16/8/2000 HAS TO BE ASSESSED AS INCOME FR OM BUSINESS OR INCOME FROM OTHER SOURCES. THE INCIDENTAL ISSUE TH AT HAS TO BE CONSIDERED IS AS TO WHETHER THE ASSESSEE WOULD BE ENTITLED TO DEP RECIATION ON THE COMPUTERS. 19. INCOME FROM LEASE OF PROPERTY BY AN OWNER OF T HE PROPERTY IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS BY VIRTUE OF THE PROVISIONS OF SEC.22 OF THE ACT. WHERE IT IS A COMPOSITE LEASE OF FACT ORY, IT WOULD BE ASSESSABLE AS INCOME FROM OTHER SOURCES U/S.56(2)(II) (III) OF THE ACT, PROVIDED IT IS NOT ASSESSABLE AS INCOME FROM BUSINESS. THE CLASSIFI CATION OF INCOME UNDER ANY OF THE THREE HEADS OF INCOME WOULD DECIDE THE D EDUCTIONS THAT THE ASSESSEE WOULD BE ALLOWED WHILE COMPUTING INCOME FR OM SUB-LETTING BY THE ASSESSEE. IN THIS CASE, THE HEAD OF INCOME FROM HO USE PROPERTY IS RULED OUT BECAUSE THE ASSESSEE IS NOT THE OWNER OF THE PROPER TY AND HE HIMSELF IS A LESSEE. THE QUESTION IS ONLY AS TO WHETHER THE INC OME IS TO BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES OR INCO ME FROM BUSINESS. IF INCOME IN QUESTION IS ASSESSED AS INCOME FROM OTHER SOURCES, THE ASSESSEE WILL GET DEDUCTION IN ACCORDANCE WITH SEC.57 OF THE ACT, WHICH WOULD INCLUDE ITA NO.2622/MUM/2010(A.Y. 2006-07) 11 ALSO DEPRECIATION. IF IT IS TREATED AS INCOME FRO M BUSINESS, THE ASSESSEE WOULD GET DEDUCTION IN ACCORDANCE WITH PROVISIONS O F SEC.28 TO 44 OF THE ACT. THE PARAMETERS FOR ALLOWING DEDUCTION U/S.57 OF THE ACT, IS CIRCUMSCRIBED BY THE REQUIREMENT OF THE EXPENDITURE HAVING BEEN I NCURRED TO EARN THE INCOME WHICH IS SOUGHT TO BE TAXED. IF IT IS TREAT ED AS INCOME FROM BUSINESS, THE CRITERIA FOR ALLOWING DEDUCTION, IS THAT THE EX PENDITURE IS INCURRED FOR THE PURPOSE OF BUSINESS, WHICH IS BROADER IN SCOPE AND ENCOMPASSES ALL EXPENDITURE WHICH IN THE OPINION OF THE ASSESSEE IS FOR THE PURPOSE OF BUSINESS. 20. IN SULTAN BROTHERS PVT. LTD. V. CIT [1964] 51 ITR 353 (SC), THE INCOME WAS FOUND ASSESSABLE AS INCOME FROM OTHER SOURCES, BECAUSE THE PROPERTY WAS LET OUT FOR A COMPOSITE RENT ALONG WITH PLANT A ND MACHINERY AND FURNITURE. WHERE MINING LEASE FOR COAL WAS ACQUIRED WITH THE OBJECT OF BUSINESS IN SUB-LEASING, INCOME WAS FOUND TO BE ASS ESSABLE AS BUSINESS INCOME IN KARANPURA DEVELOPMENT CO. LTD. V. CIT [19 62] 44 ITR 362 (SC). IN KARNANI PROPERTIES LTD. V. CIT [1971] 82 ITR 547 (SC), THE RENT PART OF THE RECEIPT WAS FOUND TAXABLE AS PROPERTY INCOME AND TH E SERVICE CHARGES AS INCOME FROM BUSINESS. IN S. G. MERCANTILE CORPORATI ON P. LTD. V. CIT [1972] 83 ITR 700 (SC), THE PROPERTY WAS TAKEN ON LEASE AN D SUBLET TO DIFFERENT TENANTS, SO THAT IT WAS FOUND ASSESSABLE AS BUSINES S INCOME. THE FACT THAT IT WAS LET OUT EVEN TO DAILY CASUAL MARKET VENDORS PRO BABLY PROMPTED THE INFERENCE, THAT IT IS BUSINESS. WHERE THE BUSINESS ASSET LIKE THE FACTORY IS LET OUT ADMITTEDLY FOR A SHORT TIME ALONG WITH OTHER AS SETS, THE INCOME COULD BE FROM BUSINESS AS HELD IN UNIVERSAL PLAST LTD. V. CI T [1999] 237 ITR 454 (SC). IN UNIVERSAL PLAST LTD. V. CIT [1999] 237 ITR 454 ( SC), THE GENERAL PRINCIPLES RELATING TO INCOME FROM LEASING OUT THE ASSETS OF T HE BUSINESS BY AN ASSESSEE WERE LAID DOWN AS UNDER: (1) NO PRECISE TEST CAN BE LAID DOWN TO ASCERTAIN WHETHER INCOME (REFERRED TO BY WHATEVER NOMENCLATUR E, LEASE AMOUNT, RENT OR LICENCE FEE) RECEIVED BY AN ASSESSEE FROM LEASIN G OR LETTING OUT OF ASSETS ITA NO.2622/MUM/2010(A.Y. 2006-07) 12 WOULD FALL UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION'; (2) IT IS A MIXED QUESTION OF LAW AND FACT AND HAS TO BE D ETERMINED FROM THE POINT OF VIEW OF A BUSINESSMAN IN THAT BUSINESS ON THE FA CTS AND IN THE CIRCUMSTANCES OF EACH CASE, INCLUDING TRUE INTERPRE TATION OF THE AGREEMENT UNDER WHICH THE ASSETS ARE LET OUT; (3) WHERE ALL T HE ASSETS OF THE BUSINESS ARE LET OUT, THE PERIOD FOR WHICH THE ASSETS ARE LE T OUT IS A RELEVANT FACTOR TO FIND OUT WHETHER THE INTENTION OF THE ASSESSEE IS T O GO OUT OF BUSINESS ALTOGETHER OR TO COME BACK AND RESTART THE SAME; (4 ) IF ONLY A FEW OF THE BUSINESS ASSETS ARE LET OUT TEMPORARILY, WHILE THE ASSESSEE IS CARRYING ON HIS OTHER BUSINESS ACTIVITIES, THEN IT IS A CASE OF EXP LOITING THE BUSINESS ASSETS OTHERWISE THAN EMPLOYING THEM FOR HIS OWN USE FOR M AKING PROFIT FOR THAT BUSINESS; BUT IF THE BUSINESS NEVER STARTED OR HAS STARTED BUT CEASED WITH NO INTENTION TO BE RESUMED, THE ASSETS ALSO WILL CEASE TO BE BUSINESS ASSETS AND THE TRANSACTION WILL ONLY BE EXPLOITATION OF PROPER TY BY AN OWNER THEREOF, BUT NOT EXPLOITATION OF BUSINESS ASSETS. 21. WE SHALL NOW EXAMINE THE FACTS OF THE CASE BEF ORE THE TRIBUNAL IN THE LIGHT OF THE GUIDELINES LAID DOWN IN THE AFORESAID DECISIONS. THE ASSESSEE IS IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE , IT ENABLED SERVICES. IT WAS NEVER IN THE BUSINESS OF LETTING OUT PROPERTIES IT HAD TAKEN ON RENT BY WAY OF SUB LEASE AND DERIVE RENTAL INCOME. THE WOR K STATIONS ALREADY EXISTED AND WERE MEANT FOR USE BY THE ASSESSEE FOR ITS OWN BUSINESS. THE AREA OF BUILDING TAKEN ON LEASE WAS EXCESSIVE CONSIDERING T HE NEED OF THE ASSESSEE AND SUCH EXCESS AREA WAS LET OUT BY WAY OF SUB-LEAS E. THE EXCESS AREA TOGETHER WITH THE EXISTING FACILITIES REFERRED TO A S WORK STATIONS WERE SUB- LEASED. IT IS AKIN TO ALLOWING SOMEBODY TO USE THE SPARE CAPACITY OF A PLANT BY AN INDUSTRIAL UNDERTAKING. ITA NO.2622/MUM/2010(A.Y. 2006-07) 13 22. TO RESOLVE THE CONTROVERSY, IT IS NECESSARY TO EXAMINE THE TERMS OF THE AGREEMENT DATED 16/8/2000 BETWEEN THE ASSESSEE AND CTS. THESE ARE AS FOLLOWS: AS CTS IS IN THE PROCESS OF CONSTRUCTING ITS OWN P REMISES, TO MEET ITS IMMEDIATE BUSINESS REQUIREMENTS IT HAS APPROACHED W NS FOR A WORK SPACE AND WNS HEREBY AGREES TO ALLOW CTS TO CARRYOU T THEIR BUSINESS OF SOFTWARE DEVELOPMENT FROM THE OFFICE SPACE AT SO FTEL BUILDING, DEEPAK COMPLEX, NATIONAL GAMES ROAD, YERAWADA, PUNE 411 006. TO AUTHORIZE CTS TO UTILIZE ALL THE FURNITURES AND FIXTURES, WORKSTATIONS, SERVER ROOMS, PANTRY, MEETING ROOMS, MANAGERIAL CABINS AND OTHER COMMON FLOOR AREAS AVAILABLE TO CARRYOUT THEIR BUSINESS ACTIVITY. AGREED TO PROVIDE CTS UP TO ONE HUNDRED SEVENTY WOR KSTATIONS. HOWEVER, WNS HAS CONFIRMED THAT IT MAY NOT BE IN A POSITION TO OFFER MORE THAN ONE HUNDRED WORKSTATIONS UNTIL 31 ST DECEMBER, 2000 BUT CAN OFFER SEVENTY WORKSTATION THEREAFTER FROM JANYA RY 2001. TO START WITH, INITIALLY THIRTY FIVE WORKSTATIONS WILL BE MA DE AVAILABLE BY 1 ST SEPTEMBER 2000, AND HENCEFORTH THE MONTHLY REQUIREM ENTS OF WORKSTATIONS WILL BE DISCUSSED AND DECIDED BY THE P ARTIES MUTUALLY ON TIME TO TIME BASIS. FURTHER CTS TO PROVIDE WNS WIT H A ROLLING FORECAST OF WORKSTATION REQUIREMENTS ON A QUARTERLY BASIS BY THE FIRST WORKING DAY OF EACH MONTH. THIS FORECAST WOULD INCLUDE A F IRM NUMBER FOR THE WORKSTATION REQUIREMENTS FOR THE IMMEDIATELY NEXT M ONTH AND A TENTATIVE REQUIREMENT FOR THE NEXT TWO MONTHS . TH E FIRST FORECAST IS DUE ON SEPTEMBER 1,2000. WNS WILL PROVIDE ONE HARDWARE ENGINEER TO MAINTAIN ALL THE HARDWARE AND NETWORKING EQUIPMENT PROVIDED BY THEM DURING TH E NORMAL WORKING HOURS. TO ENSURE FOR PROPER MAINTENANCE OF ALL OFFICE EQUI PMENTS, FURNITURES & FIXTURES , LAN CABLING, COMPUTERS, NET WORKING EQ UIPMENTS, FIRE ALARM, CCTV, INCLUDING LAN SWITCHES AND ELECTRICAL FITTINGS. WNS WILL RAISE INVOICE FOR INR 18,040/- (RUPEES EI GHTEEN THOUSAND AND FORTY ONLY) PER MONTH FOR THE ACTUAL WORKSTATIO NS UTILIZED. THE NECESSARY INVOICES IN THIS REGARD WILL BE SUBMITTED ON A MONTHLY BASIS ON OR BEFORE 5 TH OF THE FOLLOWING MONTH. THE INVOICE FOR THE FIRST MONTH FOR THE INCREMENTAL WORKSTATIONS WILL BE BILLED ON THE ACTUAL USAGE. ITA NO.2622/MUM/2010(A.Y. 2006-07) 14 23. THE MOU DATED 16/8/2000, BY WHICH THE ASSESSEE SUB LET THE WORK STATIONS TO CTS CLEARLY PROVIDES THAT THE ASSESSEE HAS TO ENSURE PROPER MAINTENANCE OF ALL OFFICE EQUIPMENTS, FURNITURE AND FIXTURES, LAN CABLING, COMPUTERS, NET WORKING EQUIPMENTS, FIRE ALARM, CCT V, INCLUDING LAN SWITCHES AND ELECTRICAL FITTINGS. WE HAVE ALSO SEE N THE FIXED ASSETS SCHEDULE TO THE BALANCE SHEET AT PAGE-28 OF THE ASSESSEES P APER BOOK. IT SHOWS THAT THE ASSESSEE HAD CLAIMED TOTAL DEPRECIATION ON COMP UTERS OF RS.72,73,247. OUT OF THE ABOVE, A SUM OF RS.59,45,806 RELATES TO COMPUTERS LEASED. THIS IS REFLECTED IN FORM NO.56F THE FORM OF CERTIFICATE OF AUDITOR FOR CLAIMING DEDUCTION U/S.10-A OF THE ACT. IT IS THUS CLEAR TH AT THE ASSESSEE OWNED THE COMPUTERS AND HAD LEASED THE SAME TO CTS. THE COMP LAINT OF THE AO THAT THE ASSESSEE HAS NOT PROVED THE LEASING OF COMPUTER S TO CTS IS NOT CORRECT IN VIEW OF THE TERMS OF THE MOU DATED 16/8/2000 AND TH E DETAILS OF FIXED ASSETS SCHEDULE CERTIFICATE OF AUDITOR IN FORM NO.5 6F. THE MOU SUGGESTS THAT THE LEASE WAS FOR A TEMPORARY PERIOD BECAUSE I T REFERS TO THE FACT THAT CTS IS IN THE PROCESS OF CONSTRUCTING ITS OWN PREMI SES AND TO MEET ITS IMMEDIATE BUSINESS REQUIREMENTS IT HAS APPROACHED T HE ASSESSEE FOR LEASE OF WORK SPACE TO ENABLE CTS TO CARRY OUT THEIR BUSI NESS OF SOFTWARE DEVELOPMENT. IT IS CLEAR FROM THE ABOVE TERMS THA T WHAT WAS LEASED OUT BY THE ASSESSEE TO CTS WAS WORK STATIONS WHICH COMPRIS ES NOT ONLY OF THE PREMISES BUT ALSO THE FURNITURES, FIXTURES, COMPUTE RS, SERVERS AND ALL OTHER FACILITIES TO CARRY ON THE BUSINESS OF DEVELOPING C OMPUTER SOFTWARE. THESE FACILITIES HAD ALREADY BEEN CREATED BY THE ASSESSEE FOR ITS USE. IT IS ONLY THE FACILITIES SO CREATED, WHICH WERE NOT IMMEDIATELY N EEDED BY THE ASSESSE, THAT WERE LET OUT TO CTS. IT WAS THEREFORE, A CASE WHER E A FEW OF THE BUSINESS ASSETS WERE LET OUT BY THE ASSESSEE WHILE THE ASSES SEE WAS CARRYING ON HIS OTHER BUSINESS ACTIVITIES. IT WILL THUS BE A CASE WHERE THE ASSESSEE EXPLOITED ITS BUSINESS ASSETS TO EARN INCOME. IN THESE CIRC UMSTANCES, WE ARE OF THE VIEW THAT THE INCOME IN QUESTION HAS TO BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS. IT IS CLEAR FROM THE TERMS OF THE A GREEMENT THAT HARD WARE ITA NO.2622/MUM/2010(A.Y. 2006-07) 15 AND NET-WORKING EQUIPMENT WERE ALSO PROVIDED TO CTS BY THE ASSESSEE. THEREFORE, THE ASSESSEE WOULD BE ENTITLED TO DEPREC IATION ON THE VARIOUS ASSETS LEASED. THE FACT THAT IN THE TDS CERTIFICAT E THE PAYMENT TO THE ASSESSEE IS SHOWN AS RENT WILL NOT BE CONCLUSIVE. I N SUCH MATTERS THE REAL NATURE OF THE RECEIPT HAS TO BE EXAMINED IN THE LIG HT OF FACTS OF A GIVEN CASE AND THE TERMS OF THE AGREEMENT. WE ARE THEREFORE, OF THE VIEW THAT CLAIM OF THE ASSESSEE OUGHT TO HAVE BEEN ACCEPTED. WE ACCOR DINGLY DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE IN THIS REGARD. GR OUND NO.1 & 2 ARE ACCORDINGLY ALLOWED. 24. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FOL LOWS: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THAT LIABILITY NO LONGER REQUIRED WRITTEN BACK AMOUNTING TO RS. 3,29,942/- I S NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10A/10B OF THE ACT. 25. WE HAVE ALREADY SEEN THAT THE ASSESSEE HAS CLAI MED DEDUCTION U/S.10- A OF THE ACT, IN RESPECT OF THE PUNE UNIT-1 AND DED UCTION U/S.10-B OF THE ACT, IN RESPECT OF ITS MUMBAI UNIT. IN COMPUTING T HE INCOME FOR ELIGIBLE FOR DEDUCTION AS AFORESAID, THE ASSESSEE HAD INCLUDED LIABILITY NO LONGER REQUIRED WRITTEN BACK OF A SUM OF RS. 2,40,877 IN RESPECT OF PUNE UNIT-1 AND RS.89,065 IN RESPECT OF THE MUMBAI UNIT. ACCOR DING TO THE AO THESE WERE NOT PROFITS DERIVED BY INDUSTRIAL UNDERTAKING AS THE BUSINESS OF THE ASSESSEE WAS ONLY TO RENDER SOFTWARE SERVICES AND D ATA PROCESSING SERVICES. HE FURTHER HELD THAT THE AFORESAID INCOME IS CHARGE ABLE U/S.41(1) OF THE ACT AND THEREFORE CANNOT BE CONSIDERED AS PART OF BUSIN ESS INCOME ELIGIBLE FOR DEDUCTION U/S.10-A AND 10-B OF THE ACT. BEFORE CIT (A), THE ASSESSEE SUBMITTED THAT IN THE PAST THE ASSESSEE HAD CLAIMED DEDUCTION OF SOME EXPENSES AND LATER ON IT TURNED OUT THAT THESE LIAB ILITIES WERE NO LONGER REQUIRED TO BE DISCHARGED AND THEREFORE THEY WERE W RITTEN OFF AND TREATED AS INCOME. THESE EXPENDITURES HAD GONE TO REDUCE THE BUSINESS PROFITS IN THE ITA NO.2622/MUM/2010(A.Y. 2006-07) 16 PAST AND WHEN THEY ARE WRITTEN BACK, THEY HAVE TO B E CONSTRUED AS INCOME FROM BUSINESS. THE EXPENDITURE WERE CONNECTED WITH THE UNDERTAKING ELIGIBLE FOR DEDUCTION U/S.10-A AND 10-B OF THE ACT RESPECTIVELY AND WERE THEREFORE TO BE CONSIDERED AS INCOME ELIGIBLE FOR D EDUCTION U/S.10-A AND 10- B OF THE ACT, RESPECTIVELY. THE CIT(A) HOWEVER CON FIRMED THE ORDER OF THE AO. HENCE, GROUND NO.3 BY THE ASSESSEE BEFORE THE TRIBU NAL. 26. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS NOT IN DISPUTE BEFORE US THAT IN AY 2000-01 IN ITA NO.794/MUM/06 THIS TRIBUN AL IN ASSESSEES OWN CASE DECIDED IDENTICAL ISSUE. THE TRIBUNAL HELD AS FOLLOWS: 10. WE HAVE CONSIDERED THE RIVAL ARGUMENTS AND PER USED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A). WE FIND THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEDUCTION UNDER SECTION 10A /10B OF THE ACT IN RESPECT OF LIABILITY NO LONGER REQUIRED WRITTEN BAC K AMOUNTING TO RS. 14,34,954/- HOLDING THE SAME TO BE INCOME FROM OTHE R SOURCES AND NOT DERIVED FROM EXPORT ACTIVITY. WE FIND THAT THE CIT(A) TREATED THE AMOUNT OF RS. 14,34,954/- WRITTEN BACK BY THE ASSE SSEE AS LIABILITY NO LONGER REQUIRED WRITTEN BACK U/S. 41(1) OF THE ACT AS BUSINESS INCOME AS AGAINST INCOME FROM OTHER SOURCES TREATED BY A SSESSING OFFICER. THE REVENUE IS NOT IN APPEAL BEFORE US AGAINST SUCH FINDING OF THE CIT(A). HOWEVER, WE FIND THE CIT(A) REJECTED THE C LAIM OF DEDUCTION U/S. 10B ON THE GROUND THAT THE AMOUNT IN QUESTION CANNOT BE SAID TO BE DERIVED FROM EXPORT OF ARTICLE OR THING AS HAS B EEN ENVISAGED U/S. 10B OF THE ACT. IT IS THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE THAT DURING THE EARLIER YEAR THE CLAIM OF EXPENSES OF THE ASSESSEE HAS BEEN ALLOWED AND, THEREFORE, THE PROFI T WAS SHOWN AT A LESSER AMOUNT. HAD THIS AMOUNT NOT BEEN CONSIDERED DURING THOSE YEARS THE PROFIT IN THE RESPECTIVE YEARS WOULD HAVE BEEN MORE AND THE ASSESSEE WOULD HAVE GOT THE BENEFIT OF HIGHER DEDUC TION U/S. 10B OF THE ACT. .. THE ASSESSEE HAS WRITTEN BACK THE AMO UNT DURING THE IMPUGNED ASSESSMENT YEAR, THEREFORE, IT CANNOT BE S AID THAT THE AMOUNT WHICH IS CREDITED TO THE PROFIT AND LOSS ACC OUNT UNDER SECTION 41(1) IS NOT DERIVED FROM EXPORT ACTIVITY;. WE FIN D FORCE IN THE ABOVE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE. IN OUR OPINION, IF THE ASSESSEE WOULD NOT HAVE CLAIMED THE EXPENSES DU RING THOSE YEARS, THE PROVISION FOR WHICH NOW HAS BEEN CREDITED TO TH E PROFIT AND LOSS A/C. U/S. 41(1), THE ASSESSEES INCOME DURING THOSE YEARS WOULD HAVE BECOME HIGHER WHICH OTHERWISE WERE ENTITLED TO DEDU CTION U/S. 10B OF ITA NO.2622/MUM/2010(A.Y. 2006-07) 17 THE ACT. THEREFORE, WHEN THE ASSESSEE WRITES OFF T HE PROVISIONS DURING THE IMPUGNED ASSESSMENT YEAR AS LIABILITY NO LONGER REQUIRED WRITTEN BACK, AND THE AMOUNT WAS CREDITED TO THE PROFIT & L OSS ACCOUNT, THEREFORE SUCH INCOME IN OUR OPINION WILL BE ELIGI BLE FOR DEDUCTION U/S. 10B OF THE ACT BEING DERIVED FROM EXPORT ACT IVITY. IN THIS VIEW OF THE MATTER, WE ET ASIDE THE ORDER OF THE CIT(A) AND THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S. 10B ON THE AMOUNT WRITT EN BACKING RESPECT OF LIABILITIES NO LONGER REQUIRED AMOUNTING TO RS.13,49,013/- IN RESPECT OF MUMBAI UNIT IS ALLOWED. AS REGARD THE R EMAINING AMOUNT RELATING TO PUNE UNIT WHICH ADMITTEDLY HAD LOSS, CA NNOT CLAIM THE BENEFIT OF DEDUCTION U/S. 10B AS THERE IS NO PROFIT . THIS GROUND BY THE ASSESSEE IS ACCORDINGLY PARTLY ALLOWED. THE FACTS AND CIRCUMSTANCES AND THE BASIS OF DISALL OWANCE BEING IDENTICAL IN THE PRESENT A.Y., RESPECTFULLY FOLLOWING THE DECISI ON OF THE ITAT REFERRED TO ABOVE, WE DIRECT THE AO TO ALLOW THE CLAIM OF THE A SSESSEE. GROUND NO.3 IS ACCORDINGLY ALLOWED. 27. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FO LLOWS: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) HAS ERRED IN NOT ADJUDICATING ON TH E GROUND THAT MISCELLANEOUS INCOME OF RS. 1,13,932/- IS DERIVED F ROM THE EXPORT UNDERTAKING. 27. THE MISCELLANEOUS INCOME OF RS. 1,13,932/-, WH ICH CONSISTED OF BANK CHARGES REFUNDED AT RS.99,885/-, INTEREST RECEIVED ON STAFF ADVANCE OF RS. 12,952/- AND MIS. INCOME OF RS.1,095/- IN RESPECT O F THE MUMBAI UNIT EARNED BY THE ASSESSEE COMPANY. ACCORDING TO THE A O, THE AFORESAID INCOME WAS NOT PROFIT DERIVED FROM THE INDUSTRIAL UNDERTAK ING, BUT WAS ONLY INCIDENTAL TO THE BUSINESS ACTIVITY OF THE INDUSTRI AL UNDERTAKING. ACCORDING TO HIM THERE MUST BE, FOR THE APPLICATION OF WORDS DERIVED FROM, USED IN SECTION 10A, A DIRECT NEXUS BETWEEN THE PROFIT & GA INS AND INDUSTRIAL UNDERTAKING. ACCORDING TO THE AO, IN THE CASE OF T HE ASSESSEE IN RESPECT OF THE AFORESAID INCOME, THERE WAS NO DIRECT NEXUS BUT ONLY INCIDENTAL. HE HELD THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF P ROVIDING COMPUTER ITA NO.2622/MUM/2010(A.Y. 2006-07) 18 SOFTWARE AND DATA PROCESSING SERVICES. BY REASON O F SUCH BUSINESS, THE ASSESSEE COMPANY HAS EARNED MISCELLANEOUS INCOME, W HICH COULD NOT BE INCLUDED IN INCOME OF THE BUSINESS OF THE ASSESSEE. THE BANK CHARGES WAS PAID IN PREVIOUS YEAR WHICH WAS REFUNDED TO THE EXT ENT OF RS.99,885/- AS IT WAS REGARDED WRONG ADJUSTMENT BY THE BANK AUTHORITY . ACCORDING TO THE AO SUCH INCOME DOES NOT CONSTITUTE BUSINESS INCOME. T HE INTEREST CHARGES OF RS. 12,952/- WAS RECEIVED ON THE AMOUNT ADVANCED TO THE STAFF OF THE ASSESSE, WHICH ACCORDING TO THE AO HAD NO NEXUS WIT H THE BUSINESS BECAUSE HE ASSESSEE WAS NOT INVOLVED IN THE MONEY LENDING B USINESS. THE AO ALSO HELD THAT THE MISCELLANEOUS INCOME OF RS. 1095/- HA S NO NEXUS WITH THE BUSINESS AND WAS ONLY INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. THEREFORE, THE AO HELD THAT AFORESAID INCOMES WERE NOT ELIGIBL E INCOME FOR DEDUCTION UNDER CHAPTER VI OF THE INCOME TAX ACT. THE AO IN THIS REGARD ALSO DREW SUPPORT FROM THE RATIO OF THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF STARLING FOODS REPORTED IN 237 ITR 579 AND HONBLE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS PVT. LTD. VS. CIT REPORTED IN 262 ITR 278. 