Chandra Poojari, A.M.:— ITA Nos. 617/Mds/2011 and 698/Mds/2011 are cross appeals for the assessment year 2006–07 and ITA No. 697/Mds/2011 is filed by the Revenue for the assessment year 2004–05. Since, the issues involved in these appeals are common, they are clubbed together, heard together and disposed off by this common order for the sake of convenience.

2. ITA Nos. 697 & 698/Mds/2011: The first common issue in these appeals is with regard to allowance of depreciation @ 100% on the leasehold improvements. The facts of the case as narrated in ITA No. 697/Mds/2011 is considered for adjudication.

3. The assessee incurred expenditure for the improvement of new leasehold premises which has been taken on lease from Technopark-STPI of Kerala to the tune of Rs. 55,74,348/- and claimed as revenue expenditure. The Assessing Officer considered it as capital expenditure and allowed depreciation only at 10%, which worked out to Rs. 55,74,348/-. On appeal, the Commissioner of Income-tax (Appeals) observed that the expenditure incurred by the assessee is purely temporary erections such as wooden structures and allowed 100% depreciation treating it as revenue expenditure. Against this, the Revenue is in appeal before us.

4. The ld. DR submitted that the improvement or extension on leasehold business premises were basically of capital in nature since such improvements were made on ‘permanent structures’. These expenditure are in the nature of capital such as, furniture, electrical fittings etc. adding value to a building and only 10% deprecation to be allowed.

5. On the other hand, the ld. AR submitted that these expenses were incurred for the purpose of providing partitions, vinyl flooring, interior decoration etc. for making business premises more useful. Further, he submitted that no asset in enduring nature was achieved from such expenditure and entire expenditure is admissible for deduction as revenue expenditure only. He relied on the judgment of the Jurisdictional High Court in the case of CIT v. Armour Consultants P. Ltd. (85 DTR 361), wherein it was held that the expenditure incurred by the assessee for design, layout and material construction, fabrication works in leased premises are deductible as revenue expenditure. He also relied on the judgment of the Jurisdictional High Court in the case of CIT v. Ayesha Hospitals P. Ltd. (292 ITR 266), wherein it was held that the expenditure incurred in the leased premises towards repairs and maintenance to be considered as revenue expenditure.

6. We have heard both the sides and perused the material on record. The assessee, in this case, incurred expenditure towards improvement to leasehold premises which include false ceilings, dismantling existing granite flooring, interior works at Technopark office, providing teak wood for door frames, laying ceramic tiles, partition work, suspended ceiling system, wall and column panelling, sanitary work, painting and cleaning work, data and voice cabling work etc. and considered the same as temporary structures and claimed 100% depreciation. There is no dispute that the expenditure incurred for renovating the existing leasehold premises. The assessee has not extended any construction in the leasehold premises. It incurred the expenditure for beautifying the existing leasehold premises. Being so, it cannot be said that the expenditure is resulted in creation of any new capital asset. In our opinion, the expenditure incurred by the assessee on providing wooden partition, paintings, interior works and other repairs to the leasehold premises etc. are to be considered as revenue expenditure. This view is fortified by the judgment of the Delhi High Court in the case of CIT v. Escorts Finance Ltd. (205 CTR 574), which was followed by the coordinate bench of the Tribunal in ITA No. 1254/Mds/2012 for the assessment year 2008–09 vide order dated 22.11.2012 in the case of Dr. Agarwal's Eye Hospital. Further, the same view was taken by the Jurisdictional High Court in the case of the case of CIT v. Armour Consultants P. Ltd. (85 DTR 361), wherein it was held that the expenditure incurred by the assessee for design, layout and material construction, fabrication works in leased premises are deductible as revenue expenditure. It also clarified by the Jurisdictional High Court in the case of Thiru Arooran Sugars Ltd. in TAX Case (Appeal) No. 197 of 2005 dated 26.7.2011, that Explanation (1) to sec. 32(1) of the Income-tax Act, 1961, which was inserted with effect from 1.4.1988, is an exceptional one which permits depreciation in cases where the assessee does not own a building in respect of which, the assessee incurs capital expenditure on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to the building. Further, it was held that the temporary structure by means of false ceiling and office renovation had not resulted in any capital expenditure. The benefit of the above decision, applies to the facts of the present case. Accordingly, we are inclined to dismiss this ground taken by the Revenue.

