-1- IN HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS 13th DAY OF OCTOBER 2014 PRESENT HON BLE MR.JUSTICE N.KUMAR AND HON BLE MR.JUSTICE B.MANOHAR I.T.A.NO.1125/2008 BETWEEN: M/S. CARITOR (INDIA) PVT. LTD., 17 & 17/1, 3RD FLOOR, SOUTH END ROAD, BASAVANAGUDI, BANGALORE (REPRESENTED BY ITS DIRECTOR, SRI.SRIKANTH RAO, AGED ABOUT 48 YEARS S/O S. RAMACHANDRAN RAO) APPELLANT (BY SRI. CHYTHANYA K.K., ADVOCATE) AND: DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 11(2), BANGALORE. ...RESPONDENT (BY SRI. K.V.ARAVIND, ADVOCATE) THIS APPEAL IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 31- 07-2008 PASSED IN ITA NO.20/BNG/2008, FOR ASSESSMENT YEAR 2004-2005, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW APPEAL AND SET ASIDE -2- ORDER PASSED BY ITAT BANGALORE IN ITA NO.20/BNG/2008, DATED 31-07-2008 IN INTEREST OF JUSTICE. THIS APPEAL COMING ON FOR HEARING THIS DAY, KUMAR J, DELIVERED FOLLOWING:- JUDGMENT assessee has preferred this appeal against order passed by Tribunal. At time of admission, three substantial question of law has been raised. They are as under: 1. Whether on facts and in circumstances of case, Honourable Tribunal was right in law in holding that rent paid to landlord and registration expenses of Chennai unit are in nature of capital expenditure? 2. Whether on facts and in circumstances of case, Honourable Tribunal was right in law in holding that telecommunication expenses are to be excluded from export turnover when such expenses were not part of negotiated price and hence did not originally form part of negotiated price and hence did not originally form part of export turnover? -3- 3. Whether on facts and in circumstances of case, Honourable Tribunal was right in law in holding that benefit of tax holiday under Section 10-A is not available in respect of interest income although same formed part of business income of appellant? 2. Insofar as 1st substantial question of law is concerned, it is regarding expenditure pertaining to setting up of 5th unit at Chennai on 03.11.2003 amounting to Rs.10,25,000/- on office rent and Rs.2,500/- on STPI registration fees. said amounts were disallowed as they are incurred prior to setting up of unit on ground that they partake nature of capital expenditure. said finding has been affirmed both by 1st and 2nd Appellate Authorities. 3. admitted facts are; assessee company is doing international transaction. They are already in business of software development and in fact they have four units at four different places. 5th unit at Chennai was set up in rented premises. After -4- taking premises on rent for two months, they were involved in making interior infrastructure. It is only after two months, they were able to commence unit. rent paid subsequent to period is allowed as revenue expenditure. However, rent of two months prior to commencement of unit is disallowed, on ground that it constitute capital expenditure and Rs.2,500/- is disallowed on ground that same being registration fees. If assessee has taken premises on rent, merely because date on which premises is taken on rent, is unable to carry on business, would in law, make no difference and rent paid would not become capital expenditure if two months is taken to commence business of unit. finding recorded by three authorities that two months prior to commencement of unit constitutes capital expenditure is unsustainable. Similarly, payment of registration fees constitutes capital expenditure is unsustainable and therefore,the findings recorded by three authorities are hereby set aside and 1st substantial -5- question of law is answered in favour of assessee and against revenue. 4. Insofar as 2nd substantial question of law is concerned, this Court in similar circumstances in case of M/s.Sasken Communication Techonologies Ltd., vs. Deputy Commissioner of Income tax in ITA Nos.40-42/14 & other connected matters, decided on 16.09.2014, had remanded matter to Tribunal to record findings on merits as well as on alternative grounds. Following said judgment, findings recorded on 2nd substantial question of law by authorities, are hereby set aside and matter is remitted back to Tribunal for fresh consideration and in accordance with law. 5. Insofar as 3rd substantial question of law is concerned, similar question were arose for consideration before this Court in case of Commissioner of Income Tax, Bangalore & another vs. M/s.Motorola India Electronics Pvt. Ltd., -6- reported in 2014-TIOL-87-HC-KAR-IT, where this Court at paragraph-8 has held as under:- In instant case, assessee is 100% EOU, which has exported software and earned income. portion of that income is included EEFC account. Yet another portion of amount is invested within country by way of fixed deposits, another portion of amount is invested by way of loan to sister concern which is deriving interest or consideration received from sale of import entitlement, which is permisable in law. Now question is whether interest received and consideration received by sale of import entitlement is to be construed as income of business of undertaking. There is direct nexus between this income and income of business undertaking. Though it does not par take character of profit and gains from sale of article, it is income which is derived from consideration realized by export of articles. In view of definition of Income from Profit and Gains incorporated in Subsection (4), assessee is entitled to benefit of exemption of said amount as contemplated under Section 10B of Act. -7- Therefore, Tribunal was justified in extending benefit to aforesaid amounts also. We do not find any merit in these appeals. Therefore, first substantial question of law raised in ITA 428/2007 is answered in favour of revenue and against assessee and first substantial question of law in ITA No.447/2007 is answered in favour of assessee and against revenue. 6. Therefore, finding of authorities below are contrary to said law and same is unsustainable and accordingly, said finding is set aside. benefit of tax holiday under Section 10-A of Act is available even in respect of interest on income. Accordingly, 3rd substantial question of law is answered in favour of assessee and against revenue. Ordered accordingly. Sd/- JUDGE Sd/- JUDGE Srl. Caritor (India) Pvt. Ltd. v. Deputy Commissioner of Income-tax Circle 11(2), Bangalore