28. THE ASSESSEE RAISED GROUND NO.3 BEFORE CIT(A) C HALLENGING THE ACTION OF THE AO EXCLUDING THE AFORESAID INCOME FOR THE PU RPOSE OF ALLOWING DEDUCTION U/S.10-/A, 10B OF THE ACT. THE CIT(A) DID NOT ADJUDICATE ON GROUND NO.3 RAISED BY THE ASSESSEE. THOUGH THE LEA RNED COUNSEL ARGUED THAT THE ISSUE CAN BE DECIDED BECAUSE THE ASSESSEE IS ENTITLED TO DEDUCTION STATUTORILY ON THE INCOMES IN QUESTION, WE ARE OF T HE VIEW THAT IT WOULD BE APPROPRIATE THAT THE CIT(A) SHOULD RENDER HIS DECIS ION ON THE ISSUE. WE THEREFORE DIRECT CIT(A) TO DECIDE GROUND NO.3 RAISE D IN THE APPEAL BY THE ASSESSEE BEFORE CIT(A) I.E., IN, APPEAL NO. CIT(A)X /IT/406/2004-05. 29. GROUND NO.5 & 6 RAISED BY THE ASSESSEE READS AS FOLLOWS: 5. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THAT THE LOSSES OF PUNE ITA NO.2622/MUM/2010(A.Y. 2006-07) 19 UNIT SHOULD NOT BE ALLOWED TO BE SET OFF AGAINST T HE INCOME FROM OTHER SOURCES. 6. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THAT CONSIDERING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 19 61, THE EXPENDITURE RELATING TO THE PUNE UNDERTAKING SHOULD NOT BE ALLO WED AS IT IS EXEMPT UNDER SECTION 10A OF THE ACT. 30. WE HAVE ALREADY SEEN THAT THE ASSESSEE HAD THRE E UNITS, VIZ., MUMBAI UNIT, PUNE UNIT-1 AND PUNE UNIT-2. WE HAVE ALSO SE EN THAT IN RESPECT OF MUMBAI UNIT AND PUNE UNIT-1, THE ASSESSEE CLAIMED D EDUCTION U/S.10-A AND 10-B OF THE ACT, RESPECTIVELY, IN RESPECT OF TH E PROFITS FROM THESE UNITS. THE PUNE UNIT-2 WAS SET UP ONLY DURING THE PREVIOUS YEAR RELEVANT TO AY 01- 02 AS SOFTWARE TECHNOLOGY PARK UNIT (STP UNIT). AD MITTEDLY TILL 31.3.2001 NO ACTIVITIES WERE CARRIED OUT BY THIS UNIT. HOWEVER PUNE UNIT-2 INCURRED A LOSS OF RS.2,33,93,312. THE LOSS IS BECAUSE THERE WERE NO RECEIPTS FROM PUNE UNIT-2 BUT THERE WERE EXPENSES WHICH WERE ADMITTEDL Y PURELY REVENUE IN NATURE. THIS IS CLEAR FROM THE PROFIT AND LOSS ACC OUNT OF PUNE UNIT-2 AT PAGE 32 OF THE PAPER BOOK. THE EXPENDITURE IN QUESTION WERE EMPLOYEES COST, ADMINISTRATION EXPENSES AND DEPRECIATION. THEY WER E TO THE EXTENT OF RS.1,98,44,646. AS PER THE COMPUTATION OF INCOME U NDER THE ACT, THE LOSS WORKED OUT TO RS.2,33,93,312 AND THERE IS NO DISPUT E ON THIS QUANTUM. THE ASSESSEE CLAIMED IN THE RETURN OF INCOME LOSS UNDER THE HEAD BUSINESS AND PROFESSION OF PUNE UNIT-2 AGAINST THE INCOME FROM S UB-LETTING OF ITS OFFICE PREMISES WHICH WAS DECLARED UNDER THE HEAD BUSINESS INCOME. THE QUESTION BEFORE THE AO WAS WHETHER SUCH A SET OFF WAS PERMIS SIBLE. 31. THE AO WAS OF THE VIEW THAT THE LOSS IN QUESTIO N CANNOT BE ALLOWED BECAUSE THE PROFIT FROM PUNE UNIT-2 IS EXEMPT U/S.1 0-A OF THE ACT, THE LOSS IN QUESTION WHICH HAS ARISEN BY REASON OF INCURRING OF REVENUE EXPENDITURE RELATING TO PUNE UNIT-2, WAS AN EXPENDITURE INCURRE D IN EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, AND THEREFORE ITA NO.2622/MUM/2010(A.Y. 2006-07) 20 CANNOT BE ALLOWED AS DEDUCTION IN VIEW OF THE PROVI SIONS OF SEC.14-A OF THE ACT, WHICH PROVIDES THAT ANY EXPENDITURE INCURRED I N EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T, CANNOT BE ALLOWED AS A DEDUCTION WHILE COMPUTING TOTAL INCOME. 32. THE ASSESSEE SUBMITTED BEFORE THE AO AS FOLLOW S: 1. THE PROVISIONS OF SEC.10-A OF THE ACT, AS IT WAS OR IGINALLY INTRODUCED IN THE ACT, EXEMPTED THE ENTIRE PROFITS OF STP UNITS A ND THEY DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HOWEVER TH OSE PROVISIONS WERE AMENDED BY THE FINANCE ACT, 2000, W.E.F. 1-4-2000 A ND THEY BECAME DEDUCTION PROVISIONS. THOUGH THE PROVISIONS OF SEC .10-A OF THE ACT, WERE IN CHAPTER III OF THE ACT, WHICH DEALS WITH INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOME, THEY BECAME DEDUCTI ON PROVISIONS AKIN IN LANGUAGE AND EFFECT TO THE DEDUCTIONS UNDER CHAP TER VI-A OF THE ACT, WHICH DEALS WITH DEDUCTIONS TO BE MADE IN COM PUTING TOTAL INCOME. THE RELEVANT PROVISIONS AS IT EXISTED OR IGINALLY WHEN INTRODUCED PRIOR TO THE FINANCE ACT, 2000 WERE AS F OLLOWS: 10A. SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLI SHED INDUSTRIAL UNDERTAKINGS IN FREE TRADE ZONES.--(1) SUBJECT TO T HE PROVISIONS OF THIS SECTION, ANY PROFITS AND GAINS DERIVED BY A N ASSESSEE FROM AN INDUSTRIAL UNDERTAKING TO WHICH THIS SECTIO N APPLIES SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE AS SESSEE . THE PROVISIONS AS THEY READ AFTER AMENDMENT BY FINA NCE ACT, 2000, WERE AS FOLLOWS: 10A. SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLI SHED UNDERTAKINGS IN FREE TRADE ZONE, ETC. (1) SUBJECT TO THE PROVISIONS OF THIS SECTION, A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIO D OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASS ESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UND ERTAKING BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLES OR T HINGS OR ITA NO.2622/MUM/2010(A.Y. 2006-07) 21 COMPUTER SOFTWARE, AS THE CASE MAY BE, SHALL BE ALL OWED FROM THE TOTAL INCOME OF THE ASSESSEE : IT WAS THUS CONTENDED BY THE ASSESSEE THAT THE SOUR CE OF INCOME U/S.10-A OF THE ACT WAS NO LONGER AN EXEMPT SOURCE AND THEREFORE THE INCOME FROM THE UNIT FIRST ENTERS THE COMPUTATION O F INCOME AND THEREAFTER A DEDUCTION IS AVAILABLE FROM SUCH INCOM E. THE ASSESSEE HIGHLIGHTED THAT IT WAS A CONSCIOUS DECISION OF THE LEGISLATURE TO DEPART FROM THE SCHEME OF TAX HOLIDAY TO A MORE RATIONALIZ ED SCHEME OF RELIEF, AND THUS, THE AMENDMENT IS MORE THAN LITERAL. TH E SCHEME WHICH WAS ORIGINALLY ABSOLUTE EXEMPTION LATER RESTRICTED QUANTUM OF DEDUCTION BY LIMITING IT TO EXPORT PROFITS ONLY. THE ASSESSEE THEREFORE SUBMITTED THAT THE PROVISIONS OF SEC.14-A OF THE AC T, COULD NOT BE APPLIED. 2. THE ASSESSEE ALSO TOOK A STAND THAT THE PROVISIONS OF SEC.14-A OF THE ACT APPLIES ONLY TO EXPENDITURE INCURRED IN EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND NOT TO A BUSINESS LOSS. THE ASSESSEE SUBMITTED THAT U/S.71 OF THE AC T, IT WAS ENTITLED TO SET OFF LOSS OF THE PREVIOUS YEARUNDER THE HEAD BUS INESS AGAINST INCOME FROM OTHER SOURCES. 