7. The next common ground in the above appeals is with regard to restricting the disallowance u/s. 14A to 2% instead of 5% added by the Assessing Officer.

8. The facts of the case as narrated in ITA No. 697/Mds/2011 are that the assessee credited Rs. 57,65,143/- as dividend income for the assessment year 2004–05. The Assessing Officer, relying on the judgment of the Supreme Court in the case of CIT v. United General Trust Ltd. (200 ITR 488) and also the order of the Tribunal, Madras bench in the case of Ind Bank Merchant Banking Securities Ltd. in ITA No. 420/Mds/98 dated 14.4.2004, considered 5% of the total dividend claimed by the assessee as exempt for disallowance. Therefore, he disallowed a sum of Rs. 2,88,257/-. On appeal, the Commissioner of Income-tax (Appeals) restricted the disallowance to 2% of the dividend income. Against this, the Revenue is in appeal.

9. We have heard both the parties and perused the material on record. After considering the totality of facts and circumstances of the case and placing reliance on the co-ordinate Bench in the case of Celebrity Fashions Ltd. in ITA Nos. 1318 & 1319/Mds/2011 dated 30.4.2012, wherein it was held that disallowance of 5% of the dividend/exempted income is reasonable expenditure. Accordingly, we reverse the order of the Commissioner of Income-tax (Appeals) and restore the order of the Assessing Officer. This ground is allowed.

10. The next ground for our consideration in ITA No. 697/Mds/2011 is with regard to exclusion of telecommunication charges from the total turnover for the purpose of computation of deduction u/s. 10A.

11. After hearing both the parties, we are of the opinion that this issue was considered by the Special Bench of the Tribunal in the case of ITO v. Sak Soft Ltd. (30 SOT 55)(Chennai), wherein it was held that for the purpose of applying formula under sub-sec.(4) of sec. 10B, the freight, telecom charges and insurance attributable to the delivery of articles or things, or computer software outside India or the expenses, if any, incurred in foreign exchange in providing technical services outside India are to be excluded, both from the export turnover and from the total turnover, which are the numerator and the denominator, respectively, in the formula. Respectfully following the aforesaid decision of the Tribunal, we are inclined to direct the Assessing Officer to exclude the telecommunication charges both from the export turnover as well as from the total turnover while computing the deduction under sec. 10B of the Act. This ground is partly allowed.

12. The next common ground taken in the above appeals is with regard to directing the Assessing Officer to verify whether such gain is on account of delay in realisation of export proceeds or on account of EEFC account and allow the assessee's claim accordingly.

13. The facts of the issue as narrated in ITA No. 697/Mds/2011 are that the assessee submitted that gain on exchange fluctuation is derived from the undertaking and considered as part of export turnover and fully exempt from tax and that exchange fluctuation arises primarily on account of the export of computer software. The assessee further submitted that as per accounting standards, forex transactions are to be accounted on the exchange rates prevailing on the date of transaction and the difference, if any, on realization should be taken to exchange fluctuation account. The assessee also submitted that the Chennai ‘C’ Bench of the Tribunal in assessee's own case, has passed an order in its favour treating the exchange gain as business income for the assessment year 2000–01. 14. On appeal, the Commissioner(Appeals), after considering the decisions relied on by the Assessing Officer and the assessee's representative observed that the exchange gain shown by the assessee includes both gain on account of EEFC account as well as on account of delayed realization of export proceeds. The ld. AR has also submitted the break-up of the foreign exchange gain before the Commissioner(Appeals). The Bombay High Court in the case of Shah Originals (2010-TIOL-293-HC-MUM-IT) has dealt with this issue, wherein it was held that the exchange fluctuation in the EEFC account arises after the completion of the export activity and hence does not bear a proximate and direct nexus with the export transaction so as to fall within the expression. He also considered the explanation of the AR that a portion of such exchange fluctuation gain is on account of delayed realization of export proceeds and another portion relates to fluctuation on account of EEFC account. Respectfully following the judgment of the Bombay High Court in the case of Shah Originals (supra), the appeal of the assessee was partly allowed by the Commissioner(Appeals). Against this, the Revenue is in appeal before us.

15. We have heard both the parties and perused the material on record. We find that the Commissioner(Appeals) has given a direction to the Assessing Officer to pass a fresh order in the light of the decision of the Bombay High Court in the case of Shah Originals (supra). Therefore, we do not find any infirmity in the order of the Commissioner(Appeals) on this issue. Accordingly, we direct the Assessing Officer to verify the exchange gain, as to whether the fluctuation is on account of delayed realization of export proceeds or not, and if it is on account of delayed realization of export proceeds, it is to be considered as business income eligible for deduction u/s. 10A of the Act. Accordingly, this ground is dismissed.

16. The next issue in ITA No. 698/Mds/2011 is with regard to allowing depreciation @ 60% on software expenses instead of 25% allowed by the Assessing Officer.

17. The facts of the case are that the assessee had claimed software expenses of Rs. 6,58,959/- holding that these expenditure are primarily licenses to use the software based on the terms of purchase. The AO held that the assessee gets the right to use the software and has the license for a long period of time and hence gets an enduring benefit. Thus, this expenditure is not revenue but capital in nature. The AO held that the assessee is eligible for depreciation @ 25% as applicable to intangible asset, he disallowed the balance claim and added Rs. 4,94,219/- to the total income. The Commissioner(Appeals) observed that in view of the fact that ‘computer software’ has been included in the deprecation table along with ‘computer’ from the assessment year 2003–04, as per the provisions of Rule 5, a higher rate of depreciation @ 60% is allowed and the assessee is not eligible to claim software expenses as revenue expenditure. Accordingly, he directed the Assessing Officer to allow depreciation @ 60% instead of 25% allowed him. Against this, the Revenue is in appeal before us.

18. We have heard both the sides and perused the material on record. Appendix I, Rule 5 as entry No. (5) from the assessment year 2006–07 onwards, suggests that computers including computer software is entitled for depreciation at 60% and being so, we do not find any infirmity in granting depreciation at 60% on software expenses. We confirm the finding of the Commissioner(Appeals) on this issue. This ground is rejected.

19. In the result, the appeals in ITA Nos. 697 & 698/Mds/11 are partly allowed.

20. In ITA No. 617/Mds/2011, the first issue raised by the assessee is that the Commissioner of Income-tax (Appeals) erred in confirming the set off of the brought forward unabsorbed depreciation of earlier years against the profits of the undertaking before allowing the deduction under sec. 10A of the Act.

21. After hearing the parties, we are of the opinion that the issue is squarely covered against the assessee by the judgment of the Supreme Court in the case of Himatasingike Seide Ltd. v. CIT (Civil Appeal No. 1501 of 2008 dated 19.9.2013, wherein they confirmed the decision of the Karanataka High Court in the case of CIT v. Himatasingike Seide Ltd. (286 ITR 255) and held that unabsorbed depreciation has to be set off before computing the exemption allowable u/s. 10A of the Act. The same was followed by this Tribunal in the case of Chettinad Quartz Products Ltd. in ITA No. 430/Mds/2014. Vide order dated 16 October, 2014, the Tribunal has held as under:

“5. Heard both sides. Perused orders of lower authorities and the decisions relied on. We find that the issue in appeal has been decided by the co-ordinate Bench of this Tribunal in the case of S.R.A. Systems Ltd. (supra) following the decision of the Hon'ble Supreme Court in the case of Himatsingka Seide Ltd. (supra). The coordinate Bench while deciding the issue held that unabsorbed depreciation has to be set off before computing exemption allowable under section 10A of the Act observing as under:—

“7. The third issue in appeal relates to the method of computation of deduction u/s. 10A of the Act. The assessee has claimed deduction u/s. 10A before setting off of unabsorbed depreciation and brought forward losses. The ld. AR of the assessee in order to fortify the stand of assessee has placed reliance on the decision of the Tribunal in assessee's appeal for the AY. 2005–06 and AY. 2007–08 (supra). The ld. AR has also drawn support from the judgment of the Hon'ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. (supra). On the other hand, the ld. DR has relied on the latest decision of the Hon'ble Apex Court in the case of Himatsingka Seide Ltd. v. CIT (supra). The Hon'ble Supreme Court of India dismissed the appeal of the assessee and has upheld the judgment of the Hon'ble Karnataka High Court. The Hon'ble High Court has held that the brought forward depreciation has to be adjusted against the profits of the EOU before computing the exemption allowable u/s. 10B. The provisions of section 10A are pari materia with the provisions of section 10B of the Act. We find that as far as un-absorbed depreciation is concerned, the Hon'ble Supreme Court of India in the case of Himatsingka Seide Ltd., v. CIT (supra), has up-held the findings of the Hon'ble Karnataka High Court and as such, un-absorbed depreciation has to be set-off before computing the exemption allowable u/s. 10A. In respect of setting-off of the brought forward losses, the decision of the Hon'ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. (supra) still holds good. Accordingly, the assessee can claim deduction u/s. 10A before setting off of brought forward losses. In view of the above, this ground of appeal of the assessee is partly allowed.”

6. Respectfully following the above decision of this Tribunal, we allow the grounds raised by the Revenue.

In view of this, we are inclined to hold that while computing deduction u/s. 10A, brought forward unabsorbed depreciation of earlier years to be set off against the profits of the undertaking.

This ground is dismissed.

22. The next ground for our consideration is that the Commissioner (Appeals) erred in not allowing the set off the unabsorbed depreciation amount to Rs. 13,22,719/- against the short term capital gains, while computing the income chargeable under head ‘capital gains’.

23. The facts of the case are that the assessee has offered short term capital gain amounting to Rs. 43,01,296/- against which Rs. 13,22,719/- has been set off towards unabsorbed depreciation. The AO had not considered the set off and subjected the entire STCG subject to tax. However, the AR of the assessee submitted that such set off of losses is not provided during the assessment and that such unabsorbed depreciation should be allowed to be set off against short term capital gains. The Commissioner(Appeals) after considering the submission of the AR and the observation of the AO, dismissed this ground. Aggrieved, the assessee is in appeal before us.

24. We have heard both the parties and perused the material on record. We do not find any merit in the argument of the ld. AR. It is seen that the entire unabsorbed depreciation was set off against the business income of the assessee. Therefore, no unabsorbed depreciation was available for the purpose of set off against the income from any other head. Hence, we do not find any merit in the plea of the assessee to set off the unabsorbed depreciation against the short term capital gain. Accordingly, this ground is rejected.

25. The last ground in this appeal is with regard to estimating 2% of dividend income as expenditure attributable to exempt income u/s. 14A of the Act, without considering the fact that no expenditure has been actually incurred by the company for earning such exempt income.

26. In view of our finding on the same issue in assessee's appeal in ITA No. 698/Mds/2011, this issue has become infructuous and the same is dismissed.

27. In the result, the assessee's appeal in ITA No. 617/Mds/2011 is dismissed and the Revenue's appeals in ITA Nos. 697 & 698/Mds/2011 are partly allowed.