DCIT Vs Ocwen Financial Solutions Pvt. Ltd.(ITAT Bangalore)
Facts-
1. Treatment of expenditure incurred on buy-back of shares-
An assessee has spent amount of INR 8,90,961 on buy-back of shares and debited the same to Profit & Loss Account treating the same as ‘revenue expenditure’.
AO treated the same as ‘capital expenditure’.
2. Set-off of brought forward losses-
The assessee has three operations units, out of which two units are claiming deduction u/s 10A. Assessee reduced brought forward loss against profit of one unit which is not claiming deduction. However, AO reduced the brought forward losses before computation of deduction u/s 10A.
Conclusion-
1. Treatment of expenditure incurred on buy-back of shares-
The Hon’ble High Court in CIT Vs. Motor Industries Co. Ltd. has held that Issue of bonus shares doesn’t result in the expansion of capital base of the company. On the contrary the consequence of such buy-back of shares is the capital base of the company gets reduced and the capital structure will go down. Where there is no flow of funds or increase in the capital employed, the expenditure incurred would be revenue expenditure.
In view of above judgement, it was held that the amount of INR 8,90,961 incurred for buy-back of shares is revenue expenditure.
2. Set-off of brought forward losses-
The Hon’ble High Court in Yokogawa India Ltd. has held that the income of section 10A unit has to be excluded before arriving at the gross total income. The income of section 10A has to be deducted at source itself and not after computing the gross total income. Thus, loss of non-section 10A unit cannot be set-off against the income of 10A unit.
In view of above judgement, AO was directed to calculate the deduction under section 10A without setting off the brought forward losses.
FULL TEXT OF THE ITAT JUDGEMENT
These are cross appeals against the final order of assessment passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] pursuant to the DRP’s directions dated 21.12.2015. Relevant assessment year is 2011-12.
2. We shall first take up the revenue’s appeal in IT(TP)A No.511/Bang/2016. The solitary effective ground raised in revenue’s appeal reads as follows:-
“2. On the facts and in the circumstances of the case, the Ld.DRP erred in law in directing the Assessing Officer to reduce the expenditure incurred in travel, telecommunication etc, both from the Export Turnover as well as the Total Turnover for the purpose of computation of deduction u/s.10A and 10AA of the IT Act without appreciating the fact that the statue allows exclusion of such expenditure only from the Export turnover by way of specific definition of Export Turnover as envisaged by sub-clause(4) of explanation 2 below sub-section 8 of section 10A. On the other hand, there is no specific provision in section 10A or 10AA warranting exclusion of above expenses from total turnover also.”
2.1 The AO in his draft assessment order had recalculated the deduction u/s 10A/10AA of the Act by reducing the travelling & conveyance, legal & professional and other expenses incurred in foreign currency from the export turnover.
2.2 The DRP in its order dated 21.12.2015 directed the AO to compute the deduction u/s. 10A of the Act after reducing the impugned expenses both from the export turnover as well as from the total turnover.
2.3 The revenue being aggrieved is in appeal before the Tribunal. The DR supported the draft assessment order passed by the AO.
2.4 The ld. AR submitted that the issue in question is squarely covered by the judgment of the Hon’ble Apex Court in the case of CIT v. HCL Technologies Ltd. – Civil Appeal Nos. 8489-8490/2013 dated 24.4.2018.
2.5 We have heard the rival submissions and perused the material on record. The issue raised is squarely covered in favour of assessee by the judgment of Hon’ble Apex Court in the case of CIT v. HCL Technologies Ltd. (supra). The Hon’ble Apex Court had categorically held that when expenses are reduced from export turnover, the same needs to be reduced also from the total turnover, while computing deduction u/s. 10A of the Act. The relevant finding of the Hon’ble Apex Court reads as follows:-
“19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.
21. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover.
22. In view of above discussion, we are of the considered view that these instant appeals are devoid of merits and deserve to be dismissed. Accordingly, all the connected matters and interlocutory applications, if any, are disposed of with no order as to costs.”
2.6 In the light of Hon’ble Apex Court judgment in the case of CIT v. HCL Technologies Ltd. (supra), we hold that the DRP is justified in its direction that the impugned expenditure that is reduced from the export turnover need to be reduced also from the total turnover, while computing deduction u/s. 10A of the Act. It is ordered accordingly.
3. In the result, the appeal filed by the revenue is dismissed.
Assessee’s appeal (IT(TP)A No. 686/Bang/2016)
4. The assessee in the original grounds had raised TP issues as well as corporate tax issues. The grounds relating to TP issues were with withdrawn since the assessee had received Resolution under the Mutual Agreement Procedure (MAP) and the same was accepted. Consequent to withdrawal of grounds relating to TP issues, the assessee has filed revised grounds and the same reads as follows:-
“1. Re-computation of deduction under section 10A/10AA – Set off of brought forward losses from the profits of Bangalore unit and Mumbai unit prior to computing deduction under section 10A/10AA
a. The learned Assessing Officer (“AO”) and Dispute Resolution Panel (“DRP”) has erred in re-computing the deduction under section 10A/10AA of the Act by reducing the brought forward business losses from the profits of business of Mumbai unit and Bangalore unit before computing deduction under section 10A/10AA of the Act.
b. The learned AO and DRP has erred in not placing reliance on various judicial precedents including the jurisdictional High Court ruling in favor of Appellant’s contention.
c. The learned AO and DRP erred in observing that jurisdictional High Court ruling is not applicable to the case of the appellant.
d. The learned AO ought to have appreciated that decision of jurisdictional High Court is binding on all Income tax officers (ITO) operating under the jurisdiction of the said High Court.
e. Notwithstanding and without prejudice to the above, the learned AO ought to have reduced the brought forward losses from the transfer pricing adjustment first and then set off the balance, if any, from profits for computing deduction under section 10A/10AA.
2. Disallowance of expenses incurred on buy-back of shares
a. The learned AO and DRP has erred in disallowing expenses incurred on buy-back of shares.
b. The learned AO ought to have observed that no benefit of enduring nature was received by the company from buy back of shares.
c. The learned AO ought to have appreciated that the alleged expenditure is allowable as business expenditure under section 37 of the Act as it satisfies all the prescribed conditions under the said section.
The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law.
The appellant prays accordingly.”
4. We shall adjudicate the above grounds as under:-
4.1 Set off of brought forward losses: For the AY 2011-12, the assessee had operation in 3 units. 2 units in Bangalore (out of which deduction u/s. 10AA was claimed of one unit) and 1 unit in Mumbai for which deduction u/s. 10A was claimed. The taxable profits for the units for the year under consideration was as under:-