33. THE AO HOWEVER DID NOT AGREE WITH THE CONTENTIO NS PUT FORTH ON BEHALF OF THE ASSESSEE. HE HELD THAT BECAUSE THE PROVISIO NS OF SEC.10-A OF THE ACT, WERE IN CHAPTER III OF THE ACT WHICH DEALS WITH INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THE INCOME IN QUESTION WAS TO BE CONSIDERED AS INCOME WHICH DOES NOT FORM PART OF TH E TOTAL INCOME UNDER THE ACT. THEREAFTER THE AO HELD THAT THE BUSINESS OF T HE ASSESSEE HAD NOT COMMENCED AND THEREFORE EVEN THOUGH THE EXPENDITURE WHICH HAS RESULTED IN THE LOSS IN QUESTION WAS REVENUE EXPENDITURE THE Y COULD NOT BE ALLOWED AS DEDUCTION AND HAD TO BE CAPITALIZED. THE ASSESSEE IN REPLY SUBMITTED THAT THE EXPENDITURE IN QUESTION WAS INCURRED IN CONNECT ION WITH EXPANSION OF AN ITA NO.2622/MUM/2010(A.Y. 2006-07) 22 EXISTING BUSINESS AND THEREFORE THEY COULD NOT BE C APITALIZED AND IN THIS REGARD RELIED ON THE ORDER OF CIT(A) FOR AY 99-00, WHEREIN IT WAS HELD THAT PUNE UNIT-2 WAS AN EXPANSION OF THE EXISTING BUSINE SS OF THE ASSESSEE. THE AO HOWEVER HELD THAT THE DECISION OF CIT(A) WAS NOT CORRECT BECAUSE U/S.35- D OF THE ACT, WHERE AN ASSESSEE INCURS EXPENDITURE IN CONNECTION WITH EXPANSION/EXTENSION OF AN EXISTING UNIT, THEN DEDUC TION OF SUCH EXPENSES HAD TO BE ALLOWED IN 5 SUCCESSIVE ASSESSMENT YEARS AT 1/5 TH OF SUCH EXPENSES . THEREAFTER THE AO OBSERVED AS FOLLOWS: 9,7 IT IS PERTINENT TO NOTE HERE THAT THE ASSESSE E COMPANY ITSELF HAS ADMITTED THAT NO ACTIVITY FOR PRODUCTION/PROCESSING IS CARRIED OUT IN THE PUNE UNIT II TILL 31 ST MARCH, 2001, THEREFORE, EXPENSES ( CLAIMED TO BE LOSS) INCURRED BY THE ASSESSEE CAN BE SAID THAT IT HAS BEEN INCURRED FOR THE PURPOSE OF SETTING UP NEW UNIT II AT PUNE B Y THE ASSESSEE COMPANY. THEREFORE, THE EXPENSES CAN BE SAID AS P RELIMINARY EXPENSES OR PREOPERATIVE EXPENSES WITHIN THE MEA NING OF SECTION 35D OF THE INCOME TAX ACT. THEREFORE, IT IS IMPOSSIBLE TO HOLD THAT THE EXPENSES DEBITED TO PROFIT & LOSS A/C. OF UNIT II A RE INCURRED DURING THE RUNNING BUSINESS OF THE ASSESSEE COMPANY. 9.8. IN VIEW OF THE ABOVE, THE TOTAL EXPENDITURE C OMPUTED IN RESPECT OF PUNE UNIT-2 AMOUNTING TO RS.2,33,93,312/- IS, THERE FORE, TREATED AS CAPITAL EXPENDITURE AND NOT ELIGIBLE FOR DEDUCTION U/S.37(1) OF THE INCOME TAX ACT, 1961. HOWEVER, THE ASSESSE GETS DE DUCTION U/S.35-D TO THE EXTENT OF 1/5 TH OF ABOVE EXPENDITURE WHICH COMES TO RS.39,68,929/-. 34. ON APPEAL BY THE ASSESSEE, THE CIT(A) HELD AS F OLLOWS: NEXT THREE GROUNDS OF APPEAL RELATES TO LOSSES INC URRED IN RESPECT OF PUNE UNIT INCOME WHEREFROM IS EXEMPT U/S. 10A OF T HE ACT. BRIEFLY THE FACTS ARE, THE APPELLANT COMPANY HAD IN CURRED LOSS IN RESPECT OF PUNE UNIT PROFIT WHEREFROM IS EXEMPT U/S . 10A OF THE ACT. IT WAS OBSERVED BY THE AO THAT ON ONE HAND THE APPE LLANT COMPANY HAD CLAIMED EXEMPTION OF PROFIT IN RESPECT OF MUMBA I UNIT U/S. 10B STATING THE INCOME WAS EXEMPT U/S. 10B IT HAD NOT G IVEN SIMILAR TREATMENT TO LOSS INCURRED IN RESPECT OF PUNE UNITS INCOME WHERE FROM IS EXEMPT U/S. 10A OF THE ACT AND THAT THE LOSS SO INCURRED WAS ADJUSTED AGAINST THE INTEREST INCOME AGAINST THE BU SINESS INCOME EARNED FROM THE MUMBAI UNIT. THUS ACCORDING TO THE AO THE APPELLANT ITA NO.2622/MUM/2010(A.Y. 2006-07) 23 COMPANY HAD CONTRADICTED ITS OWN STANDS WHEN IT CAM E TO PROFIT OF MUMBAI UNIT AND LOSS FROM PUNE UNIT. FURTHER THE A O HAS ALSO TREATED SUCH EXPENSES IN RESPECT OF PUNE UNIT AS CA PITAL EXPENSES THEREBY NOT ALLOWING SUCH LOSS AS BUSINESS LOSS. A GGRIEVED BY SUCH ACTION OF THE AO THE APPELLANT IS IN APPEAL BEFORE ME. THIS ISSUE WAS ALSO AN ISSUE BEFORE MY PREDECESSOR FOR THE A.Y 1999- 2000 AND FOR THE REASONS RECORDED THEREIN IT WAS HE LD THAT THOUGH THE APPELLANTS CLAIM FOR REVENUE LOSS WAS ACCEPTABLE L OSS FROM SUCH UNIT WAS NOT ELIGIBLE FOR SET OFF AGAINST THE INTEREST A ND OTHER INCOME AND APPLYING THE PROVISIONS OF SECTION 14A MY PREDECES SOR HAD REJECTED THE APPELLANTS CLAIM OF SUCH LOSSES. AS THE FACTS OF THE CASE AND ISSUE REMAINING THE SAME RESPECTFULLY FOLLOWING THE DECISION OF MY PREDECESSOR THESE GROUNDS OF APPEAL ARE REJECTED. 35. BEFORE US IT IS NOT IN DISPUTE THAT IN AY 2000- 01 ON AN IDENTICAL ISSUE, THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.794/ MUM/06 IN ITS ORDER DATED 26/8/09 HELD AS FOLLOWS: 11. GROUND S OF APPEAL NO.3 & 4 BY THE ASSESSEE READ AS UNDER:- 5. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THAT THE LOSSES OF PUNE UNIT AMOUNTING TO RS.3,98,35,579/- SHOULD NOT BE AL LOWED TO BE SET OFF AGAINST THE INCOME FROM OTHER SOURCES. 6. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THAT CONSIDERING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 19 61, THE EXPENDITURE RELATING TO THE PUNE UNDERTAKING SHOULD NOT BE ALLO WED AS IT IS EXEMPT UNDER SECTION 10A OF THE ACT. 12. FACTS OF THE CASE, IN BRIEF , ARE THAT THE ASS ESSEE COMPANY HAD INCURRED LOSS IN RESPECT OF PUNE UNIT THE PROFIT WH EREFROM IS EXEMPT U/S, 10A OF THE ACT. IT WAS OBSERVED BY THE ASSESS ING OFFICER THAT ON ONE HAND THE ASSESSEE COMPANY HAD CLAIMED EXEMPTION OF PROFIT IN RESPECT OF MUMBAI UNIT U/S. 10B STATING THAT THE I NCOME WAS EXEMPT U/S. 10B IT HAD NOT GIVEN SIMILAR TREATMENT TO LOSS INCURRED IN RESPECT OF PUNE UNIT INCOME WHERE PROFIT IS EXEMPT U/S. 10A OF THE ACT AND THAT THE LOSS SO INCURRED WAS ADJUSTED AGAINST THE INTEREST INCOME AS AGAINST THE BUSINESS INCOME EARNED FROM THE MUMBAI UNIT. THUS ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE CO MPANY HAD CONTRADICTED ITS OWN STAND WHEN IT CAME TO PROFIT O F MUMBAI UNIT AND ITA NO.2622/MUM/2010(A.Y. 2006-07) 24 LOSS FROM PUNE UNIT. FURTHER THE ASSESSING OFFICE R ALSO TREATED SUCH EXPENSES IN RESPECT OF PUNE UNIT AS CAPITAL EXPENSE S THEREBY NOT ALLOWING SUCH LOSS AS BUSINESS LOSS. 13. IN APPEAL, THE CIT(A) FOLLOWING THE ORDER FOR A.Y 1999-2000 CONFIRMED THE ACTION OF THE ASSESSING