Wipro Limited Vs Addl. CIT (ITAT Bangalore)
Claim of depreciation on software-
Depreciation claimed by the assessee on the amount of software capitalized was disallowed invoking provisions of section 40(a)(ia) for non-deduction of tax at source.
Held, depreciation is a statutory allowance and hence it cannot be considered as expenditure. Accordingly, disallowance of depreciation cannot be made under section 40(a)(ia).
Allocation of corporate overheads to units claiming deduction under section 10A/ 10AA/ 10B-
Held, since deduction is allowed u/s 10A/10AA/10B of the Act on the profits derived from the undertakings, all direct or indirect expenses, must be adjusted in order to arrive at the profits derived from the undertaking. In that process, the component of head office expenses also requires allocation.
Setting off loss of STPI/SEZ units against business income from non-STPI/non-SEZ units-
The assessee set off the losses incurred in the “SEZ/STPI undertakings” against the business income generated from “non-STPI/non-SEZ” undertakings”.
Held that the loss arising in eligible SEZ/STPI undertakings are not required to be adjusted against the profits arising from other SEZ/STPI undertakings and the said loss can be adjusted against profits arising from non-SEZ/non-STPI units. Accordingly, this issue is decided in favour of the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
All these appeals are directed against the assessment orders passed by Assessing officer u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 [‘the Act’ for short] in pursuance of directions issued by Ld Dispute Resolution Panel (DRP). The assessee has filed the appeals for assessment years 2009-10 to 2014-15. The revenue has filed the appeals for assessment years 2009-10 to 2011-12. Since most of the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.
2. The assessee is engaged in different types of business activities, viz., software development services and IT services; manufacture of Vanaspati/Hydro generated oils; toilet soaps; lighting products; pharmaceuticals & Neutraceutical products; leather products; computers, hydraulic and pneumatic equipment; water treatment systems and solutions etc. It is also engaged in trading of servers, routers, networking equipments, spare parts, etc.
3. During the course of hearing before us, the Ld. Counsel appearing for the assessee submitted that most of the issues urged in the appeals filed by both assessee and revenue are common in nature in all the years. Accordingly, he suggested that the Tribunal may adjudicate each of the issues separately and the same may be applied to all the years under consideration. Accordingly he preferred to advance his arguments also issue wise. The Ld D.R also agreed for the same. Accordingly, we are dealing with the grounds urged in all the years by both the parties issue-wise.
4. Issue No.1 relates to setting off of LOSS OF STPI/SEZ UNITS against business income from non-STPI/non-SEZ units:-
4.1 This issue is urged by the assessee and it relates to disallowance of claim of set off of loss arising in STPI/SEZ undertakings against “business income” generated from non-STPI/non-SEZ undertakings. STPI refers to “Software Technology Park” and SEZ refers to “Special Economic Zone”. This issue has been urged by the assessee in all the six years under consideration, viz., AY 2009-10 to 2014-15.
4.2 The facts relating to the issue are stated in brief. The assessee has set up various undertakings in SEZ/STPI located at different places in India. While most of the undertakings were making profits, certain undertakings were incurring losses during the years under consideration. The assessee set off the losses incurred in the “SEZ/STPI undertakings” against the business income generated from “non-STPI/non-SEZ” undertakings”. Accordingly, it claimed deductions u/s 10A/10AA of the Act in respect of profits earned by profit making SEZ/STPI undertakings.
4.3 However, the A.O. took the view that the provisions of section 10A/10AA of the Act are a special code by themselves. Accordingly he took the view that the profits/losses generated by SEZ/STPI undertakings should be grouped together, in which case, the losses incurred by STPI/SEZ undertakings should be set off against profits earned by other SEZ/STPI undertakings. The deduction u/s 10A/10AA is allowed for 10 years. The AO apparently took the view that the aggregate amount of deduction claimed during the period of 10 years by a SEZ/STPI undertaking should not exceed the aggregate amount of net income (aggregate amount of profits (minus) aggregate amount of loss) generated during the above said period of 10 years. Accordingly, the AO expressed the view that allowing losses incurred by a particular unit in first few years to be set off against the profits earned from non-SEZ/non-STPI units, will result in allowing deduction of only profits generated by SEZ/STPI units under sec. 10A/10AA of the Act and it will result in allowing deduction in excess of aggregate amount of net income generated by the STPI/SEZ units during the fiscal period of 10 years. Accordingly, the A.O. rejected the claim of the assessee for set off of losses incurred by SEZ/STPI undertakings against the profit earned by non-SEZ/non-STPI undertakings.
4.4 Before Ld. D.R.P., the assessee submitted that an identical claim made by the assessee in assessment year 2007-08 has been allowed by the Tribunal. Accordingly, it was prayed that the claim of the assessee should be allowed. However, the Ld. DRP did not accept the submissions of the assessee and accordingly, confirmed the order of the A.O. with the following observations:
”It is observed by the Panel in the immediately preceding year vide its order dated 17.9.2012 the Panel has decided while dealing with the preceding year that the A.O. had rightly denied the set off current year losses with 10A units with other income It has also upheld the AO’s action of denying set-off of losses of STP units in the AY 2007-08 while computing the profits of the business before allowing deduction under Chapter VIA and XA. The issue has not been judicially clarified by the Ld. Supreme Court in the case of HimatsingkaSeide Vs. CIT. This Panel therefore finds no reason to take a different view in the matter for the period under consideration. Accordingly, both the objections raised under this ground are rejected.”
4.5 The Ld. A.R. submitted that the provisions of section 10A of the Act has been substituted altogether by Finance Act, 2000 w.e.f. 1.4.2001. The new section envisages allowing “deduction of profits & gains” derived by an eligible undertaking. Accordingly, the provisions of section 10A of the Act has now been interpreted as “deduction provision”, meaning thereby, the question of allowing deduction u/s 10A shall arise only if the eligible undertaking generates profits. Consequently, if the eligible undertaking incurs loss, the question of allowing any deduction u/s 10A of the Act does not arise. The Ld A.R submitted that the position for section 10AA of the Act also is identical. Accordingly, he submitted that the assessee has claimed set off of loss incurred by any of the SEZ/STPI undertakings against income earned from non-STPI/non-SEZ undertakings. He submitted that the assessee has made identical claims in assessment years 2001-02 to 2005-06 and the same has been allowed by Tribunal in the assessee’s own case. The Ld A.R further submitted that the Hon’ble High Court of Karnataka has also upheld the view taken by the Tribunal on this issue in AY 2001-02 to 2004-05. He submitted that the decision rendered by Hon’ble Karnataka High Court is reported in 382 ITR 179 (kar.). The Ld. A.R. further submitted that the coordinate bench of the Tribunal has decided an identical issue in favour of the assessee in AY 2008-09 by following the decision rendered by Hon’ble Karnataka High Court in the assessee’s own case (referred above) and also the decision rendered in the assessee’s own case by the Tribunal in assessment year 2007-08. Accordingly, he submitted that the order passed by the A.O. in this regard should be reversed.
4.6 On the contrary, the Ld D.R relied upon the order passed by Ld DRP/AO on this issue.
4.7 We heard rival contentions on this issue and perused the record. We notice that the co-ordinate bench has considered an identical issue in AY 2008-09 in assessee’s own case in ITA No.1665/Bang/2012 dated 04-01-2017 and it was decided in favour of the assessee with the following observations:-
“14. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that an identical issue was also involved for the Assessment Year 2004-05 as well as for the Assessment Year 2007-08. The Hon’ble jurisdictional High Court in assessee’s own case reported in 382 ITR 179 for the Assessment Year 2004-05 has upheld the decision of this Tribunal in favour of the assessee and against the revenue. We further note that this Tribunal in assessee’s own case for the Assessment Year 2007-08 has again decided this issue in para 7.4 as under :
“7.4 We have heard both parties and perused and carefully considered thematerial on record We find that the identical issue was considered by a coordinate bench of the Tribunal in the assessee’s own case for Assessment Year 2004-05 in ITA Na1072/Bang/2007 (supra), wherein the Tribunal confirming the finding of the learned CI (A), at para 16.4 on pages 29 and 30 thereof, held as under :
“16.4. We have carefully considered the contentions of the either parties and also carefully perused the order of the Hon’ble Tribunal While deciding an identical issue, the Hon’ble Tribunal cited the following decisions –
(1) [12.5.] ITA No: 669 & 804/Ban/05 dated: 22.3.2006 for the AY-2000-01 in the case of assessee company wherein it was concluded that we direct the AO to allow set off of loss from 10,4 units against the other business income of the assessee or incomefromother sources.”
(2) ITA NO.248 & 249/Bang/07 dated 271 1.2007 in the case of I-Gate Global Solutions Ltd v. ACIT wherein the issue was decided in favour of the assessee.
(3) ITA No.387/Bang/06 dated: 26.6.2007 in the case of M/s Web Spectron P.Ltd the issue was decided in favour of the assessee. The Hon’ble Tribunal has, further, observed that “the decision of jurisdictional High Court is to the effect that deduction allowed u/s 10A in respect of undertaking is to be allowed after setting off of brought forward loss of that undertaking. Income of each undertaking is to be computed independently as per the provisions of the Act. An assessee cannot be compelled to seek deduction u/s 10A in respect of an undertaking in which there is a loss. This is the basis of not setting off of losses of 10A units against the profit of 10A units for computing deduction u/s 10A. This is in view of the decision of the Third Member in the case of Navin Bharat Industries Ltd v. DCIT 90 ITD 1. In view of the judgment of the jurisdictional High Court in the case of Himmatsingh (supra), the assessing officer will set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction u/s 10A”.
16.5 Respectfully following the decisions of the Hon’ble Tribunal referred supra, we direct the assessing officer to set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction u/s 10A”
Respectfully following the decision of the coordinate bench of the Tribunal in the assessee’s own case for Assessment Year 2004-05 (supra) on this issue, we direct the Assessing Officer to set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction under section 10A.”
Thus it is clear that the Tribunal has followed the earlier order for the Assessment Year 2004-05 which has been upheld by the Hon ‘ble jurisdictional High Court. Following the earlier order of this Tribunal as well as Hon ‘ble jurisdictional High Court, we decide this issue in favour of the assessee and against the revenue. ”
4.8 Though it is stated that the issue is decided in favour of the assessee, we notice that the discussions were not happily worded. We notice that an identical issue was decided by Hon’ble High Court of Karnataka in AY 2001-02 to 2004-05 in the assessee’s own case reported in 382 ITR 179. We extract below the relevant discussions made by Hon’ble Karnataka High Court on this issue:-
“Substantial question of law No.14:
“Whether the Tribunal was right in directing that losses of a section 10A unit, which are already set off against other business income of the appellant, should be again carried forward and set-off against eligible profits of the same unit in a subsequent year ?”
“Whether the Tribunal was correct in holding that income of each undertaking should be taken independently and losses of section 10A units cannot be set off against profits of section 10A units, when computing deduction under section 10A of the Act?”
“Whether the appellate authorities failing to take into consideration the amendment provision of section 10A(6)(ii) of the Act, which clearly contemplated that the loss of the undertaking can be carried forward and adjusted against other income?”
“Whether the appellate authorities were correct in holding that the finding recorded by the Assessing Officer that in view of the amendment to section 10A(6)(ii) with effect from April 1, 2001 the loss of the STP units should be carried forward at the end of the 10 years, tax holiday period under section 10A of the Act and should be set off against profits in respect of Madivala R&D unit by treating the cost of development of shrink wrap computer software as work in progress and therefore cannot set off the loss?”
163. The said substantial questions of law was considered by the apex court in the case of CIT v. Canara Workshops P. Ltd. (1986) 161 ITR 320 (SC) in favour of the assessee and against the Revenue.
164. Following the said judgement in the assessee’s case itself in ITA 1395 of 2006 connected with ITA 1394 of 2006, this court by its order dated November, 5, 2013 following the judgement of the Supreme Court answered the said substantial question of law in favour of the assessee and against the Revenue. Therefore, aforesaid questions of law are answered in favour of assessee and against the Revenue.”
4.9 We notice that the jurisdictional Hon’ble Karnataka High Court has decided an identical issue in favour of the assessee. Accordingly, we hold that the loss arising in eligible SEZ/STPI undertakings are not required to be adjusted against the profits arising from other SEZ/STPI undertakings and the said loss can be adjusted against profits arising from non-SEZ/non-STPI units. Accordingly, this issue is decided in favour of the assessee.
5. Issue No.2 relates to Exclusion of Miscellaneous income while computing deduction u/s 10A/10AA/10B:-
5.1 The next issue relates to denial of deduction u/s 10A/10AA/10B in respect of miscellaneous income disclosed by eligible undertakings. This issue has been urged by the assessee in all the six years, viz., assessment years 2009-10 to 2014-15.
5.2 The assessee has disclosed certain item of receipts as miscellaneous income and claimed the same as part of business profits. Accordingly, it claimed a deduction u/s 10A/10AA/10B of the Act on such income also. In assessment year 2009-10, the miscellaneous
income disclosed by the assessee consisted of following items:
