M/S SUBEX LTD V. THE ADDITIONAL COMMISSIONER OF INCOME TAX

ITA/394/2016

AI Insights

This case involves an appeal by M/s Subex Ltd. against the order of the Income Tax Appellate Tribunal (ITAT), Bengaluru, which denied certain deductions under the Income Tax Act, 1961 for the assessment year 2009-2010. The main issues revolved around the inclusion of share premium and the cost of acquisition of companies as part of 'Capital Employed' for deductions under Section 35D, and the exclusion of telecommunication expenses from export turnover in computing deductions under Section 10AA. The High Court of Karnataka, after considering the substantial questions of law, upheld the ITAT's decision on most counts but reversed the exclusion of telecommunication expenses from export turnover.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 695849 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 01-10-2021
• Assessment Year: misc
• Other Referred Cases: Berger Paints India Ltd. V/s. Commissioner of Income-tax, Delhi-V, Commissioner of Income-tax V/s. Ashok Leyland Ltd., Coffeeday Global Ltd., M/s. Mindtree Ltd. V/s. The Asst. Commissioner of Income Tax
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: JEEVAN NEERALGI; T N C SRIDHAR
• Assessee Lawyers: CHYTHANYA
• Keywords: Capital Employed; Deduction; Export Turnover; Income tax appeal; Share premium; Telecommunication Expense
• Section: 10AA; 35D; 260-A

Judgement Text

" IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 1ST DAY OF OCTOBER, 2021 PRESENT THE HON’BLE MRS.JUSTICE S.SUJATHA AND THE HON’BLE MR. JUSTICE RAVI V. HOSMANI I.T.A.No.394/2016 BETWEEN : M/s SUBEX LTD., RMZ ECOWORLD DEVARABISANAHALLI, OUTER RING ROAD, BENGALURU-560 037 REP BY ITS MANAGING DIRECTOR, SRI SURJEET SINGH, S/O SRI THAKUR SINGH AGED ABOUT 47 YEARS ...APPELLANT (BY SRI CHYTHANYA K.K., ADV.) AND : THE ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE 12, BMTC BUILDING, 80 FEET ROAD, 6TH BLOCK, KORAMANGALA, BENGALURU-560 095 …RESPONDENT (BY SRI JEEVAN J. NEERALGI, ADV. A/W SRI T.N.C.SRIDHAR, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 16.03.2016 PASSED IN ITA NO.223/BANG/2014, FOR THE ASSESSMENT YEAR 2009-2010 ANNEXURE-A PRAYING TO - 2 - 1. FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET-ASIDE THE IMPUGNED ORDER OF THE ITAT, BENGALURU 'B' BENCH IN ITA NO.223/BANG/2014, DATED 16.03.2016 FOR THE ASSESSMENT YEAR 2009-2010 ANNEXURE-A. THIS APPEAL HAVING BEEN HEARD AND RESERVED, COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING: J U D G M E N T This appeal arising against the order of the Income Tax Appellate Tribunal [ITAT] “B” Bench, Bengaluru dated 16.03.2016 passed in ITA No.223/Bang/2014 relating to the assessment year 2009-10. 2. This appeal was admitted to consider the following substantial questions of law: “1. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in holding that the share premium collected on the issue of Share Capital by the appellant cannot be taken as part of the ‘Capital Employed’ for allowing deduction under Section 35D of the IT Act? 2. Whether, in the facts and in the circumstances of the case, the Tribunal is - 3 - right in law in holding that the cost of acquisition of companies cannot be treated as asset for allowing deduction under Section 35D of the IT Act? 3. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in impliedly holding that the deduction under Section 35D be disturbed in the subsequent years? 4. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in impliedly holding that telecommunication expense re to be excluded from export turnover in computing deuction under Section 10AA?” Re. substantial question of law No.1: 3. The points raised herein are squarely covered by the judgment of the Hon'ble Apex Court in Berger Paints India Ltd., V/s. Commissioner of Income-tax, Delhi-V, [(2017) 79 taxmann.com 450 (SC)]. Hence, this substantial question of law is - 4 - answered against the assessee and in favour of the Revenue. Re. substantial question of law No.2: 4. This issue is squarely covered by the decision of this Court in the assessee’s own case in ITA No.378/2015 wherein this substantial question of law is answered against the assessee and in favour of the Revenue. The relevant paragraphs of which reads thus: “21. In the case of Commissioner of Income-tax V/s. Ashok Leyland Ltd., [and vice versa] [(2012) 349 ITR 663], Hon’ble Madras High Court has considered the meaning of the phrase “being” and declared that the expenditure that qualified for consideration under Section 35D is restricted by reason of use of phrase “being”. Thus, expenditure incurred in connection with issue of shares and debentures of the company to public subscription, whether qualify for consideration under Section 35D, it has been held that the rates of expenditure which would go for amortization under Section 35D, - 5 - particularly with reference to clause[c] specifically mentioned therein and nothing beyond, rejecting the reliance placed on the decision of the Hon’ble High Court of Madhya Pradesh in the case of Shree Synthetics Ltd., supra. 22. In Coffeeday Global Ltd., supra, the Co-ordinate Bench of this Court has considered the meaning of the word “expansion” and “extension” and it has been held that these words connote different meaning and legislature in its wisdom has used the terms differently under various provisions of the Act itself and therefore, the words cannot be used synonymously. With great respect, we are unable to concur with the judgment of the Hon’ble High Court of Madhya Pradesh inasmuch as the interpretation given to the phrase “being” in Explanation [a][ii] to Section 35D[3] of the Act. In our considered opinion, the word “being” gets colour from the associated words. Preceding word “fixed assets” indicated as land, buildings, leaseholds, plant machinery relates to the - 6 - nature of assets mentioned therein and the same is exhaustive. Acquisition of companies by acquiring 100% subsidiary shares would not be construed as acquisition of fixed assets that were acquired or developed in connection with the extension of industrial undertaking or setting up of new industrial unit of the assessee We concur with the ruling of the Hon’ble High Court of Madras in Ashok Leyland Ltd., supra. 23. The assessee itself stated before the revisional authority under 263 proceedings with regard to computation of cost of project it had incurred, that expenditure towards issue of Global Depository Receipt and Foreign Currency Convertible Bonds was related to extension of industrial undertaking of the assessee; there being no definition of the word “extension” under the Act, the word “expansion” has to be considered as “extension”. Thus, going by meaning assigned to the word “extension”, quite apart from the horizontal expansion in the industrial undertaking, vertical expansion also stands - 7 - included within the meaning of the term “extension” of the industrial undertaking. It was further stated that the assessee has incurred expenditure for the purpose of acquisition of Subex Americas Inc., and Subex UK Limited and the same was incurred for the purpose of expansion of the business. As aforementioned, there being vast difference between “expansion” and “extension”, the arguments of the learned counsel for the assessee, placing reliance on the consolidation procedures as per the Accounting Standard [AS-21], cannot be countenanced.” Hence, the substantial question of law No.2 is answered against the assessee and in favour of the Revenue. Re. Substantial question of law No.3: 5. It is not in dispute that Section 35D has been disturbed in the subsequent years in a manner known to law. Hence, this question is answered in favour of the Revenue and against the assessee. - 8 - Re. Substantial question of law No.4: 6. This question is covered by the ruling of Co- ordinate Bench of this Court in the case of M/s. Mindtree Ltd., V/s. The Asst. Commissioner of Income Tax [ITA No.89/2013, D.D. 25.08.2020], wherein it is observed thus: 9. Thus, the Commissioner of Income Tax (Appeals) has recorded a categorical finding that assessee is engaged in the development of computer software, which is exported outside India. The aforesaid finding has not been set aside by the Tribunal. Therefore, in view of Explanation 2(iii) to Section 10B of the Act, the expression ‘export turnover’ does not include any expenses incurred in foreign exchange in providing technical services outside India. The assessee has incurred expenditure of Rs.198,17,58,814/- in foreign currency from export turnover for software development. Similarly, the telecommunication charges attributable to delivery of computer - 9 - software outside India could not have been excluded from the export turnover in view of Explanation 1(i) to Section 10AA of the Act. It is also noteworthy that Explanation 2 to Section 10AA provides that profits and gains derived from; on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. In view of the aforesaid, this substantial question of law is answered in favour of the assessee and against the Revenue. Substantial question of law Nos.1 to 3 are answered against the assessee and in favour of the Revenue. Substantial question of law No.4 is answered in favour of the assessee and against the Revenue. For the reasons aforesaid, appeal stands dismissed. Sd/- JUDGE Sd/- JUDGE NC. "