OFFICER. AGG RIEVED WITH SUCH ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFO RE US. 14. AFTER HEARING BOTH THE SIDES, WE FIND SIMILAR ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y 1999-2000. WE FIND THE TRIBUNAL VIDE ITA NO.1833/M/03 ORDER DATED 25 TH AUGUST, 2006 AT PARA 5 TO 7 OF THE ORDER HAS HELD AS UNDER: - 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. WE FIND THA T THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE CASE OF NAVIN BHARAT INDUSTRIES LTD. VS. DCI T REPORTED IN 90 ITD 1. IN THIS CASE, THE BRIEFLY STATED FACTS WERE THAT THE ASSESSEE COMPANY ESTABLISHED AN UNDERTAKING AT AN E XPORT PROCESSING ZONE WHICH WAS A FREE TRADE ZONE WITHIN THE MEANING OF SECTION 10A. THE ASSESSEE CLAIMED THE BENEFIT O F SECTION 10A FOR THE FIRST THREE ASSESSMENT YEARS I.E. 1987-88, 1988-89 AND 1989-90. THAT BENEFIT WAS AVAILABLE FOR A PERIOD O F FIVE YEARS. IN THE ASSESSMENT YEAR 1990-91, THE ASSESSEE INCURRED A LOSS IN RESPECT OF THE SAID UNDERTAKING. THE LOSS WAS ADJU STED AGAINST PROFITS OF SOME OTHER UNITS. THE ASSESSING OFFICE R DISALLOWED THE ADJUSTMENT OF LOSS AND HELD THAT, AS PROFITS OF SEEPZ UNITS WERE NOT TAXABLE, LOSS COULD NOT BE ALLOWED. ON AP PEAL THE CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICE R. HOWEVER, ON SECOND APPEAL, WHILE THE ACCOUNTANT MEMBER OPINE D THAT THE ASSESSEES CLAIM WAS ADMISSIBLE THE JUDICIAL MEMBER OPINED THAT IT WAS NOT ADMISSIBLE. THE MATTER WAS REFERR ED TO THE THIRD MEMBER ON REFERENCE UNDER SECTION255(4) WHO HELD A S UNDER: SPENDING IN THE SENSE OF PAYING OUT OR AWAY OF MONE Y IS THE PRIMARY MEANING OF EXPENDITURE. EXPENDITURE IS W HAT IS PAID OUT OR AWAY AND IS SOMETHING, WHICH IS GONE IRRETRI EVABLY. EXPENDITURE RELATES TO A DISBURSEMENT THAT MEANS SO METHING THAT A TRADER PAID OUT INDICATING A SORT OF VIOLATI ON ON HIS PART. HE CHOOSES TO PAY OUT SOME DISBURSEMENT IT IS AN EX PENSE, IT IS SOMETHING, WHICH COMES OUT OF HIS POCKET. A LOSS IS SOMETHING DIFFERENCE. THAT IS NOT A THING, WHICH HE EXPENDS OR DISBURSES. THAT IS A THING, WHICH COMES UPON HIM AS EXTRA BUSI NESS EXPENDITURE IS ALLOWABLE IF IT IS LAID OUT OR EXPEN DED WHOLLY AND ITA NO.2622/MUM/2010(A.Y. 2006-07) 25 EXCLUSIVELY FOR THE ASSESSEES BUSINESS, WHILE A BU SINESS LOSS IS ALLOWABLE IF IT IS OF NON-CAPITAL NATURE AND IS NOT ONLY CONNECTED WITH THE TRADE, BUT INCIDENTAL TO THE TRADE ITSELF. IN ASSESSING THE AMOUNT OF PROFIT AND GAINS OF A YEAR ACCOUNT MU ST NECESSARILY BE TAKEN OF ALL LOSSES INCURRED BESIDES THE EXPENDITURE ALLOWABLE UNDER SECTIONS 30 TO 40D. TH EREFORE, LOSS CANNOT BE CONSTRUED TO BE EXPENDITURE . SECTION 14 A IS APPLICABLE QUA THE EXPENDITURE AND NOT QUA THE LOS S. IN THE INSTANT CASE, THE BENEFIT OF SECTION 10A WAS AVAILABLE TO THE ASSESSEE FOR FIVE YEARS. THE ASSESSEE CLAIMED BENEFIT FOR THREE YEARS. FOR THE REST OF THE YEARS, THE ASSES SEE DID NOT CLAIM THE BENEFIT OF SECTION 10A. THE ASSESSEE OPT ED TO GET THE PROFITS OF NEW INDUSTRIAL UNDERTAKING ASSESSED UNDE R THE NORMAL PROVISIONS . THERE IS NO PROVISION IN THE ACT BY W HICH THE ASSESSEE CAN BE FORCED TO AVAIL THE BENEFIT FOR FIV E YEARS. IF THE ASSESSEE WANT TO PUT THE INCOME UNDER THE NORMAL CO MPUTATION PROCEDURE, THERE APPEARS TO BE NO BAR FOR DOING SO. IF THE BENEFIT IS CONFERRED ON THE ASSESSEE, HE CANNOT BE FORCED TO AVAIL THE SAME. SECTION 10A, IS A CODE BY ITSELF. IT CONTAINS THE SCHEME OF TAXATION FORMULATED BY THE GOVERNMENT FOR TAXABILIT Y OF UNITS SET UP IN THE EXPORT PROCESSING ZONE. AS SUCH, IT CAN NOT BE COMPARED WITH SECTION 10. COMING TO THE APPLICABIL ITY OF SECTION 10A(4)(II), IT PUT INTERDICT QUA SECTION 72 AND 74 . IT DOES NOT PRECLUDE THE OPERATION OF SECTION 70AND 71. SECTIO N 14A IS APPLICABLE IN RESPECT OF EXPENDITURE. LOSS IS DIF FERENT FROM EXPENDITURE. AS SUCH THE ASSESSEE WAS ENTITLED TO SETTING OFF OF THE LOSS INCURRED BY THE SEEPZUNIT. WHILE DOING SO VARIOUS CASE LAWS OF VARIOUS HIGH CO URTS WERE CONSIDERED BY THE THIRD MEMBER AND THEN ALLOWED TH E APPEAL OF THE ASSESSEE. 6. THE FACTS IN THE PRESENT CASE ARE ALSO SIMILAR AND IN THIS CASE ALSO NO DEDUCTION U/S. 10A WAS CLAIMED BY THE ASSES SEE FOR THE YEAR UNDER CONSIDERATION AND THE LOSS WERE ADJUSTE D AGAINST THE OTHER UNIT OF THE SAME BUSINESS. AS STATED ABOVE, THE ASSESSING OFFICER AND CIT(A) DISALLOWED THE CLAIM OF THE SSES SEE AND NOW THE ASSESSEE IS NO APPEAL HERE BEFORE THE TRIBUNAL. 7. THERE IS NO DISPUTE THAT THE EXPENDITURE INCURRE D BY THE ASSESSEE ARE REVENUE IN NATURE AS THEY ARE INCURRED ON RENT, ITA NO.2622/MUM/2010(A.Y. 2006-07) 26 ELECTRICITY CHARGES, BROKERAGE, SECURITY EXPENSES, ETC. THE EXPENSES TOWARDS BROKERAGE, RENT, ELECTRICITY ETC. CANNOT BE SAID THAT THEY ARE IN THE CHARACTER OF CAPITAL IN NATURE . THE OBSERVATION OF THE CIT(A) THAT IN FUTURE YEAR THE A SSESEE HAS TO CLAIM EXEMPTION U/S. 10A AND THEREAFTER HE DISALLOW ED THE CLAIM OF THE ASSESSEE FOR SET OFF OF THE LOSS AGAINST THE INCOME OF OTHER UNIT BY OBSERVING THAT SINCE THE INCOME IS EXEMPT U /S. 10A, THEREFORE, THE PROVISIONS OF SECTION 14A ARE APPLIC ABLE. IN OUR CONSIDERED VIEW, THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE. BECAUSE THE ASSESSEE HAS NOT CLAIMED ANY EXEMPTION U/S. 10A FOR THE YEAR UNDER CONSIDERATION . THEREFORE, IN VIEW OF THE ABOVE FACTS AND THE CIRCUMSTANCES AN D IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF NAVIN B HARAT INDUSTRIES LTD. (SUPRA), WE DIRECT THE ASSESSING OF FICER TO ALLOW THE CLAIM OF SET OFF OF THE ASESSEE. WE ORDER ACCO RDINGLY. 15. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE THESE GROUNDS RAISED BY THE ASSESSEE ARE A LLOWED. 36. SIMILAR DECISIONS WERE RENDERED BY THE ITAT IN HONEYWELL INTERNATIONAL (INDIA) PVT. LTD. VS. DCIT 108 TTJ (DEL) 924 AND SO VIKA INFOTEK LTD. VS. ITO (2008) 23 SOT 271 (MUM). RESPECTFULLY FOLLOWING T HE DECISIONS REFERRED TO ABOVE, WE DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE. GROUND NO.5 AND 6 RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED . 37. GROUND NO.7 & 8 RAISED BY THE ASSESSEE READS AS FOLLOWS: 7. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS LEGALLY ERRED IN NOT ALLOWING S ETOFF OF LOSSES OF EARLIER YEARS AGAINST THE INCOME OF THE APPELLANT. 8, WITHOUT PREJUDICE TO GROUND 5, 6 AND 7, THE LE ARNED CIT(A) HAS ERRED IN NOT PASSING A SPEAKING ORDER WHILST DISPOS ING OF THESE GROUNDS OF APPEAL.(I.E. GROUND NO.5,6 &7) 38. THE ASSESSEE COMPANY HAS CLAIMED CARRY FORWARD OF UNABSORBED LOSSES AND DEPRECIATION IN THE RETURN OF INCOME AS FOLLOWS : ITA NO.2622/MUM/2010(A.Y. 2006-07) 27 PARTICULARS A.Y 1997- 98 A.Y 1998-99 AY 1999- 00 AY 2000- 01 AY 2001- 02 TOTAL BUSINESS LOSS 21,686,727 NA 12,863,531 22,566,956 7,938,360 65,055,574 DEPRECIATION 4,828,721 NA NA 18,451,289 4,057,380 27,337,390 26,515,448 12,863,531 41,018,245 11,995,740 92,392,964 THE AO DISALLOWED THE CLAIM OF THE ASSESSEE BY MAKI NG A REFERENCE TO CLAUSE (II) OF SUB-SECTION (6) OF SEC.10-A OF THE ACT. 39. BEFORE CIT(A) THE ASSESSEE POINTED OUT THAT THE PROVISIONS OF SEC.10- A(6) OF THE ACT ARE APPLICABLE ONLY FOR COMPUTING T HE INCOME FOR THE PREVIOUS YEAR SUBSEQUENT TO THE RELEVANT ASSESSMENT YEARS I. E., AFTER THE END OF THE TEN YEAR HOLIDAY PERIOD. THE QUESTION OF APPLICABI LITY OF THOSE PROVISIONS DURING THE AY 01-02, IT WAS SUBMITTED, DOES NOT ARI SE FOR CONSIDERATION AT ALL. THE CIT(A) DID NOT ACCEPT THE PLEA OF THE ASS ESSEE AND HE CONFIRMED THE ORDER OF THE AO. HENCE, GROUND NO.7 & 8 BY THE ASS ESSEE BEFORE THE TRIBUNAL. 40. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE RELEV ANT PROVISIONS OF SEC.10-A(6)(II) READS AS FOLLOWS: (6) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHE R PROVISION OF THIS ACT, IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE LAST OF THE RELEVANT ASSESSMENT YEARS, OR OF ANY PREVIOUS Y EAR, RELEVANT TO ANY SUBSEQUENT ASSESSMENT YEAR, (I) SECTION 32, SECTION 32A, SECTION 33, SECTION 35 AND CLAUSE (IX) OF SUB-SECTION (1) OF SECTION 36 SHALL APPLY AS IF EVE RY ALLOWANCE OR DEDUCTION REFERRED TO THEREIN AND RELATING TO OR AL LOWABLE FOR ANY OF THE RELEVANT ASSESSMENT YEARS, IN RELATION TO ANY BUILD ING, MACHINERY, PLANT OR FURNITURE USED FOR THE PURPOSES OF THE BUS INESS OF THE UNDERTAKING IN THE PREVIOUS YEAR RELEVANT TO SUCH A SSESSMENT YEAR OR ANY EXPENDITURE INCURRED FOR THE PURPOSES OF SUCH B USINESS IN SUCH PREVIOUS YEAR HAD BEEN GIVEN FULL EFFECT TO FOR THA T ASSESSMENT YEAR ITA NO.2622/MUM/2010(A.Y. 2006-07) 28 ITSELF AND ACCORDINGLY SUB-SECTION (2) OF SECTION 3 2, CLAUSE (II) OF SUB- SECTION (3) OF SECTION 32A, CLAUSE (II) OF SUB-SECT ION (2) OF SECTION 33, SUB-SECTION (4) OF SECTION 35 OR THE SECOND PROVISO TO CLAUSE (IX) OF SUB- SECTION (1) OF SECTION 36, AS THE CASE MAY BE, SHAL L NOT APPLY IN RELATION TO ANY SUCH ALLOWANCE OR DEDUCTION ; (II) NO LOSS REFERRED TO IN SUB-SECTION (1) OF SECT ION 72 OR SUB-SECTION (1) OR SUB-SECTION (3) OF SECTION 74 IN SO FAR AS SUCH LOSS RELATES TO THE BUSINESS OF THE UNDERTAKING, SHALL BE CARRIED FORWA RD OR SET OFF WHERE SUCH LOSS RELATES TO ANY OF THE RELEVANT ASSESSMENT YEARS ; EXPLN.-2 (VI) TO SEC.10-A OF THE ACT DEFINES RELEV ANT ASSESSMENT YEAR FOR THE PURPOSE OF SEC.10-A OF THE ACT AS FOLLOWS: (VI) RELEVANT ASSESSMENT YEAR MEANS ANY ASSESSM ENT YEAR FALLING WITHIN A PERIOD OF TEN CONSECUTIVE ASSESSME NT YEARS REFERRED TO IN THIS SECTION ; 41. IT IS CLEAR FROM THE AFORESAID PROVISIONS THAT THEY APPLY DURING THE ASSESSMENT YEARS AFTER THE END OF THE HOLIDAY PERIO D. ADMITTEDLY THE PRESENT AY RELATES TO THE HOLIDAY PERIOD AND THEREFORE THE ABOVE PROVISIONS ARE NOT APPLICABLE. IN THE CASE OF ENERCON WIND FARMS (KRI SHNA) LTD. VS. ACIT (2008) 21 SOT 29 (MUM) THIS TRIBUNAL HAS TAKEN THE VIEW THAT PROVISIONS OF SEC.10-B(6)(II) ARE APPLICABLE ONLY AFTER THE TAX H OLIDAY PERIOD IS OVER. THE TRIBUNAL HELD THAT IF AFTER ALLOWING DEDUCTION U/S. 10-B OF THE ACT, THERE WAS CERTAIN INCOME STILL LEFT WITH THE ASSESSEE, THE SA ME WILL BE TOTAL INCOME OF THE ASSESSEE TO WHICH ALL OTHER SECTIONS OF THE ACT , INCLUDING SEC.72 WOULD APPLY AND CARRIED FORWARD LOSSES COULD DEFINITELY B E SET OFF AGAINST SUCH TOTAL INCOME. SIMILAR VIEW WAS EXPRESSED BY THE ITAT BAN GALORE BENCH IN THE CASE OF MINDTREE CONSULTING (P) LTD. VS. ACIT 102 T TJ (BANG) 691. RESPECTFULLY FOLLOWING THE DECISIONS REFERRED TO AB OVE, WE DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE. GROUND NO.7 IS AL LOWED. GROUND NO.8 BEING GENERAL IN NATURE DOES NOT CALL FOR ANY SPECIFIC AD JUDICATION. 42. GROUND NO.9 RAISED BY THE ASSESSEE READS AS FOL LOWS: ITA NO.2622/MUM/2010(A.Y. 2006-07) 29 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) HAS LEGALLY ERRED IN NOT ALLOWING TH E SECOND INSTALLMENT UNDER SECTION 35D OF THE ACT RELATING TO ASSESSMEN T YEAR 2001-02 OF RS.79,67,151/-. 43. ON THIS GROUND OF APPEAL OF THE ASSESSEE, THE C IT(A) HAS DIRECTED THE AO TO CONSIDER THE GRIEVANCE OF THE ASSESSEE AS PRO JECTED IN ITS APPLICATION U/S.154 OF THE ACT. IT IS THE GRIEVANCE OF THE ASS ESSEE THAT IN AY 2000-01, DEDUCTION U/S.35-D OF THE ACT HAD BEEN ALLOWED FOR FIVE CONSECUTIVE A.Y.S FROM AY 00-01 AND IN THIS YEAR THE SECOND INSTALLME NT OF DEDUCTION OUGHT TO HAVE BEEN ALLOWED. WE ARE OF THE VIEW THAT IT WOUL D BE APPROPRIATE TO DIRECT THE AO TO CONSIDER THE CLAIM OF THE ASSESSEE IN THI S REGARD IN ACCORDANCE WITH LAW AFTER AFFORDING ASSESSEE OPPORTUNITY OF BE ING HEARD. GROUND NO.9 IS ACCORDINGLY ALLOWED. 44. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. ITA NO.796/MUM/06: (AY 2002-03): 45. THE GROUNDS OF APPEAL OF THE ASSESSEE READ AS F OLLOWS: 1. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) [CIT(A )] HAS LEGALLY ERRED IN CONFIRMING THAT THE INCOME FROM SUBLETTING OF PREMISES, FURNITURE, COMPUTERS ETC. IS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. 2. WITHOUT PREJUDICE TO GROUND NO.1, BASED ON THE F ACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CI T(A) HAS LEGALLY ERRED IN NOT ALLOWING DEDUCTION OF DEPRECIATION ON COMPUTERS WHILST COMPUTING THE INCOME FROM SUBLETTING ACTIVITY. 3. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THAT LIABILITY NO LONGER REQUIRED WRITTEN BACK AMOUNTING TO RS. 3,75,168/- I S NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10A/10B OF THE ACT. ITA NO.2622/MUM/2010(A.Y. 2006-07) 30 4. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN NOT ADJUDICATING ON TH E GROUND THAT MISCELLANEOUS INCOME OF RS. 95,758/- IS DERIVED FRO M THE EXPORT UNDERTAKING. 5. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THAT THE LOSSES OF PUNE UNIT SHOULD NOT BE ALLOWED TO BE SET OFF AGAINST T HE INCOME FROM OTHER SOURCES. 6. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THAT CONSIDERING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 19 61, THE EXPENDITURE RELATING TO THE PUNE UNDERTAKING SHOULD NOT BE ALLO WED AS IT IS EXEMPT UNDER SECTION 10A OF THE ACT. 7. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS LEGALLY ERRED IN NOT ALLOWING S ETOFF OF LOSSES OF EARLIER YEARS AGAINST THE INCOME OF THE APPELLANT. 8. WITHOUT PREJUDICE TO GROUND 5, 6 AND 7, THE LE ARNED CIT(A) HAS ERRED IN NOT PASSING A SPEAKING ORDER WHILST DISPOS ING OF THESE GROUNDS OF APPEAL.(I.E. GROUND NO.5,6 &7) 46. THESE GROUNDS ARE IDENTICAL TO THE GROUNDS ALRE ADY DECIDED IN ITA NO.795/MUM/06. FOR THE REASONS STATED THEREIN, GRO UNDS NO.1 TO 7 ARE ALLOWED, WHILE GROUND NO.8 DOES NOT CALL FOR ANY AD JUDICATION. 47. IN THE RESULT, ITA NO.796/MUM/06 IS ALLOWED. ITA NO.3828/MUM/07 AND ITA NO.3791/M/07: 48. ITA NO.3838/MUM/07 IS AN APPEAL BY THE REVENUE WHILE ITA NO.3791/MUM/07 IS AN APPEAL BY THE ASSESSEE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 14/3/2007 OF CIT(A )-X, MUMBAI RELATING TO AY 03-04. ITA NO.2622/MUM/2010(A.Y. 2006-07) 31 ITA NO.3828/MUM/10 : (REVENUES APPEAL): 49. THE GROUND OF APPEAL OF THE REVENUE READS AS FO LLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING THE SET OFF OF LOSS FROM PUNE UNIT II AND MUMBAI UNIT II AGAINST THE OTHER TAXABL E INCOME EARNED BY THE ASSESSEE IGNORING THE FACT THAT HIS PREDECESSOR HAS UPHELD THE DECISION OF THE ASSESSING OFFICER FOR A.Y 1999-2000 ON SIMILAR ISSUE. 50. THE ISSUE RAISED IN THE AFORESAID GROUND IS SIM ILAR TO GROUND NO.5 AND 6 IN ITA NO.795 & 796/MUM/06 FOR AY 01-02 AND 02-03 . FOR THE REASONS STATED THEREIN THE ORDER OF CIT(A) IS UPHELD. IN T HE RESULT, THE APPEAL BY THE REVENUE IS DISMISSED. ITA NO.3791/MUM/07: (ASSESSEES APPEAL): 51. THE GROUNDS OF APPEAL OF THE ASSESSEE READS AS FOLLOWS: 1. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS LE GALLY ERRED IN CONFIRMING THAT MISCELLANEOUS BUSINESS INCOME AMOUN TING TO RS.13,236/- FROM MUMBAI UNIT I, RS,115,311 FROM PUN E UNIT I AND RS. 14,774/- FROM PUNE UNIT II IS NOT ELIGIBLE FOR EXEM PTION UNDER SECTION 10A OF THE INCOME TAX ACT, 1961. 2. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE LAW THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN NOT ALLOWING THE SET OFF OF UN ABSORBED DEPRECIATION OF EARLIER YEARS AGAINST THE INCOME OF THE APPELLAN T. 52. THE AO TREATED THE ABOVE MISCELLANEOUS INCOME A S NOT ELIGIBLE FOR DEDUCTION U/S.10-A OF THE ACT. ACCORDING TO THE AS SESSEE SUB SECTION (1) OF SECTION 10A OF THE ACT READS AS UNDER: SUBJECT TO THE PROVISIONS OF THIS SECTION, A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MA NUFACTURE OR ITA NO.2622/MUM/2010(A.Y. 2006-07) 32 PRODUCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWAR E, AS THE CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE A SSESSEE : ACCORDING TO THE ASSESSEE, SUB SECTION (1) CLEARLY PROVIDES THAT AN ASSESSEE WILL BE ALLOWED DEDUCTION FOR SUCH PROFITS AS ARE D ERIVED FROM UNDERTAKING FROM EXPORT OF SOFTWARE. SECTION 10A(4) CLARIFIES THAT FOR THE PURPOSE OF SECTION (1) OF THE PROFITS DERIVED FROM EXPORT OF A RTICLES OR THINGS SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS T HE SAME PROPORTION AS THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE. THE ASSESSEE POINTED OUT THAT IT WAS ENGAGED IN EXPORT OF SERVICES THROUGH ITS UNIT IN MUMBAI AND PUNE. ACCO RDINGLY THE ENTIRE MISCELLANEOUS BUSINESS INCOME IS ON ACCOUNT OF EXPO RT OF SUCH SERVICES I.E. THE ASSESSEES BUSINESS AND HENCE QUALIFIES FOR DED UCTION U/S. 10A AS THESE ARE THE PROFITS OF THE BUSINESS OF THE ASSESSEE COM PANY. 53. AS ALREADY STATED THE AO DID NOT ACCEPT THE PL EA OF THE ASSESSEE FOR THE REASON THAT IN THE ASSESSMENT YEAR FOR A.Y 2002-03 THE THEN ASSESSING OFFICER HAD ALSO HELD THAT THE MISCELLANEOUS BUSINE SS INCOME DOES NOT CONSTITUTE BUSINESS INCOME SINCE THE ASSESSEE COMPA NY HAS NOT DERIVED SUCH INCOME BY CARRYING OUT REGULAR BUSINESS ACTIVI TIES AND ACCORDINGLY TREATED THE SAID INCOME AS NOT ELIGIBLE FOR DEDUCT ION U/S. 10A OF THE ACT. THE AO THEREFORE TREATED THE MISCELLANEOUS BUSINESS INCOME OF RS.1,43,321/- AS NOT QUALIFY FOR DEDUCTION U/S. 10A OF THE ACT. ACCORDINGLY THE SAME WAS TREATED AS INCOME FROM OTHER SOURCES. 54. THE CIT(A) CONFIRMED THE ORDER OF THE AO. WE H AVE WHILE DECIDING THE APPEAL OF THE ASSESSEE FOR AY 01-02 ALREADY ALLOWED SIMILAR GROUND OF APPEAL OF THE ASSESSEE. FOR THE REASONS STATED THEREIN, T HE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO.2622/MUM/2010(A.Y. 2006-07) 33 55. IN THE RESULT, APPEAL BY THE ASSESSEE IS ALLOWE D. 56. IN THE RESULT, ITA NO.795 & 796/MUM/06 ARE ALLO WED. ITA NO. 3828/MUM/07 IS DISMISSED. ITA NO.3791/MUM/07 IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 18 TH DAY OF MARCH, 2011. SD/- SD/- (P.M.JAGTAP) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 18 TH MARCH.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RG BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.2622/MUM/2010(A.Y. 2006-07) 34 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 11/3/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 14/3/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT C OMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER