Polaris Financial Technology Limited, CHENNAI V. ACIT, CHENNAI

ITA 1053/CHNY/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4915 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 18-01-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 25-04-2014
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH JT
• Assessee Lawyers: VIKRAM VIJAYARAGHVAN
• Keywords: Reopening of assessment; Audit objection; Tangible material; Difference of opinion; Capital receipt; Change of opinion; Reassessment proceedings
• Section: 143(3); 147

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C, CHENNAI , . , ! ' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ITA NO.1053/MDS/2014 ! # $# / ASSESSMENT YEAR : 2005-06 POLARIS FINANCIAL TECHNOLOGY LTD., (FORMERLY KNOWN AS POLARIS SOFTWARE LAB LTD.), 244, CAREX CENTER, ANNA SALAI, CHENNAI 600 006. [PAN: AAACP 4341E] VS. ASST. COMMISSIONER OF INCOME- TAX, COMPANY CIRCLE-V, CHENNAI. ( /APPELLANT ) ( / RESPONDENT ) %& ( ) / APPELLANT BY : SHRI VIKRAM VIJAYARAGHVAN, ADVOCATE *+%& ( ) / RESPONDENT BY : SHRI A.V.SREEKANTH, JT. CIT ( , / DATE OF HEARING : 18.01.2017 -$ ( , / DATE OF PRONOUNCEMENT : 11.04.2017 /O R D E R PER SANJAY ARORA, AM : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-V, CHENNAI (C IT(A) FOR SHORT) DATED 02.12.2013, DISMISSING THE ASSESSEES APPEAL CONTES TING ITS ASSESSMENT U/S. 143(3) R/W S. 147 OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) DATED 26.12.2008 FOR ASSESSMENT YEAR (AY) 2005-06. 2 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT 2. THE APPEAL RAISES THREE ISSUES, I.E., APART FROM THAT QUA JURISDICTION; THE IMPUGNED ASSESSMENT BEING BY WAY OF REASSESSMENT, I NITIATED AFTER FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR EVEN A S THE ASSESSMENT IN THE FIRST INSTANCE WAS U/S. 143(3) (R/W. 92CA) OF THE ACT (VI DE ORDER DATED 26.12.2008/ COPY ON RECORD). IT IS CLAIMED THAT THERE HAS BEEN NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL F ACTS NECESSARY FOR ITS ASSESSMENT FOR THE RELEVANT YEAR (REFER FIRST PROVISO TO S. 147) AND, FURTHER, THAT NO NEW OR TANGIBLE MATERIAL INFORMS THE REVENUES CASE, WHICH OUGHT TO BE THE CASE, OR ELSE IT IS ONLY A CHANGE OF OPINION WHICH, AS IS WE LL SETTLED, CANNOT SUSTAIN REASSESSMENT ( CIT V. KELVINATOR OF INDIA LTD. [2010] 320 ITR 561 (SC)), ALSO PLACING RELIANCE ON THE ORDER BY THE TRIBUNAL IN TH E ASSESSEES OWN CASE FOR THE TWO IMMEDIATELY PRECEDING YEARS (IN ITA NOS. 1908 & 1909/MDS/2012 DATED 18.03.2016/COPY ON RECORD). 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 THE REASONS FOR REOPENING THE ASSESSMENT, AS CO MMUNICATED BY THE ASSESSING OFFICER (AO) (PB PG.5), BEARS THREE REASO NS. WE SHALL, ACCORDINGLY, EXAMINE THE ASSESSEES CASE ON MERITS QUA EACH OF THEM. THE TRIBUNAL HAS FOR THE EARLIER TWO YEARS ALLOWED THE ASSESSEES APPEAL ON THE BASIS OF A FINDING OF FACT THAT THE ASSESSEE HAD PRODUCED ALL THE RELEVANT MAT ERIAL. THE FIRST REASON (PB PG.5) IS THAT THE ASSESSEE HAD NOT ADJUSTED THE LOS S OF THE STP UNITS AT HYDERABAD AND GURGAON AGAINST THE PROFIT FROM OTHER SECTION 1 0A UNITS, SWELLING ITS CLAIM FOR DEDUCTION UNDER SECTION10A TO THAT EXTENT. A PE RUSAL OF THE ASSESSMENT ORDER DATED 26.12.2008 SHOWS THAT THE ASSESSEE HAD IN FAC T CLAIMED DEDUCTION AT A HIGHER AMOUNT, I.E., WITHOUT ADJUSTING THE LOSS (BE ING AT . 268.72 LACS), ONLY DURING THE ASSESSMENT PROCEEDINGS (VIDE LETTER DATE D 18.12.2008/PB PG. 29) THAT PER THE RETURN OF INCOME BEING UPON SUCH ADJUS TMENT, DULY SUPPORTING IT WITH A CERTIFICATE FROM THE CA IN FORM F, WHICH ON VERIFICATION APPEARED CORRECT, AND ALLOWED ON THAT BASIS (PARA 5 OF THE A SSESSMENT ORDER). HOW COULD 3 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT THEN, WE WONDER, THIS FORM A REASON FOR AN INCOME E SCAPING ASSESSMENT, WHICH IS CLEARLY A CHANGE OF OPINION, BARRING REASSESSMEN T. 3.2 THE SECOND REASON, REFERRING TO NOTE B-18 OF TH E NOTES TO THE ACCOUNTS (SCHEDULE-XV TO THE BALANCE SHEET/PB PGS. 39-72), S TATED IS THAT THE ASSESSEE HAD IN CONSEQUENCE TO ITS MERGER WITH ORBITECH SOLU TIONS LTD. (A SUBSIDIARY OF ORBITECH LTD.), RECEIVED . 7.50 CR. DURING THE RELEVANT YEAR FROM THE PARENT COMPANY. IN-AS-MUCH AS THE ASSESSEE HAD FOLLOWED POOLING OF INTEREST METHOD IN TAKING OVER THE ASSETS AND LIABILITIES OF THE AM ALGAMATING COMPANY (ORBITECH SOLUTIONS LTD), THERE IS NO QUESTION OF THE MERGER RESULTING IN ANY CASH RECEIPT, WHICH WAS ACCORDINGLY ONLY INCOME, ASSESSABLE U/S. 28(IV). THE ASSESSEE ADVERTED OUR ATTENTION TO ITS LETTERS DATED 18.12. 2008 AND 22.12.2008 (PB PGS. 29-31), FURNISHED DURING THE ASSESSMENT PROCEEDINGS , WHEREAT THIS ASPECT WAS EXPLAINED, STATING THE RECEIPT TO BE A CAPITAL RECE IPT; BESIDES TO NOTE B-18, TO WHICH THE REASON RECORDED ITSELF REFERS, SO THAT TH ERE WAS BOTH TRUE AND FULL DISCLOSURE, AS WELL AS DUE CONSIDERATION OF THE MAT TER IN THE ORIGINAL ASSESSMENT. THE RELEVANT NOTE READS AS UNDER: (PB PAGE 71) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS B. NOTES TO THE ACCOUNTS 1 TO 17 18. MISCELLANEOUS INCOME (UNDER OTHER INCOME (SCHED ULE 11)) INCLUDES RS. 750 LAKHS RECEIVED DURING THE YEAR FRO M ORBITECH LIMITED, THE ERSTWHILE SHAREHOLDER OF ORBITECH SOLUTIONS LIMITED (WHICH HAS BEEN AMALGAMATED WITH POLARIS SOFTWARE LAB LIMITED ON 1 NOVEMBER 2002) TOWARD THE PRE MERGER CONTINGENCIES AND / OR ANY ME RGER RELATED MATTERS. THE LETTERS DATED 18.12.2008 AND 22.12.2008 (SUPRA) REITERATE THE SAME, BESIDES ADDING THAT THE ASSESSEE HAD ADJUSTED .717 LAKHS INCURRED TOWARD MERGER WITH RESERVE AND SURPLUS AND, FURTHER, NOT AVAILED OF DEDUCTION UNDER SECTION 35- DD. SURELY, IF THAT BE THE CASE, NO INFERENCE AS TO THE RECEIPT BEING INCOME ARISES DESPITE THE FACT THAT, EVEN AS STATED IN THE REASON RECORDED, THE MERGER PER SE WOULD NOT LEAD TO ANY CASH EXCHANGE BETWEEN THE COM PANIES UNDERGOING 4 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT AMALGAMATION AND, THUS, TO A CASH RECEIPT TO THE AM ALGAMATED (ASSESSEE) COMPANY. ALSO, THE AO CAN ONLY BE REGARDED AS HAVIN G CONSIDERED THE ASSESSEES REPLIES, SO THAT HIS DECISION NOT TO EFF ECT ANY ADJUSTMENT ON THIS COUNT IN ASSESSMENT IMPLIES HIS SATISFACTION WITH THE ASS ESSEES EXPLANATION. THE ASSESSEES CASE IS THUS UNEXCEPTIONAL; THE ONLY RID ER OR CAVEAT BEING THAT WHAT THE ASSESSEE HAS STATED IN THE ASSESSMENT PROCEEDIN GS IS FULL AND TRUE AND NOTHING MATERIAL HAS BEEN OMITTED TO BE DISCLOSED. THE REASON IS SIMPLE; WHERE NOT SO, THE CONDITION OF THE FIRST PROVISO TO S. 147 WOULD STAND SATISFIED AND, BESIDES, THE SATISFACTION OF THE AO ON THAT BASIS, I.E., INCOMPLETE OR UNTRUE FACTS, CAN HARDLY BE REGARDED AS A VALID SATISFACTION IN L AW SO AS TO ATTRACT THE CHARGE OF CHANGE OF OPINION. TOWARD THIS, WE FIND THE ASSES SMENT ORDER RECORDS THE FOLLOWING, AND WHICH STANDS ALSO REPRODUCED IN THE IMPUGNED ORDER (PARA 5): A) THE ASSESSEE HAS ALREADY CLAIMED PRE-MERGER EXPENDI TURE IN THE YEAR OF AMALGAMATION AS PER THE HIGH COURTS ORDER AND REDU CED THE AMOUNT FROM THE GENERAL RESERVE; B) DEDUCTION IS ALSO CLAIMED ON MERGER EXPENSES (AT TH E RATE OF 1/5 TH ) IN THE STATEMENT OF INCOME FROM ASSESSMENT YEAR 2003-04 ON WARDS; [ C) THE ASSESSEES ANNUAL REPORT FOR THE RELEVANT PREVI OUS YEAR (I.E., F.Y. 2004- 05) ADMIT RS. 7.50 CR. AS MISCELLANEOUS INCOME UNDE R THE HEAD OTHER INCOME. IT GOES ON TO STATE THAT UNDER THE CIRCUMSTANCES TH E ASSESSEE CANNOT NOW, I.E., AFTER TWO YEARS OF THE AMALGAMATION, CLAIM THE RECE IPT AS THE PAYMENT OF PRE MERGER CONTINGENCIES/ANY MERGER RELATED MATTERS, A S STATED IN THE NOTE B-18. AND, ACCORDINGLY, THAT POOLING OF INTEREST CANNOT R ESULT IN ANY CASH FOR THE AMALGAMATED COMPANY FROM THE AMALGAMATING COMPANY. THE ASSESSEE HAS NOT REBUTTED ANY OF THESE FACTS, WHICH CLEARLY CONTRA DICT WHAT STANDS STATED BY IT IN THE ASSESSMENT PROCEEDINGS. WHY, THE ACCOUNTS THEMS ELVES SPEAK OTHERWISE. THE MERGER EXPENSES STAND DEDUCTED FROM THE GENERAL RESERVE AND CLAIMED @ 1/5 TH FROM THE YEAR OF MERGER (I.E., AY 2003-04 ONWARDS) . IF THE ASSESSEE HAD INDEED RECEIVED THE IMPUGNED SUM (OF . 750 LACS) TOWARD MERGER EXPENSES, 5 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT STATED AT RS. 717 LACS, IT HAS RECOUPED THE ENTIRE EXPENDITURE INCURRED ON MERGER. THE SAME WOULD IMPLY THAT THE ASSESSEE HAS NOT INCU RRED ANY EXPENDITURE ON MERGER, IN-AS-MUCH AS THE SAME COULD ONLY BE RECKON ED AT NET OF THAT RECOVERED; RATHER, GENERATING A SURPLUS. IT WOULD, UNDER THE C IRCUMSTANCES, APART FROM NOT CLAIMING ANY EXPENDITURE (CLAIMED @ 1/5 TH , AS PROVIDED U/S. 35DD) FOR THE CURRENT YEAR, ALSO SURRENDER THAT CLAIMED FOR THE EARLIER YEARS, CITING THE RECEIPT FROM OBL ON THAT ACCOUNT. IN FACT, IF THERE WAS ANY SUCH UNDERSTANDING WITH OBL, IT WOULD NOT HAVE PREFERRED ANY CLAIM FOR MERG ER EXPENSES IN THE FIRST PLACE, DEBITING THE SAID EXPENDITURE TO THE ACCOUNT OF OBL IN ITS ACCOUNTS. IN ANY CASE, IT WOULD, ON ITS RECEIPT (OF MERGER EXPEN SES), TRANSFER BACK THE EXPENDITURE DEDUCTED FROM THE GENERAL RESERVE A/C (FALLING UNDER THE HEAD RESERVE & SURPLUS) IN ACCOUNTS AND ADJUST THE SAM E AGAINST THE SUM RECEIVED, I.E., CREDIT THE RESERVE ACCOUNT AND DEBIT THE ACCO UNT IN WHICH THE RECEIPT (FROM OBL) IS HELD. DOING SO WOULD RESULT IN ONLY THE EXC ESS RS. 33 LACS BEING REFLECTED IN THIS ACCOUNT, SO THAT IT IS THIS BALAN CE ONLY WHICH COULD BE TRANSFERRED DIRECTLY TO THE BALANCE SHEET. THIS ONL Y WOULD BE IN CONSISTENCE WITH WHAT IS BEING STATED IN THE NOTES TO THE ACCOUNTS. IN OTHER WORDS, THE ASSESSEES CLAIM IS CONTRADICTED BY ITS OWN ACCOUNTS AS WELL AS ITS RETURN OF INCOME. THE AO IS THUS JUSTIFIED IN HOLDING A HONEST BELIEF THA T WHAT IS BEING STATED IS NOT CORRECT, AND THAT THEREFORE INCOME HAD ESCAPED ASSE SSMENT. THE CONDITION OF THE FIRST PROVISO TO SECTION 147 IS SATISFIED. THE REASSESSMENT NOTI CE IS ACCORDINGLY VALID ON THIS COUNT. 3.3 THE THIRD REASON RECORDED FOR THE REOPENING OF ASSESSMENT IS WITH REFERENCE TO SCHEDULES VII AND VIII TO THE BALANCE SHEET (AS AT THE RELEVANT YEAR-END), WHICH ARE IN RESPECT OF LOANS & ADVANCE S AND CURRENT LIABILITIES RESPECTIVELY. THE SAME BEAR BALANCES UNDER THE ACC OUNT HEADS BILLING IN EXCESS OF REVENUE AND REVENUE IN EXCESS OF BILLING RESP ECTIVELY. THE REASON RECORDED 6 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT STATES THAT AS THE ASSESSEE IS FOLLOWING MERCANTILE METHOD OF ACCOUNTING, THE ENTIRE INCOME ACCRUED DURING THE YEAR IS TO BE OFFE RED AS INCOME FOR THAT YEAR. THERE IS NOTHING ON RECORD, OR REFERRED TO, TO SUGG EST THAT THE ACCOUNTS DO NOT REFLECT THE CORRECT POSITION IN THIS REGARD. IF THE AMOUNT BILLED IS IN EXCESS OF THE REVENUE, IMPLYING THAT CHARGEABLE ON THE BASIS OF THE SERVICES RENDERED, THE SAME IS LIABLE TO BE SHOWN AS A CURRENT LIABILITY. SIMILARLY, WHERE THE SERVICES RENDERED ARE IN EXCESS OF THAT BILLED, REVENUE HAS TO BE RECOGNIZED IRRESPECTIVE OF IT BEING NOT BILLED AS AT THE YEAR-END. THERE BE ING NO MATERIAL TO SUPPORT THE REASON, WHICH COULD ONLY BE VALID WHERE THE ACCOUNT S DO NOT STATE THE CORRECT POSITION, I.E., ON FACTS, THE SAME CANNOT HOLD. THE SAID REASON ACCORDINGLY FAILS. 3.4 AS WE HAVE UPHELD THE AOS ACTION QUA THE SECOND REASON, THE ASSESSEES CHALLENGE ON JURISDICTION FAILS. THE ASSESSEE STATI NG THAT THE REOPENING IS BASED ON AN AUDIT OBJECTION, WOULD, AGAIN, BE OF NO MOMEN T. REFERENCE IN THIS CONTEXT IS MADE TO THE DECISION IN CIT V. P.V.S. BEEDIES (P.) LTD. [1999] 237 ITR 13 (SC). THE MATTER IS FACTUAL, AND IT HAS BEEN SHOWN THAT THE ASSESSEE DID NOT DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS RELEVAN T FOR ITS ASSESSMENT. TO PUT SUCCINCTLY, THE ASSESSEE CLAIMS THE IMPUGNED RECEIP T TO BE AGAINST EXPENDITURE, SO THAT IT STANDS REIMBURSED, WHILE AT THE SAME TIM E HAS NOT ONLY CLAIMED DEDUCTION IN ITS RESPECT, SO THAT IT HAS BEEN BORNE BY IT , BUT ALSO CONTINUES TO DO SO (IN-AS-MUCH AS THE SAME IS ON AN AMORTIZED BASIS @ 1/5 TH FOR EACH YEAR), I.E., CLAIM DEDUCTION IN RESPECT OF REIMBURSED EXPENDITUR E EVEN AFTER REIMBURSEMENT - WHICH IS TWO YEARS HENCE, A TREATMENT SUPPORTED B Y ITS ACCOUNTS, I.E., BOOKING THE RECEIPT AS INCOME RATHER THAN ADJUSTING IT AGAI NST EXPENDITURE. IN OTHER WORDS, THERE IS A COMPLETE CONTRADICTION. WE CLARIF Y THIS AS AN EXPLANATION BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS WOUL D HAVE MEANT THAT THE REASSESSMENT PROCEEDINGS, AS FOR THE OTHER REASONS, WOULD NOT BE SUSTAINABLE. 7 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT 4. WE NEXT DISCUSS THE VARIOUS ISSUES ON MERITS. TH E FIRST ISSUE (GROUND 7) IS QUA DEDUCTION U/S. 10A. WE HAVE ALREADY STATED THAT TH E AO HAS TAKEN A VIEW IN THE MATTER. HE IS ACCORDINGLY PRECLUDED FROM VISITI NG THE MATTER AGAIN IN THE REASSESSMENT PROCEEDINGS INASMUCH AS HE HAS NO POWE R TO REVIEW HIS ORDER. EVEN OTHERWISE, THE MATTER IS SQUARELY COVERED BY T HE DECISION BY THE HON'BLE APEX COURT IN CIT VS. YOKOGAWA (INDIA) LTD. (IN CA NO. 8498 OF 2013 DATED 16.12.2016), RELIED UPON, CLARIFYING THAT DEDUCTION U/SS. 10A/10B IS TO BE ALLOWED WHILE COMPUTING THE GROSS TOTAL INCOME UNDE R CHAPTER-IV OF THE ACT AND NOT AT THE STAGE OF COMPUTING THE TOTAL INCOME UNDER ITS CHAPTER-VI. THE DEDUCTION U/S. 10A AS ALLOWED IN ASSESSMENT CANNOT ACCORDINGLY BE INTERFERED WITH. WE DECIDE ACCORDINGLY. 5. THE NEXT ISSUE (RAISED PER GROUNDS 8 AND 9) IS T HE ASSESSABILITY OR OTHERWISE IN LAW OF THE SUM OF .750 LACS RECEIVED BY THE ASSESSEE FROM OBL AS INCOME IN THE FACTS AND CIRCUMSTANCES OF THE CASE. IN OUR VIEW, THE FIRST ASPECT THAT NEEDS TO BE CONSIDERED IS IF IT IS INCOME. THE HEAD OF INCOME IS OF SECONDARY IMPORTANCE, RELEVANT FOR DETERMINING IF I T IS LIABLE FOR DEDUCTION U/S.10A OR S. 80 HHE, AS THE ASSESSEE CLAIMS IN THE ALTERNATIVE. SURELY, IF IT IS RECEIVED, AS CLAIMED, TOWARD MERGER EXPENSES, IT IS ONLY A CAPITAL RECEIPT IN THE ASSESSEES HANDS. THERE IS HOWEVER NO MATERIAL TO S UPPORT THIS. THERE IS IN FACT EVEN NO CORROBORATIVE EVIDENCE AS (SAY) COPY OF THE AGREEMENT PURSUANT TO WHICH IT WAS PAID; THE BOARD RESOLUTION OF OBL AUTH ORIZING THE PAYMENT OR A CERTIFICATE FROM ITS AUDITORS, ETC., TO THAT EFFEC T, ON RECORD. IN FACT, WHERE SO, THE ASSESSEES EXPLANATION, CLAIMING IT TO HAVE INCURRE D MERGER EXPENSES AT . 717 LACS, STANDS WHOLLY MET, SO THAT THERE IS NO QUESTI ON OF IT CLAIMING DEDUCTION U/S. 35 DD, WHICH THE AO STATES IS BEING CLAIMED REGULAR LY @ 1/5 TH SINCE AY 2003- 04 ONWARDS. HOW COULD, EVEN AS OBSERVED EARLIER, DE DUCTION BE CLAIMED IN RESPECT OF REIMBURSABLE OR REIMBURSED EXPENDITURE? IT IS IN FACT FOR THESE REASONS THAT THE REASSESSMENT STANDS UPHELD QUA JURISDICTION. EVEN IF THE AMOUNT IS 8 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT RECEIVED SUBSEQUENTLY, AND THERE WAS SOME UNCERTAIN TY WITH REGARD TO ITS RECEIPT, THERE OUGHT NOT TO BE ANY CLAIM (@ 1/5 TH ) FOR THE CURRENT YEAR, AS WELL AS THE DEDUCTION OF THE MERGER EXPENSES FROM THE GENERAL R ESERVE, WHICH IS AT . 467.25 LACS (REFER SCHEDULE-2 TO THE BALANCE SHEET) , WHICH WOULD STAND TO BE ADJUSTED AGAINST THE AMOUNT RECEIVED. AT THE SAME TIME, IT IS NOT CLEAR IF THE ASSESSEE HAS CLAIMED DEDUCTION U/S. 35DD IN RESPECT OF THE MERGER EXPENSES ADJUSTED AGA INST THE GENERAL RESERVE FOR THE CURRENT YEAR, I.E., . 467.25 LACS. IF NOT, FOR WHICH THE ASSESSEE IS A PPARENTLY ENTITLED, ITS CLAIM OF HAVING RECEIVED THE AMOUNT FROM OBL TOWARD THE SAME, COULD HAVE, PRIMA FACIE , SOME RELEVANCE. WE SAY SO, I.E., PRIMA FACIE , AS THE ASSESSEE HAS ITSELF IN ITS ACCOUNTS TREATED THE SAI D AMOUNT AS INCOME RATHER THAN TAKING IT TO THE BALANCE-SHEET. AS SUCH, TO THE EXT ENT THE ASSESSEE HAS NOT CLAIMED THE EXPENDITURE QUA MERGER EXPENSES, WHICH WE MAY THOUGH CLARIFY WOULD NOT INCLUDE PRE-MERGER EXPENSES, THE RECEIPT FROM THE O BL WOULD TO THAT EXTENT BE REGARDED AS A REIMBURSEMENT THEREOF AND, ACCORDINGL Y, ONLY A CAPITAL RECEIPT, NOT LIABLE TO TAX. THIS IS OF COURSE SUBJECT TO THE AS SESSEE PRODUCING SOME EXTERNAL MATERIAL TOWARD EVIDENCING THE NATURE OF THE RECEIP T, I.E., AS TOWARD MERGER EXPENSES. FURTHER, ITS CLAIM QUA THE BALANCE AMOUNT, I.E., RECEIVED IN EXCESS, BEING TREATED AS SO, CANNOT BE ACCEPTED; THERE BEIN G NO EXPENDITURE AGAINST WHICH THE SAME COULD BE CONSIDERED AS RECEIVED. ALS O, THE EXPENDITURE INCURRED, WHERE AND TO THE EXTENT CLAIMED AS A DEDUCTION, CAN NOT ALSO BE CONSIDERED AS HAVING BEEN RECOVERED, WHICH WOULD BE INCONSISTENT WITH THE ASSESSEES ACCOUNTS, DULY AUDITED, AND THE RETURNS, DULY VERIF IED, FURNISHED FOR THE CURRENT, PRECEDING AND EVEN SUCCEEDING YEAR/S. THE SAME IS, AS OTHER RECEIPTS, IN-AS- MUCH AS THERE IS NO CORRESPONDING OBLIGATION TO RET URN THE VALUE RECEIVED, EITHER IN CASH OR ANY KIND, ONLY IN THE NATURE OF INCOME, AND RIGHTLY ASSESSED AS SO AND, IN FACT, TO THAT EXTENT, RIGHTLY TAKEN IN ACCOUNTS TO THE INCOME ACCOUNT. REFERENCE IN THIS CONTEXT MAY BE MADE TO THE DECISIONS IN EMIL WEBBER V. CIT [1993] 200 ITR 483 (SC) AND CIT V. G.R.KARTHIKEYAN [1993] 201 ITR 866 (SC). AS REGARDS 9 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT THE ASSESSEES ALTERNATE CLAIM, THE AMOUNT IS NEITH ER IN RESPECT OF EXPORT NOR RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE AND, ACCOR DINGLY, THERE IS NO BASIS FOR ITS CLAIM FOR DEDUCTION U/S. 10A OR S. 80HHE IN IT S RESPECT. QUA QUANTUM, THE AO SHALL VERIFY THE ASSESSEES CLAIM IN THIS REGARD AND DECIDE ON THE FOREGOING TERMS ON THE BASIS OF HIS FACTUAL FINDINGS. THE ONU S TO PROVE ITS CLAIM/S, WE MAY ADD, WOULD BE ON THE ASSESSEE. THE ASSESSEES CLAIM IS PARTLY ALLOWED ON THE FOREGOING TERMS, DISPOSING THE AFORESAID GROUNDS OF THE APPEAL. 6. THE FINAL ISSUE RAISED IN APPEAL IS IN RESPECT O F DISALLOWANCE OF LEGAL AND PROFESSIONAL FEE, PAID OF . 13.53 LACS (VIDE GDS. 10 & 11). THE SAME, IT WAS OBSERVED BY THE AO WITH REFERENCE TO THE NOTES TO T HE ACCOUNTS TO THE ASSESSEES FINAL ACCOUNTS FOR AY 2009-10, IS PART O F THE LEGAL CHARGES PAID TO A LAW FIRM FOR ACQUISITION OF A US COMPANY BY THE NAM E DATA INC., USA (AT USD 6 LACS). THE EXPENDITURE BEING IN RESPECT OF ACQUIS ITION OF A COMPANY, WAS THUS CONSTRUED AS CAPITAL IN NATURE AND, ACCORDINGLY, DI SALLOWED IN COMPUTING THE ASSESSABLE INCOME. 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE PRIMARY FACTS ARE NOT DISPUTED; IN FACT, AT ANY STAGE, INCL UDING BEFORE US, BEING, RATHER, ARISING FROM THE ASSESSEES OWN AUDITED ACCOUNTS. W E ACCORDINGLY FIND NO INFIRMITY IN THE SAID DISALLOWANCE, AND CONFIRM THE SAME. WE DECIDE ACCORDINGLY. 8. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON APRIL 11, 2017 AT CHENNAI . SD/- SD/- ( . ) ( ) (G. PAVAN KUMAR) (SANJAY ARORA) ! /JUDICIAL MEMBER /ACCOUNTANT MEMBER 10 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT /CHENNAI, . /DATED, APRIL 11, 2017. EDN / ( *!,01 21$, /COPY TO: 1. %& /APPELLANT 2. *+%& /RESPONDENT 3. 3, ( )/CIT(A) 4. 3, /CIT 5. 145 *!,! /DR 6. 56# 7 /GF , , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C, CHENNAI , . , ! ' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ITA NO.1053/MDS/2014 ! # $# / ASSESSMENT YEAR : 2005-06 POLARIS FINANCIAL TECHNOLOGY LTD., (FORMERLY KNOWN AS POLARIS SOFTWARE LAB LTD.), 244, CAREX CENTER, ANNA SALAI, CHENNAI 600 006. [PAN: AAACP 4341E] VS. ASST. COMMISSIONER OF INCOME- TAX, COMPANY CIRCLE-V, CHENNAI. ( /APPELLANT ) ( / RESPONDENT ) %& ( ) / APPELLANT BY : SHRI VIKRAM VIJAYARAGHVAN, ADVOCATE *+%& ( ) / RESPONDENT BY : SHRI A.V.SREEKANTH, JT. CIT ( , / DATE OF HEARING : 18.01.2017 -$ ( , / DATE OF PRONOUNCEMENT : 11.04.2017 /O R D E R PER SANJAY ARORA, AM : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-V, CHENNAI (C IT(A) FOR SHORT) DATED 02.12.2013, DISMISSING THE ASSESSEES APPEAL CONTES TING ITS ASSESSMENT U/S. 143(3) R/W S. 147 OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) DATED 26.12.2008 FOR ASSESSMENT YEAR (AY) 2005-06. 2 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT 2. THE APPEAL RAISES THREE ISSUES, I.E., APART FROM THAT QUA JURISDICTION; THE IMPUGNED ASSESSMENT BEING BY WAY OF REASSESSMENT, I NITIATED AFTER FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR EVEN A S THE ASSESSMENT IN THE FIRST INSTANCE WAS U/S. 143(3) (R/W. 92CA) OF THE ACT (VI DE ORDER DATED 26.12.2008/ COPY ON RECORD). IT IS CLAIMED THAT THERE HAS BEEN NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL F ACTS NECESSARY FOR ITS ASSESSMENT FOR THE RELEVANT YEAR (REFER FIRST PROVISO TO S. 147) AND, FURTHER, THAT NO NEW OR TANGIBLE MATERIAL INFORMS THE REVENUES CASE, WHICH OUGHT TO BE THE CASE, OR ELSE IT IS ONLY A CHANGE OF OPINION WHICH, AS IS WE LL SETTLED, CANNOT SUSTAIN REASSESSMENT ( CIT V. KELVINATOR OF INDIA LTD. [2010] 320 ITR 561 (SC)), ALSO PLACING RELIANCE ON THE ORDER BY THE TRIBUNAL IN TH E ASSESSEES OWN CASE FOR THE TWO IMMEDIATELY PRECEDING YEARS (IN ITA NOS. 1908 & 1909/MDS/2012 DATED 18.03.2016/COPY ON RECORD). 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 THE REASONS FOR REOPENING THE ASSESSMENT, AS CO MMUNICATED BY THE ASSESSING OFFICER (AO) (PB PG.5), BEARS THREE REASO NS. WE SHALL, ACCORDINGLY, EXAMINE THE ASSESSEES CASE ON MERITS QUA EACH OF THEM. THE TRIBUNAL HAS FOR THE EARLIER TWO YEARS ALLOWED THE ASSESSEES APPEAL ON THE BASIS OF A FINDING OF FACT THAT THE ASSESSEE HAD PRODUCED ALL THE RELEVANT MAT ERIAL. THE FIRST REASON (PB PG.5) IS THAT THE ASSESSEE HAD NOT ADJUSTED THE LOS S OF THE STP UNITS AT HYDERABAD AND GURGAON AGAINST THE PROFIT FROM OTHER SECTION 1 0A UNITS, SWELLING ITS CLAIM FOR DEDUCTION UNDER SECTION10A TO THAT EXTENT. A PE RUSAL OF THE ASSESSMENT ORDER DATED 26.12.2008 SHOWS THAT THE ASSESSEE HAD IN FAC T CLAIMED DEDUCTION AT A HIGHER AMOUNT, I.E., WITHOUT ADJUSTING THE LOSS (BE ING AT . 268.72 LACS), ONLY DURING THE ASSESSMENT PROCEEDINGS (VIDE LETTER DATE D 18.12.2008/PB PG. 29) THAT PER THE RETURN OF INCOME BEING UPON SUCH ADJUS TMENT, DULY SUPPORTING IT WITH A CERTIFICATE FROM THE CA IN FORM F, WHICH ON VERIFICATION APPEARED CORRECT, AND ALLOWED ON THAT BASIS (PARA 5 OF THE A SSESSMENT ORDER). HOW COULD 3 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT THEN, WE WONDER, THIS FORM A REASON FOR AN INCOME E SCAPING ASSESSMENT, WHICH IS CLEARLY A CHANGE OF OPINION, BARRING REASSESSMEN T. 3.2 THE SECOND REASON, REFERRING TO NOTE B-18 OF TH E NOTES TO THE ACCOUNTS (SCHEDULE-XV TO THE BALANCE SHEET/PB PGS. 39-72), S TATED IS THAT THE ASSESSEE HAD IN CONSEQUENCE TO ITS MERGER WITH ORBITECH SOLU TIONS LTD. (A SUBSIDIARY OF ORBITECH LTD.), RECEIVED . 7.50 CR. DURING THE RELEVANT YEAR FROM THE PARENT COMPANY. IN-AS-MUCH AS THE ASSESSEE HAD FOLLOWED POOLING OF INTEREST METHOD IN TAKING OVER THE ASSETS AND LIABILITIES OF THE AM ALGAMATING COMPANY (ORBITECH SOLUTIONS LTD), THERE IS NO QUESTION OF THE MERGER RESULTING IN ANY CASH RECEIPT, WHICH WAS ACCORDINGLY ONLY INCOME, ASSESSABLE U/S. 28(IV). THE ASSESSEE ADVERTED OUR ATTENTION TO ITS LETTERS DATED 18.12. 2008 AND 22.12.2008 (PB PGS. 29-31), FURNISHED DURING THE ASSESSMENT PROCEEDINGS , WHEREAT THIS ASPECT WAS EXPLAINED, STATING THE RECEIPT TO BE A CAPITAL RECE IPT; BESIDES TO NOTE B-18, TO WHICH THE REASON RECORDED ITSELF REFERS, SO THAT TH ERE WAS BOTH TRUE AND FULL DISCLOSURE, AS WELL AS DUE CONSIDERATION OF THE MAT TER IN THE ORIGINAL ASSESSMENT. THE RELEVANT NOTE READS AS UNDER: (PB PAGE 71) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS B. NOTES TO THE ACCOUNTS 1 TO 17 18. MISCELLANEOUS INCOME (UNDER OTHER INCOME (SCHED ULE 11)) INCLUDES RS. 750 LAKHS RECEIVED DURING THE YEAR FRO M ORBITECH LIMITED, THE ERSTWHILE SHAREHOLDER OF ORBITECH SOLUTIONS LIMITED (WHICH HAS BEEN AMALGAMATED WITH POLARIS SOFTWARE LAB LIMITED ON 1 NOVEMBER 2002) TOWARD THE PRE MERGER CONTINGENCIES AND / OR ANY ME RGER RELATED MATTERS. THE LETTERS DATED 18.12.2008 AND 22.12.2008 (SUPRA) REITERATE THE SAME, BESIDES ADDING THAT THE ASSESSEE HAD ADJUSTED .717 LAKHS INCURRED TOWARD MERGER WITH RESERVE AND SURPLUS AND, FURTHER, NOT AVAILED OF DEDUCTION UNDER SECTION 35- DD. SURELY, IF THAT BE THE CASE, NO INFERENCE AS TO THE RECEIPT BEING INCOME ARISES DESPITE THE FACT THAT, EVEN AS STATED IN THE REASON RECORDED, THE MERGER PER SE WOULD NOT LEAD TO ANY CASH EXCHANGE BETWEEN THE COM PANIES UNDERGOING 4 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT AMALGAMATION AND, THUS, TO A CASH RECEIPT TO THE AM ALGAMATED (ASSESSEE) COMPANY. ALSO, THE AO CAN ONLY BE REGARDED AS HAVIN G CONSIDERED THE ASSESSEES REPLIES, SO THAT HIS DECISION NOT TO EFF ECT ANY ADJUSTMENT ON THIS COUNT IN ASSESSMENT IMPLIES HIS SATISFACTION WITH THE ASS ESSEES EXPLANATION. THE ASSESSEES CASE IS THUS UNEXCEPTIONAL; THE ONLY RID ER OR CAVEAT BEING THAT WHAT THE ASSESSEE HAS STATED IN THE ASSESSMENT PROCEEDIN GS IS FULL AND TRUE AND NOTHING MATERIAL HAS BEEN OMITTED TO BE DISCLOSED. THE REASON IS SIMPLE; WHERE NOT SO, THE CONDITION OF THE FIRST PROVISO TO S. 147 WOULD STAND SATISFIED AND, BESIDES, THE SATISFACTION OF THE AO ON THAT BASIS, I.E., INCOMPLETE OR UNTRUE FACTS, CAN HARDLY BE REGARDED AS A VALID SATISFACTION IN L AW SO AS TO ATTRACT THE CHARGE OF CHANGE OF OPINION. TOWARD THIS, WE FIND THE ASSES SMENT ORDER RECORDS THE FOLLOWING, AND WHICH STANDS ALSO REPRODUCED IN THE IMPUGNED ORDER (PARA 5): A) THE ASSESSEE HAS ALREADY CLAIMED PRE-MERGER EXPENDI TURE IN THE YEAR OF AMALGAMATION AS PER THE HIGH COURTS ORDER AND REDU CED THE AMOUNT FROM THE GENERAL RESERVE; B) DEDUCTION IS ALSO CLAIMED ON MERGER EXPENSES (AT TH E RATE OF 1/5 TH ) IN THE STATEMENT OF INCOME FROM ASSESSMENT YEAR 2003-04 ON WARDS; [ C) THE ASSESSEES ANNUAL REPORT FOR THE RELEVANT PREVI OUS YEAR (I.E., F.Y. 2004- 05) ADMIT RS. 7.50 CR. AS MISCELLANEOUS INCOME UNDE R THE HEAD OTHER INCOME. IT GOES ON TO STATE THAT UNDER THE CIRCUMSTANCES TH E ASSESSEE CANNOT NOW, I.E., AFTER TWO YEARS OF THE AMALGAMATION, CLAIM THE RECE IPT AS THE PAYMENT OF PRE MERGER CONTINGENCIES/ANY MERGER RELATED MATTERS, A S STATED IN THE NOTE B-18. AND, ACCORDINGLY, THAT POOLING OF INTEREST CANNOT R ESULT IN ANY CASH FOR THE AMALGAMATED COMPANY FROM THE AMALGAMATING COMPANY. THE ASSESSEE HAS NOT REBUTTED ANY OF THESE FACTS, WHICH CLEARLY CONTRA DICT WHAT STANDS STATED BY IT IN THE ASSESSMENT PROCEEDINGS. WHY, THE ACCOUNTS THEMS ELVES SPEAK OTHERWISE. THE MERGER EXPENSES STAND DEDUCTED FROM THE GENERAL RESERVE AND CLAIMED @ 1/5 TH FROM THE YEAR OF MERGER (I.E., AY 2003-04 ONWARDS) . IF THE ASSESSEE HAD INDEED RECEIVED THE IMPUGNED SUM (OF . 750 LACS) TOWARD MERGER EXPENSES, 5 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT STATED AT RS. 717 LACS, IT HAS RECOUPED THE ENTIRE EXPENDITURE INCURRED ON MERGER. THE SAME WOULD IMPLY THAT THE ASSESSEE HAS NOT INCU RRED ANY EXPENDITURE ON MERGER, IN-AS-MUCH AS THE SAME COULD ONLY BE RECKON ED AT NET OF THAT RECOVERED; RATHER, GENERATING A SURPLUS. IT WOULD, UNDER THE C IRCUMSTANCES, APART FROM NOT CLAIMING ANY EXPENDITURE (CLAIMED @ 1/5 TH , AS PROVIDED U/S. 35DD) FOR THE CURRENT YEAR, ALSO SURRENDER THAT CLAIMED FOR THE EARLIER YEARS, CITING THE RECEIPT FROM OBL ON THAT ACCOUNT. IN FACT, IF THERE WAS ANY SUCH UNDERSTANDING WITH OBL, IT WOULD NOT HAVE PREFERRED ANY CLAIM FOR MERG ER EXPENSES IN THE FIRST PLACE, DEBITING THE SAID EXPENDITURE TO THE ACCOUNT OF OBL IN ITS ACCOUNTS. IN ANY CASE, IT WOULD, ON ITS RECEIPT (OF MERGER EXPEN SES), TRANSFER BACK THE EXPENDITURE DEDUCTED FROM THE GENERAL RESERVE A/C (FALLING UNDER THE HEAD RESERVE & SURPLUS) IN ACCOUNTS AND ADJUST THE SAM E AGAINST THE SUM RECEIVED, I.E., CREDIT THE RESERVE ACCOUNT AND DEBIT THE ACCO UNT IN WHICH THE RECEIPT (FROM OBL) IS HELD. DOING SO WOULD RESULT IN ONLY THE EXC ESS RS. 33 LACS BEING REFLECTED IN THIS ACCOUNT, SO THAT IT IS THIS BALAN CE ONLY WHICH COULD BE TRANSFERRED DIRECTLY TO THE BALANCE SHEET. THIS ONL Y WOULD BE IN CONSISTENCE WITH WHAT IS BEING STATED IN THE NOTES TO THE ACCOUNTS. IN OTHER WORDS, THE ASSESSEES CLAIM IS CONTRADICTED BY ITS OWN ACCOUNTS AS WELL AS ITS RETURN OF INCOME. THE AO IS THUS JUSTIFIED IN HOLDING A HONEST BELIEF THA T WHAT IS BEING STATED IS NOT CORRECT, AND THAT THEREFORE INCOME HAD ESCAPED ASSE SSMENT. THE CONDITION OF THE FIRST PROVISO TO SECTION 147 IS SATISFIED. THE REASSESSMENT NOTI CE IS ACCORDINGLY VALID ON THIS COUNT. 3.3 THE THIRD REASON RECORDED FOR THE REOPENING OF ASSESSMENT IS WITH REFERENCE TO SCHEDULES VII AND VIII TO THE BALANCE SHEET (AS AT THE RELEVANT YEAR-END), WHICH ARE IN RESPECT OF LOANS & ADVANCE S AND CURRENT LIABILITIES RESPECTIVELY. THE SAME BEAR BALANCES UNDER THE ACC OUNT HEADS BILLING IN EXCESS OF REVENUE AND REVENUE IN EXCESS OF BILLING RESP ECTIVELY. THE REASON RECORDED 6 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT STATES THAT AS THE ASSESSEE IS FOLLOWING MERCANTILE METHOD OF ACCOUNTING, THE ENTIRE INCOME ACCRUED DURING THE YEAR IS TO BE OFFE RED AS INCOME FOR THAT YEAR. THERE IS NOTHING ON RECORD, OR REFERRED TO, TO SUGG EST THAT THE ACCOUNTS DO NOT REFLECT THE CORRECT POSITION IN THIS REGARD. IF THE AMOUNT BILLED IS IN EXCESS OF THE REVENUE, IMPLYING THAT CHARGEABLE ON THE BASIS OF THE SERVICES RENDERED, THE SAME IS LIABLE TO BE SHOWN AS A CURRENT LIABILITY. SIMILARLY, WHERE THE SERVICES RENDERED ARE IN EXCESS OF THAT BILLED, REVENUE HAS TO BE RECOGNIZED IRRESPECTIVE OF IT BEING NOT BILLED AS AT THE YEAR-END. THERE BE ING NO MATERIAL TO SUPPORT THE REASON, WHICH COULD ONLY BE VALID WHERE THE ACCOUNT S DO NOT STATE THE CORRECT POSITION, I.E., ON FACTS, THE SAME CANNOT HOLD. THE SAID REASON ACCORDINGLY FAILS. 3.4 AS WE HAVE UPHELD THE AOS ACTION QUA THE SECOND REASON, THE ASSESSEES CHALLENGE ON JURISDICTION FAILS. THE ASSESSEE STATI NG THAT THE REOPENING IS BASED ON AN AUDIT OBJECTION, WOULD, AGAIN, BE OF NO MOMEN T. REFERENCE IN THIS CONTEXT IS MADE TO THE DECISION IN CIT V. P.V.S. BEEDIES (P.) LTD. [1999] 237 ITR 13 (SC). THE MATTER IS FACTUAL, AND IT HAS BEEN SHOWN THAT THE ASSESSEE DID NOT DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS RELEVAN T FOR ITS ASSESSMENT. TO PUT SUCCINCTLY, THE ASSESSEE CLAIMS THE IMPUGNED RECEIP T TO BE AGAINST EXPENDITURE, SO THAT IT STANDS REIMBURSED, WHILE AT THE SAME TIM E HAS NOT ONLY CLAIMED DEDUCTION IN ITS RESPECT, SO THAT IT HAS BEEN BORNE BY IT , BUT ALSO CONTINUES TO DO SO (IN-AS-MUCH AS THE SAME IS ON AN AMORTIZED BASIS @ 1/5 TH FOR EACH YEAR), I.E., CLAIM DEDUCTION IN RESPECT OF REIMBURSED EXPENDITUR E EVEN AFTER REIMBURSEMENT - WHICH IS TWO YEARS HENCE, A TREATMENT SUPPORTED B Y ITS ACCOUNTS, I.E., BOOKING THE RECEIPT AS INCOME RATHER THAN ADJUSTING IT AGAI NST EXPENDITURE. IN OTHER WORDS, THERE IS A COMPLETE CONTRADICTION. WE CLARIF Y THIS AS AN EXPLANATION BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS WOUL D HAVE MEANT THAT THE REASSESSMENT PROCEEDINGS, AS FOR THE OTHER REASONS, WOULD NOT BE SUSTAINABLE. 7 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT 4. WE NEXT DISCUSS THE VARIOUS ISSUES ON MERITS. TH E FIRST ISSUE (GROUND 7) IS QUA DEDUCTION U/S. 10A. WE HAVE ALREADY STATED THAT TH E AO HAS TAKEN A VIEW IN THE MATTER. HE IS ACCORDINGLY PRECLUDED FROM VISITI NG THE MATTER AGAIN IN THE REASSESSMENT PROCEEDINGS INASMUCH AS HE HAS NO POWE R TO REVIEW HIS ORDER. EVEN OTHERWISE, THE MATTER IS SQUARELY COVERED BY T HE DECISION BY THE HON'BLE APEX COURT IN CIT VS. YOKOGAWA (INDIA) LTD. (IN CA NO. 8498 OF 2013 DATED 16.12.2016), RELIED UPON, CLARIFYING THAT DEDUCTION U/SS. 10A/10B IS TO BE ALLOWED WHILE COMPUTING THE GROSS TOTAL INCOME UNDE R CHAPTER-IV OF THE ACT AND NOT AT THE STAGE OF COMPUTING THE TOTAL INCOME UNDER ITS CHAPTER-VI. THE DEDUCTION U/S. 10A AS ALLOWED IN ASSESSMENT CANNOT ACCORDINGLY BE INTERFERED WITH. WE DECIDE ACCORDINGLY. 5. THE NEXT ISSUE (RAISED PER GROUNDS 8 AND 9) IS T HE ASSESSABILITY OR OTHERWISE IN LAW OF THE SUM OF .750 LACS RECEIVED BY THE ASSESSEE FROM OBL AS INCOME IN THE FACTS AND CIRCUMSTANCES OF THE CASE. IN OUR VIEW, THE FIRST ASPECT THAT NEEDS TO BE CONSIDERED IS IF IT IS INCOME. THE HEAD OF INCOME IS OF SECONDARY IMPORTANCE, RELEVANT FOR DETERMINING IF I T IS LIABLE FOR DEDUCTION U/S.10A OR S. 80 HHE, AS THE ASSESSEE CLAIMS IN THE ALTERNATIVE. SURELY, IF IT IS RECEIVED, AS CLAIMED, TOWARD MERGER EXPENSES, IT IS ONLY A CAPITAL RECEIPT IN THE ASSESSEES HANDS. THERE IS HOWEVER NO MATERIAL TO S UPPORT THIS. THERE IS IN FACT EVEN NO CORROBORATIVE EVIDENCE AS (SAY) COPY OF THE AGREEMENT PURSUANT TO WHICH IT WAS PAID; THE BOARD RESOLUTION OF OBL AUTH ORIZING THE PAYMENT OR A CERTIFICATE FROM ITS AUDITORS, ETC., TO THAT EFFEC T, ON RECORD. IN FACT, WHERE SO, THE ASSESSEES EXPLANATION, CLAIMING IT TO HAVE INCURRE D MERGER EXPENSES AT . 717 LACS, STANDS WHOLLY MET, SO THAT THERE IS NO QUESTI ON OF IT CLAIMING DEDUCTION U/S. 35 DD, WHICH THE AO STATES IS BEING CLAIMED REGULAR LY @ 1/5 TH SINCE AY 2003- 04 ONWARDS. HOW COULD, EVEN AS OBSERVED EARLIER, DE DUCTION BE CLAIMED IN RESPECT OF REIMBURSABLE OR REIMBURSED EXPENDITURE? IT IS IN FACT FOR THESE REASONS THAT THE REASSESSMENT STANDS UPHELD QUA JURISDICTION. EVEN IF THE AMOUNT IS 8 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT RECEIVED SUBSEQUENTLY, AND THERE WAS SOME UNCERTAIN TY WITH REGARD TO ITS RECEIPT, THERE OUGHT NOT TO BE ANY CLAIM (@ 1/5 TH ) FOR THE CURRENT YEAR, AS WELL AS THE DEDUCTION OF THE MERGER EXPENSES FROM THE GENERAL R ESERVE, WHICH IS AT . 467.25 LACS (REFER SCHEDULE-2 TO THE BALANCE SHEET) , WHICH WOULD STAND TO BE ADJUSTED AGAINST THE AMOUNT RECEIVED. AT THE SAME TIME, IT IS NOT CLEAR IF THE ASSESSEE HAS CLAIMED DEDUCTION U/S. 35DD IN RESPECT OF THE MERGER EXPENSES ADJUSTED AGA INST THE GENERAL RESERVE FOR THE CURRENT YEAR, I.E., . 467.25 LACS. IF NOT, FOR WHICH THE ASSESSEE IS A PPARENTLY ENTITLED, ITS CLAIM OF HAVING RECEIVED THE AMOUNT FROM OBL TOWARD THE SAME, COULD HAVE, PRIMA FACIE , SOME RELEVANCE. WE SAY SO, I.E., PRIMA FACIE , AS THE ASSESSEE HAS ITSELF IN ITS ACCOUNTS TREATED THE SAI D AMOUNT AS INCOME RATHER THAN TAKING IT TO THE BALANCE-SHEET. AS SUCH, TO THE EXT ENT THE ASSESSEE HAS NOT CLAIMED THE EXPENDITURE QUA MERGER EXPENSES, WHICH WE MAY THOUGH CLARIFY WOULD NOT INCLUDE PRE-MERGER EXPENSES, THE RECEIPT FROM THE O BL WOULD TO THAT EXTENT BE REGARDED AS A REIMBURSEMENT THEREOF AND, ACCORDINGL Y, ONLY A CAPITAL RECEIPT, NOT LIABLE TO TAX. THIS IS OF COURSE SUBJECT TO THE AS SESSEE PRODUCING SOME EXTERNAL MATERIAL TOWARD EVIDENCING THE NATURE OF THE RECEIP T, I.E., AS TOWARD MERGER EXPENSES. FURTHER, ITS CLAIM QUA THE BALANCE AMOUNT, I.E., RECEIVED IN EXCESS, BEING TREATED AS SO, CANNOT BE ACCEPTED; THERE BEIN G NO EXPENDITURE AGAINST WHICH THE SAME COULD BE CONSIDERED AS RECEIVED. ALS O, THE EXPENDITURE INCURRED, WHERE AND TO THE EXTENT CLAIMED AS A DEDUCTION, CAN NOT ALSO BE CONSIDERED AS HAVING BEEN RECOVERED, WHICH WOULD BE INCONSISTENT WITH THE ASSESSEES ACCOUNTS, DULY AUDITED, AND THE RETURNS, DULY VERIF IED, FURNISHED FOR THE CURRENT, PRECEDING AND EVEN SUCCEEDING YEAR/S. THE SAME IS, AS OTHER RECEIPTS, IN-AS- MUCH AS THERE IS NO CORRESPONDING OBLIGATION TO RET URN THE VALUE RECEIVED, EITHER IN CASH OR ANY KIND, ONLY IN THE NATURE OF INCOME, AND RIGHTLY ASSESSED AS SO AND, IN FACT, TO THAT EXTENT, RIGHTLY TAKEN IN ACCOUNTS TO THE INCOME ACCOUNT. REFERENCE IN THIS CONTEXT MAY BE MADE TO THE DECISIONS IN EMIL WEBBER V. CIT [1993] 200 ITR 483 (SC) AND CIT V. G.R.KARTHIKEYAN [1993] 201 ITR 866 (SC). AS REGARDS 9 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT THE ASSESSEES ALTERNATE CLAIM, THE AMOUNT IS NEITH ER IN RESPECT OF EXPORT NOR RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE AND, ACCOR DINGLY, THERE IS NO BASIS FOR ITS CLAIM FOR DEDUCTION U/S. 10A OR S. 80HHE IN IT S RESPECT. QUA QUANTUM, THE AO SHALL VERIFY THE ASSESSEES CLAIM IN THIS REGARD AND DECIDE ON THE FOREGOING TERMS ON THE BASIS OF HIS FACTUAL FINDINGS. THE ONU S TO PROVE ITS CLAIM/S, WE MAY ADD, WOULD BE ON THE ASSESSEE. THE ASSESSEES CLAIM IS PARTLY ALLOWED ON THE FOREGOING TERMS, DISPOSING THE AFORESAID GROUNDS OF THE APPEAL. 6. THE FINAL ISSUE RAISED IN APPEAL IS IN RESPECT O F DISALLOWANCE OF LEGAL AND PROFESSIONAL FEE, PAID OF . 13.53 LACS (VIDE GDS. 10 & 11). THE SAME, IT WAS OBSERVED BY THE AO WITH REFERENCE TO THE NOTES TO T HE ACCOUNTS TO THE ASSESSEES FINAL ACCOUNTS FOR AY 2009-10, IS PART O F THE LEGAL CHARGES PAID TO A LAW FIRM FOR ACQUISITION OF A US COMPANY BY THE NAM E DATA INC., USA (AT USD 6 LACS). THE EXPENDITURE BEING IN RESPECT OF ACQUIS ITION OF A COMPANY, WAS THUS CONSTRUED AS CAPITAL IN NATURE AND, ACCORDINGLY, DI SALLOWED IN COMPUTING THE ASSESSABLE INCOME. 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE PRIMARY FACTS ARE NOT DISPUTED; IN FACT, AT ANY STAGE, INCL UDING BEFORE US, BEING, RATHER, ARISING FROM THE ASSESSEES OWN AUDITED ACCOUNTS. W E ACCORDINGLY FIND NO INFIRMITY IN THE SAID DISALLOWANCE, AND CONFIRM THE SAME. WE DECIDE ACCORDINGLY. 8. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON APRIL 11, 2017 AT CHENNAI . SD/- SD/- ( . ) ( ) (G. PAVAN KUMAR) (SANJAY ARORA) ! /JUDICIAL MEMBER /ACCOUNTANT MEMBER 10 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT /CHENNAI, . /DATED, APRIL 11, 2017. EDN / ( *!,01 21$, /COPY TO: 1. %& /APPELLANT 2. *+%& /RESPONDENT 3. 3, ( )/CIT(A) 4. 3, /CIT 5. 145 *!,! /DR 6. 56# 7 /GF , , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C, CHENNAI , . , ! ' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ITA NO.1053/MDS/2014 ! # $# / ASSESSMENT YEAR : 2005-06 POLARIS FINANCIAL TECHNOLOGY LTD., (FORMERLY KNOWN AS POLARIS SOFTWARE LAB LTD.), 244, CAREX CENTER, ANNA SALAI, CHENNAI 600 006. [PAN: AAACP 4341E] VS. ASST. COMMISSIONER OF INCOME- TAX, COMPANY CIRCLE-V, CHENNAI. ( /APPELLANT ) ( / RESPONDENT ) %& ( ) / APPELLANT BY : SHRI VIKRAM VIJAYARAGHVAN, ADVOCATE *+%& ( ) / RESPONDENT BY : SHRI A.V.SREEKANTH, JT. CIT ( , / DATE OF HEARING : 18.01.2017 -$ ( , / DATE OF PRONOUNCEMENT : 11.04.2017 /O R D E R PER SANJAY ARORA, AM : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-V, CHENNAI (C IT(A) FOR SHORT) DATED 02.12.2013, DISMISSING THE ASSESSEES APPEAL CONTES TING ITS ASSESSMENT U/S. 143(3) R/W S. 147 OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) DATED 26.12.2008 FOR ASSESSMENT YEAR (AY) 2005-06. 2 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT 2. THE APPEAL RAISES THREE ISSUES, I.E., APART FROM THAT QUA JURISDICTION; THE IMPUGNED ASSESSMENT BEING BY WAY OF REASSESSMENT, I NITIATED AFTER FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR EVEN A S THE ASSESSMENT IN THE FIRST INSTANCE WAS U/S. 143(3) (R/W. 92CA) OF THE ACT (VI DE ORDER DATED 26.12.2008/ COPY ON RECORD). IT IS CLAIMED THAT THERE HAS BEEN NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL F ACTS NECESSARY FOR ITS ASSESSMENT FOR THE RELEVANT YEAR (REFER FIRST PROVISO TO S. 147) AND, FURTHER, THAT NO NEW OR TANGIBLE MATERIAL INFORMS THE REVENUES CASE, WHICH OUGHT TO BE THE CASE, OR ELSE IT IS ONLY A CHANGE OF OPINION WHICH, AS IS WE LL SETTLED, CANNOT SUSTAIN REASSESSMENT ( CIT V. KELVINATOR OF INDIA LTD. [2010] 320 ITR 561 (SC)), ALSO PLACING RELIANCE ON THE ORDER BY THE TRIBUNAL IN TH E ASSESSEES OWN CASE FOR THE TWO IMMEDIATELY PRECEDING YEARS (IN ITA NOS. 1908 & 1909/MDS/2012 DATED 18.03.2016/COPY ON RECORD). 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 THE REASONS FOR REOPENING THE ASSESSMENT, AS CO MMUNICATED BY THE ASSESSING OFFICER (AO) (PB PG.5), BEARS THREE REASO NS. WE SHALL, ACCORDINGLY, EXAMINE THE ASSESSEES CASE ON MERITS QUA EACH OF THEM. THE TRIBUNAL HAS FOR THE EARLIER TWO YEARS ALLOWED THE ASSESSEES APPEAL ON THE BASIS OF A FINDING OF FACT THAT THE ASSESSEE HAD PRODUCED ALL THE RELEVANT MAT ERIAL. THE FIRST REASON (PB PG.5) IS THAT THE ASSESSEE HAD NOT ADJUSTED THE LOS S OF THE STP UNITS AT HYDERABAD AND GURGAON AGAINST THE PROFIT FROM OTHER SECTION 1 0A UNITS, SWELLING ITS CLAIM FOR DEDUCTION UNDER SECTION10A TO THAT EXTENT. A PE RUSAL OF THE ASSESSMENT ORDER DATED 26.12.2008 SHOWS THAT THE ASSESSEE HAD IN FAC T CLAIMED DEDUCTION AT A HIGHER AMOUNT, I.E., WITHOUT ADJUSTING THE LOSS (BE ING AT . 268.72 LACS), ONLY DURING THE ASSESSMENT PROCEEDINGS (VIDE LETTER DATE D 18.12.2008/PB PG. 29) THAT PER THE RETURN OF INCOME BEING UPON SUCH ADJUS TMENT, DULY SUPPORTING IT WITH A CERTIFICATE FROM THE CA IN FORM F, WHICH ON VERIFICATION APPEARED CORRECT, AND ALLOWED ON THAT BASIS (PARA 5 OF THE A SSESSMENT ORDER). HOW COULD 3 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT THEN, WE WONDER, THIS FORM A REASON FOR AN INCOME E SCAPING ASSESSMENT, WHICH IS CLEARLY A CHANGE OF OPINION, BARRING REASSESSMEN T. 3.2 THE SECOND REASON, REFERRING TO NOTE B-18 OF TH E NOTES TO THE ACCOUNTS (SCHEDULE-XV TO THE BALANCE SHEET/PB PGS. 39-72), S TATED IS THAT THE ASSESSEE HAD IN CONSEQUENCE TO ITS MERGER WITH ORBITECH SOLU TIONS LTD. (A SUBSIDIARY OF ORBITECH LTD.), RECEIVED . 7.50 CR. DURING THE RELEVANT YEAR FROM THE PARENT COMPANY. IN-AS-MUCH AS THE ASSESSEE HAD FOLLOWED POOLING OF INTEREST METHOD IN TAKING OVER THE ASSETS AND LIABILITIES OF THE AM ALGAMATING COMPANY (ORBITECH SOLUTIONS LTD), THERE IS NO QUESTION OF THE MERGER RESULTING IN ANY CASH RECEIPT, WHICH WAS ACCORDINGLY ONLY INCOME, ASSESSABLE U/S. 28(IV). THE ASSESSEE ADVERTED OUR ATTENTION TO ITS LETTERS DATED 18.12. 2008 AND 22.12.2008 (PB PGS. 29-31), FURNISHED DURING THE ASSESSMENT PROCEEDINGS , WHEREAT THIS ASPECT WAS EXPLAINED, STATING THE RECEIPT TO BE A CAPITAL RECE IPT; BESIDES TO NOTE B-18, TO WHICH THE REASON RECORDED ITSELF REFERS, SO THAT TH ERE WAS BOTH TRUE AND FULL DISCLOSURE, AS WELL AS DUE CONSIDERATION OF THE MAT TER IN THE ORIGINAL ASSESSMENT. THE RELEVANT NOTE READS AS UNDER: (PB PAGE 71) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS B. NOTES TO THE ACCOUNTS 1 TO 17 18. MISCELLANEOUS INCOME (UNDER OTHER INCOME (SCHED ULE 11)) INCLUDES RS. 750 LAKHS RECEIVED DURING THE YEAR FRO M ORBITECH LIMITED, THE ERSTWHILE SHAREHOLDER OF ORBITECH SOLUTIONS LIMITED (WHICH HAS BEEN AMALGAMATED WITH POLARIS SOFTWARE LAB LIMITED ON 1 NOVEMBER 2002) TOWARD THE PRE MERGER CONTINGENCIES AND / OR ANY ME RGER RELATED MATTERS. THE LETTERS DATED 18.12.2008 AND 22.12.2008 (SUPRA) REITERATE THE SAME, BESIDES ADDING THAT THE ASSESSEE HAD ADJUSTED .717 LAKHS INCURRED TOWARD MERGER WITH RESERVE AND SURPLUS AND, FURTHER, NOT AVAILED OF DEDUCTION UNDER SECTION 35- DD. SURELY, IF THAT BE THE CASE, NO INFERENCE AS TO THE RECEIPT BEING INCOME ARISES DESPITE THE FACT THAT, EVEN AS STATED IN THE REASON RECORDED, THE MERGER PER SE WOULD NOT LEAD TO ANY CASH EXCHANGE BETWEEN THE COM PANIES UNDERGOING 4 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT AMALGAMATION AND, THUS, TO A CASH RECEIPT TO THE AM ALGAMATED (ASSESSEE) COMPANY. ALSO, THE AO CAN ONLY BE REGARDED AS HAVIN G CONSIDERED THE ASSESSEES REPLIES, SO THAT HIS DECISION NOT TO EFF ECT ANY ADJUSTMENT ON THIS COUNT IN ASSESSMENT IMPLIES HIS SATISFACTION WITH THE ASS ESSEES EXPLANATION. THE ASSESSEES CASE IS THUS UNEXCEPTIONAL; THE ONLY RID ER OR CAVEAT BEING THAT WHAT THE ASSESSEE HAS STATED IN THE ASSESSMENT PROCEEDIN GS IS FULL AND TRUE AND NOTHING MATERIAL HAS BEEN OMITTED TO BE DISCLOSED. THE REASON IS SIMPLE; WHERE NOT SO, THE CONDITION OF THE FIRST PROVISO TO S. 147 WOULD STAND SATISFIED AND, BESIDES, THE SATISFACTION OF THE AO ON THAT BASIS, I.E., INCOMPLETE OR UNTRUE FACTS, CAN HARDLY BE REGARDED AS A VALID SATISFACTION IN L AW SO AS TO ATTRACT THE CHARGE OF CHANGE OF OPINION. TOWARD THIS, WE FIND THE ASSES SMENT ORDER RECORDS THE FOLLOWING, AND WHICH STANDS ALSO REPRODUCED IN THE IMPUGNED ORDER (PARA 5): A) THE ASSESSEE HAS ALREADY CLAIMED PRE-MERGER EXPENDI TURE IN THE YEAR OF AMALGAMATION AS PER THE HIGH COURTS ORDER AND REDU CED THE AMOUNT FROM THE GENERAL RESERVE; B) DEDUCTION IS ALSO CLAIMED ON MERGER EXPENSES (AT TH E RATE OF 1/5 TH ) IN THE STATEMENT OF INCOME FROM ASSESSMENT YEAR 2003-04 ON WARDS; [ C) THE ASSESSEES ANNUAL REPORT FOR THE RELEVANT PREVI OUS YEAR (I.E., F.Y. 2004- 05) ADMIT RS. 7.50 CR. AS MISCELLANEOUS INCOME UNDE R THE HEAD OTHER INCOME. IT GOES ON TO STATE THAT UNDER THE CIRCUMSTANCES TH E ASSESSEE CANNOT NOW, I.E., AFTER TWO YEARS OF THE AMALGAMATION, CLAIM THE RECE IPT AS THE PAYMENT OF PRE MERGER CONTINGENCIES/ANY MERGER RELATED MATTERS, A S STATED IN THE NOTE B-18. AND, ACCORDINGLY, THAT POOLING OF INTEREST CANNOT R ESULT IN ANY CASH FOR THE AMALGAMATED COMPANY FROM THE AMALGAMATING COMPANY. THE ASSESSEE HAS NOT REBUTTED ANY OF THESE FACTS, WHICH CLEARLY CONTRA DICT WHAT STANDS STATED BY IT IN THE ASSESSMENT PROCEEDINGS. WHY, THE ACCOUNTS THEMS ELVES SPEAK OTHERWISE. THE MERGER EXPENSES STAND DEDUCTED FROM THE GENERAL RESERVE AND CLAIMED @ 1/5 TH FROM THE YEAR OF MERGER (I.E., AY 2003-04 ONWARDS) . IF THE ASSESSEE HAD INDEED RECEIVED THE IMPUGNED SUM (OF . 750 LACS) TOWARD MERGER EXPENSES, 5 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT STATED AT RS. 717 LACS, IT HAS RECOUPED THE ENTIRE EXPENDITURE INCURRED ON MERGER. THE SAME WOULD IMPLY THAT THE ASSESSEE HAS NOT INCU RRED ANY EXPENDITURE ON MERGER, IN-AS-MUCH AS THE SAME COULD ONLY BE RECKON ED AT NET OF THAT RECOVERED; RATHER, GENERATING A SURPLUS. IT WOULD, UNDER THE C IRCUMSTANCES, APART FROM NOT CLAIMING ANY EXPENDITURE (CLAIMED @ 1/5 TH , AS PROVIDED U/S. 35DD) FOR THE CURRENT YEAR, ALSO SURRENDER THAT CLAIMED FOR THE EARLIER YEARS, CITING THE RECEIPT FROM OBL ON THAT ACCOUNT. IN FACT, IF THERE WAS ANY SUCH UNDERSTANDING WITH OBL, IT WOULD NOT HAVE PREFERRED ANY CLAIM FOR MERG ER EXPENSES IN THE FIRST PLACE, DEBITING THE SAID EXPENDITURE TO THE ACCOUNT OF OBL IN ITS ACCOUNTS. IN ANY CASE, IT WOULD, ON ITS RECEIPT (OF MERGER EXPEN SES), TRANSFER BACK THE EXPENDITURE DEDUCTED FROM THE GENERAL RESERVE A/C (FALLING UNDER THE HEAD RESERVE & SURPLUS) IN ACCOUNTS AND ADJUST THE SAM E AGAINST THE SUM RECEIVED, I.E., CREDIT THE RESERVE ACCOUNT AND DEBIT THE ACCO UNT IN WHICH THE RECEIPT (FROM OBL) IS HELD. DOING SO WOULD RESULT IN ONLY THE EXC ESS RS. 33 LACS BEING REFLECTED IN THIS ACCOUNT, SO THAT IT IS THIS BALAN CE ONLY WHICH COULD BE TRANSFERRED DIRECTLY TO THE BALANCE SHEET. THIS ONL Y WOULD BE IN CONSISTENCE WITH WHAT IS BEING STATED IN THE NOTES TO THE ACCOUNTS. IN OTHER WORDS, THE ASSESSEES CLAIM IS CONTRADICTED BY ITS OWN ACCOUNTS AS WELL AS ITS RETURN OF INCOME. THE AO IS THUS JUSTIFIED IN HOLDING A HONEST BELIEF THA T WHAT IS BEING STATED IS NOT CORRECT, AND THAT THEREFORE INCOME HAD ESCAPED ASSE SSMENT. THE CONDITION OF THE FIRST PROVISO TO SECTION 147 IS SATISFIED. THE REASSESSMENT NOTI CE IS ACCORDINGLY VALID ON THIS COUNT. 3.3 THE THIRD REASON RECORDED FOR THE REOPENING OF ASSESSMENT IS WITH REFERENCE TO SCHEDULES VII AND VIII TO THE BALANCE SHEET (AS AT THE RELEVANT YEAR-END), WHICH ARE IN RESPECT OF LOANS & ADVANCE S AND CURRENT LIABILITIES RESPECTIVELY. THE SAME BEAR BALANCES UNDER THE ACC OUNT HEADS BILLING IN EXCESS OF REVENUE AND REVENUE IN EXCESS OF BILLING RESP ECTIVELY. THE REASON RECORDED 6 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT STATES THAT AS THE ASSESSEE IS FOLLOWING MERCANTILE METHOD OF ACCOUNTING, THE ENTIRE INCOME ACCRUED DURING THE YEAR IS TO BE OFFE RED AS INCOME FOR THAT YEAR. THERE IS NOTHING ON RECORD, OR REFERRED TO, TO SUGG EST THAT THE ACCOUNTS DO NOT REFLECT THE CORRECT POSITION IN THIS REGARD. IF THE AMOUNT BILLED IS IN EXCESS OF THE REVENUE, IMPLYING THAT CHARGEABLE ON THE BASIS OF THE SERVICES RENDERED, THE SAME IS LIABLE TO BE SHOWN AS A CURRENT LIABILITY. SIMILARLY, WHERE THE SERVICES RENDERED ARE IN EXCESS OF THAT BILLED, REVENUE HAS TO BE RECOGNIZED IRRESPECTIVE OF IT BEING NOT BILLED AS AT THE YEAR-END. THERE BE ING NO MATERIAL TO SUPPORT THE REASON, WHICH COULD ONLY BE VALID WHERE THE ACCOUNT S DO NOT STATE THE CORRECT POSITION, I.E., ON FACTS, THE SAME CANNOT HOLD. THE SAID REASON ACCORDINGLY FAILS. 3.4 AS WE HAVE UPHELD THE AOS ACTION QUA THE SECOND REASON, THE ASSESSEES CHALLENGE ON JURISDICTION FAILS. THE ASSESSEE STATI NG THAT THE REOPENING IS BASED ON AN AUDIT OBJECTION, WOULD, AGAIN, BE OF NO MOMEN T. REFERENCE IN THIS CONTEXT IS MADE TO THE DECISION IN CIT V. P.V.S. BEEDIES (P.) LTD. [1999] 237 ITR 13 (SC). THE MATTER IS FACTUAL, AND IT HAS BEEN SHOWN THAT THE ASSESSEE DID NOT DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS RELEVAN T FOR ITS ASSESSMENT. TO PUT SUCCINCTLY, THE ASSESSEE CLAIMS THE IMPUGNED RECEIP T TO BE AGAINST EXPENDITURE, SO THAT IT STANDS REIMBURSED, WHILE AT THE SAME TIM E HAS NOT ONLY CLAIMED DEDUCTION IN ITS RESPECT, SO THAT IT HAS BEEN BORNE BY IT , BUT ALSO CONTINUES TO DO SO (IN-AS-MUCH AS THE SAME IS ON AN AMORTIZED BASIS @ 1/5 TH FOR EACH YEAR), I.E., CLAIM DEDUCTION IN RESPECT OF REIMBURSED EXPENDITUR E EVEN AFTER REIMBURSEMENT - WHICH IS TWO YEARS HENCE, A TREATMENT SUPPORTED B Y ITS ACCOUNTS, I.E., BOOKING THE RECEIPT AS INCOME RATHER THAN ADJUSTING IT AGAI NST EXPENDITURE. IN OTHER WORDS, THERE IS A COMPLETE CONTRADICTION. WE CLARIF Y THIS AS AN EXPLANATION BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS WOUL D HAVE MEANT THAT THE REASSESSMENT PROCEEDINGS, AS FOR THE OTHER REASONS, WOULD NOT BE SUSTAINABLE. 7 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT 4. WE NEXT DISCUSS THE VARIOUS ISSUES ON MERITS. TH E FIRST ISSUE (GROUND 7) IS QUA DEDUCTION U/S. 10A. WE HAVE ALREADY STATED THAT TH E AO HAS TAKEN A VIEW IN THE MATTER. HE IS ACCORDINGLY PRECLUDED FROM VISITI NG THE MATTER AGAIN IN THE REASSESSMENT PROCEEDINGS INASMUCH AS HE HAS NO POWE R TO REVIEW HIS ORDER. EVEN OTHERWISE, THE MATTER IS SQUARELY COVERED BY T HE DECISION BY THE HON'BLE APEX COURT IN CIT VS. YOKOGAWA (INDIA) LTD. (IN CA NO. 8498 OF 2013 DATED 16.12.2016), RELIED UPON, CLARIFYING THAT DEDUCTION U/SS. 10A/10B IS TO BE ALLOWED WHILE COMPUTING THE GROSS TOTAL INCOME UNDE R CHAPTER-IV OF THE ACT AND NOT AT THE STAGE OF COMPUTING THE TOTAL INCOME UNDER ITS CHAPTER-VI. THE DEDUCTION U/S. 10A AS ALLOWED IN ASSESSMENT CANNOT ACCORDINGLY BE INTERFERED WITH. WE DECIDE ACCORDINGLY. 5. THE NEXT ISSUE (RAISED PER GROUNDS 8 AND 9) IS T HE ASSESSABILITY OR OTHERWISE IN LAW OF THE SUM OF .750 LACS RECEIVED BY THE ASSESSEE FROM OBL AS INCOME IN THE FACTS AND CIRCUMSTANCES OF THE CASE. IN OUR VIEW, THE FIRST ASPECT THAT NEEDS TO BE CONSIDERED IS IF IT IS INCOME. THE HEAD OF INCOME IS OF SECONDARY IMPORTANCE, RELEVANT FOR DETERMINING IF I T IS LIABLE FOR DEDUCTION U/S.10A OR S. 80 HHE, AS THE ASSESSEE CLAIMS IN THE ALTERNATIVE. SURELY, IF IT IS RECEIVED, AS CLAIMED, TOWARD MERGER EXPENSES, IT IS ONLY A CAPITAL RECEIPT IN THE ASSESSEES HANDS. THERE IS HOWEVER NO MATERIAL TO S UPPORT THIS. THERE IS IN FACT EVEN NO CORROBORATIVE EVIDENCE AS (SAY) COPY OF THE AGREEMENT PURSUANT TO WHICH IT WAS PAID; THE BOARD RESOLUTION OF OBL AUTH ORIZING THE PAYMENT OR A CERTIFICATE FROM ITS AUDITORS, ETC., TO THAT EFFEC T, ON RECORD. IN FACT, WHERE SO, THE ASSESSEES EXPLANATION, CLAIMING IT TO HAVE INCURRE D MERGER EXPENSES AT . 717 LACS, STANDS WHOLLY MET, SO THAT THERE IS NO QUESTI ON OF IT CLAIMING DEDUCTION U/S. 35 DD, WHICH THE AO STATES IS BEING CLAIMED REGULAR LY @ 1/5 TH SINCE AY 2003- 04 ONWARDS. HOW COULD, EVEN AS OBSERVED EARLIER, DE DUCTION BE CLAIMED IN RESPECT OF REIMBURSABLE OR REIMBURSED EXPENDITURE? IT IS IN FACT FOR THESE REASONS THAT THE REASSESSMENT STANDS UPHELD QUA JURISDICTION. EVEN IF THE AMOUNT IS 8 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT RECEIVED SUBSEQUENTLY, AND THERE WAS SOME UNCERTAIN TY WITH REGARD TO ITS RECEIPT, THERE OUGHT NOT TO BE ANY CLAIM (@ 1/5 TH ) FOR THE CURRENT YEAR, AS WELL AS THE DEDUCTION OF THE MERGER EXPENSES FROM THE GENERAL R ESERVE, WHICH IS AT . 467.25 LACS (REFER SCHEDULE-2 TO THE BALANCE SHEET) , WHICH WOULD STAND TO BE ADJUSTED AGAINST THE AMOUNT RECEIVED. AT THE SAME TIME, IT IS NOT CLEAR IF THE ASSESSEE HAS CLAIMED DEDUCTION U/S. 35DD IN RESPECT OF THE MERGER EXPENSES ADJUSTED AGA INST THE GENERAL RESERVE FOR THE CURRENT YEAR, I.E., . 467.25 LACS. IF NOT, FOR WHICH THE ASSESSEE IS A PPARENTLY ENTITLED, ITS CLAIM OF HAVING RECEIVED THE AMOUNT FROM OBL TOWARD THE SAME, COULD HAVE, PRIMA FACIE , SOME RELEVANCE. WE SAY SO, I.E., PRIMA FACIE , AS THE ASSESSEE HAS ITSELF IN ITS ACCOUNTS TREATED THE SAI D AMOUNT AS INCOME RATHER THAN TAKING IT TO THE BALANCE-SHEET. AS SUCH, TO THE EXT ENT THE ASSESSEE HAS NOT CLAIMED THE EXPENDITURE QUA MERGER EXPENSES, WHICH WE MAY THOUGH CLARIFY WOULD NOT INCLUDE PRE-MERGER EXPENSES, THE RECEIPT FROM THE O BL WOULD TO THAT EXTENT BE REGARDED AS A REIMBURSEMENT THEREOF AND, ACCORDINGL Y, ONLY A CAPITAL RECEIPT, NOT LIABLE TO TAX. THIS IS OF COURSE SUBJECT TO THE AS SESSEE PRODUCING SOME EXTERNAL MATERIAL TOWARD EVIDENCING THE NATURE OF THE RECEIP T, I.E., AS TOWARD MERGER EXPENSES. FURTHER, ITS CLAIM QUA THE BALANCE AMOUNT, I.E., RECEIVED IN EXCESS, BEING TREATED AS SO, CANNOT BE ACCEPTED; THERE BEIN G NO EXPENDITURE AGAINST WHICH THE SAME COULD BE CONSIDERED AS RECEIVED. ALS O, THE EXPENDITURE INCURRED, WHERE AND TO THE EXTENT CLAIMED AS A DEDUCTION, CAN NOT ALSO BE CONSIDERED AS HAVING BEEN RECOVERED, WHICH WOULD BE INCONSISTENT WITH THE ASSESSEES ACCOUNTS, DULY AUDITED, AND THE RETURNS, DULY VERIF IED, FURNISHED FOR THE CURRENT, PRECEDING AND EVEN SUCCEEDING YEAR/S. THE SAME IS, AS OTHER RECEIPTS, IN-AS- MUCH AS THERE IS NO CORRESPONDING OBLIGATION TO RET URN THE VALUE RECEIVED, EITHER IN CASH OR ANY KIND, ONLY IN THE NATURE OF INCOME, AND RIGHTLY ASSESSED AS SO AND, IN FACT, TO THAT EXTENT, RIGHTLY TAKEN IN ACCOUNTS TO THE INCOME ACCOUNT. REFERENCE IN THIS CONTEXT MAY BE MADE TO THE DECISIONS IN EMIL WEBBER V. CIT [1993] 200 ITR 483 (SC) AND CIT V. G.R.KARTHIKEYAN [1993] 201 ITR 866 (SC). AS REGARDS 9 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT THE ASSESSEES ALTERNATE CLAIM, THE AMOUNT IS NEITH ER IN RESPECT OF EXPORT NOR RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE AND, ACCOR DINGLY, THERE IS NO BASIS FOR ITS CLAIM FOR DEDUCTION U/S. 10A OR S. 80HHE IN IT S RESPECT. QUA QUANTUM, THE AO SHALL VERIFY THE ASSESSEES CLAIM IN THIS REGARD AND DECIDE ON THE FOREGOING TERMS ON THE BASIS OF HIS FACTUAL FINDINGS. THE ONU S TO PROVE ITS CLAIM/S, WE MAY ADD, WOULD BE ON THE ASSESSEE. THE ASSESSEES CLAIM IS PARTLY ALLOWED ON THE FOREGOING TERMS, DISPOSING THE AFORESAID GROUNDS OF THE APPEAL. 6. THE FINAL ISSUE RAISED IN APPEAL IS IN RESPECT O F DISALLOWANCE OF LEGAL AND PROFESSIONAL FEE, PAID OF . 13.53 LACS (VIDE GDS. 10 & 11). THE SAME, IT WAS OBSERVED BY THE AO WITH REFERENCE TO THE NOTES TO T HE ACCOUNTS TO THE ASSESSEES FINAL ACCOUNTS FOR AY 2009-10, IS PART O F THE LEGAL CHARGES PAID TO A LAW FIRM FOR ACQUISITION OF A US COMPANY BY THE NAM E DATA INC., USA (AT USD 6 LACS). THE EXPENDITURE BEING IN RESPECT OF ACQUIS ITION OF A COMPANY, WAS THUS CONSTRUED AS CAPITAL IN NATURE AND, ACCORDINGLY, DI SALLOWED IN COMPUTING THE ASSESSABLE INCOME. 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE PRIMARY FACTS ARE NOT DISPUTED; IN FACT, AT ANY STAGE, INCL UDING BEFORE US, BEING, RATHER, ARISING FROM THE ASSESSEES OWN AUDITED ACCOUNTS. W E ACCORDINGLY FIND NO INFIRMITY IN THE SAID DISALLOWANCE, AND CONFIRM THE SAME. WE DECIDE ACCORDINGLY. 8. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON APRIL 11, 2017 AT CHENNAI . SD/- SD/- ( . ) ( ) (G. PAVAN KUMAR) (SANJAY ARORA) ! /JUDICIAL MEMBER /ACCOUNTANT MEMBER 10 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT /CHENNAI, . /DATED, APRIL 11, 2017. EDN / ( *!,01 21$, /COPY TO: 1. %& /APPELLANT 2. *+%& /RESPONDENT 3. 3, ( )/CIT(A) 4. 3, /CIT 5. 145 *!,! /DR 6. 56# 7 /GF , , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C, CHENNAI , . , ! ' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ITA NO.1053/MDS/2014 ! # $# / ASSESSMENT YEAR : 2005-06 POLARIS FINANCIAL TECHNOLOGY LTD., (FORMERLY KNOWN AS POLARIS SOFTWARE LAB LTD.), 244, CAREX CENTER, ANNA SALAI, CHENNAI 600 006. [PAN: AAACP 4341E] VS. ASST. COMMISSIONER OF INCOME- TAX, COMPANY CIRCLE-V, CHENNAI. ( /APPELLANT ) ( / RESPONDENT ) %& ( ) / APPELLANT BY : SHRI VIKRAM VIJAYARAGHVAN, ADVOCATE *+%& ( ) / RESPONDENT BY : SHRI A.V.SREEKANTH, JT. CIT ( , / DATE OF HEARING : 18.01.2017 -$ ( , / DATE OF PRONOUNCEMENT : 11.04.2017 /O R D E R PER SANJAY ARORA, AM : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-V, CHENNAI (C IT(A) FOR SHORT) DATED 02.12.2013, DISMISSING THE ASSESSEES APPEAL CONTES TING ITS ASSESSMENT U/S. 143(3) R/W S. 147 OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) DATED 26.12.2008 FOR ASSESSMENT YEAR (AY) 2005-06. 2 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT 2. THE APPEAL RAISES THREE ISSUES, I.E., APART FROM THAT QUA JURISDICTION; THE IMPUGNED ASSESSMENT BEING BY WAY OF REASSESSMENT, I NITIATED AFTER FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR EVEN A S THE ASSESSMENT IN THE FIRST INSTANCE WAS U/S. 143(3) (R/W. 92CA) OF THE ACT (VI DE ORDER DATED 26.12.2008/ COPY ON RECORD). IT IS CLAIMED THAT THERE HAS BEEN NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL F ACTS NECESSARY FOR ITS ASSESSMENT FOR THE RELEVANT YEAR (REFER FIRST PROVISO TO S. 147) AND, FURTHER, THAT NO NEW OR TANGIBLE MATERIAL INFORMS THE REVENUES CASE, WHICH OUGHT TO BE THE CASE, OR ELSE IT IS ONLY A CHANGE OF OPINION WHICH, AS IS WE LL SETTLED, CANNOT SUSTAIN REASSESSMENT ( CIT V. KELVINATOR OF INDIA LTD. [2010] 320 ITR 561 (SC)), ALSO PLACING RELIANCE ON THE ORDER BY THE TRIBUNAL IN TH E ASSESSEES OWN CASE FOR THE TWO IMMEDIATELY PRECEDING YEARS (IN ITA NOS. 1908 & 1909/MDS/2012 DATED 18.03.2016/COPY ON RECORD). 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 THE REASONS FOR REOPENING THE ASSESSMENT, AS CO MMUNICATED BY THE ASSESSING OFFICER (AO) (PB PG.5), BEARS THREE REASO NS. WE SHALL, ACCORDINGLY, EXAMINE THE ASSESSEES CASE ON MERITS QUA EACH OF THEM. THE TRIBUNAL HAS FOR THE EARLIER TWO YEARS ALLOWED THE ASSESSEES APPEAL ON THE BASIS OF A FINDING OF FACT THAT THE ASSESSEE HAD PRODUCED ALL THE RELEVANT MAT ERIAL. THE FIRST REASON (PB PG.5) IS THAT THE ASSESSEE HAD NOT ADJUSTED THE LOS S OF THE STP UNITS AT HYDERABAD AND GURGAON AGAINST THE PROFIT FROM OTHER SECTION 1 0A UNITS, SWELLING ITS CLAIM FOR DEDUCTION UNDER SECTION10A TO THAT EXTENT. A PE RUSAL OF THE ASSESSMENT ORDER DATED 26.12.2008 SHOWS THAT THE ASSESSEE HAD IN FAC T CLAIMED DEDUCTION AT A HIGHER AMOUNT, I.E., WITHOUT ADJUSTING THE LOSS (BE ING AT . 268.72 LACS), ONLY DURING THE ASSESSMENT PROCEEDINGS (VIDE LETTER DATE D 18.12.2008/PB PG. 29) THAT PER THE RETURN OF INCOME BEING UPON SUCH ADJUS TMENT, DULY SUPPORTING IT WITH A CERTIFICATE FROM THE CA IN FORM F, WHICH ON VERIFICATION APPEARED CORRECT, AND ALLOWED ON THAT BASIS (PARA 5 OF THE A SSESSMENT ORDER). HOW COULD 3 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT THEN, WE WONDER, THIS FORM A REASON FOR AN INCOME E SCAPING ASSESSMENT, WHICH IS CLEARLY A CHANGE OF OPINION, BARRING REASSESSMEN T. 3.2 THE SECOND REASON, REFERRING TO NOTE B-18 OF TH E NOTES TO THE ACCOUNTS (SCHEDULE-XV TO THE BALANCE SHEET/PB PGS. 39-72), S TATED IS THAT THE ASSESSEE HAD IN CONSEQUENCE TO ITS MERGER WITH ORBITECH SOLU TIONS LTD. (A SUBSIDIARY OF ORBITECH LTD.), RECEIVED . 7.50 CR. DURING THE RELEVANT YEAR FROM THE PARENT COMPANY. IN-AS-MUCH AS THE ASSESSEE HAD FOLLOWED POOLING OF INTEREST METHOD IN TAKING OVER THE ASSETS AND LIABILITIES OF THE AM ALGAMATING COMPANY (ORBITECH SOLUTIONS LTD), THERE IS NO QUESTION OF THE MERGER RESULTING IN ANY CASH RECEIPT, WHICH WAS ACCORDINGLY ONLY INCOME, ASSESSABLE U/S. 28(IV). THE ASSESSEE ADVERTED OUR ATTENTION TO ITS LETTERS DATED 18.12. 2008 AND 22.12.2008 (PB PGS. 29-31), FURNISHED DURING THE ASSESSMENT PROCEEDINGS , WHEREAT THIS ASPECT WAS EXPLAINED, STATING THE RECEIPT TO BE A CAPITAL RECE IPT; BESIDES TO NOTE B-18, TO WHICH THE REASON RECORDED ITSELF REFERS, SO THAT TH ERE WAS BOTH TRUE AND FULL DISCLOSURE, AS WELL AS DUE CONSIDERATION OF THE MAT TER IN THE ORIGINAL ASSESSMENT. THE RELEVANT NOTE READS AS UNDER: (PB PAGE 71) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS B. NOTES TO THE ACCOUNTS 1 TO 17 18. MISCELLANEOUS INCOME (UNDER OTHER INCOME (SCHED ULE 11)) INCLUDES RS. 750 LAKHS RECEIVED DURING THE YEAR FRO M ORBITECH LIMITED, THE ERSTWHILE SHAREHOLDER OF ORBITECH SOLUTIONS LIMITED (WHICH HAS BEEN AMALGAMATED WITH POLARIS SOFTWARE LAB LIMITED ON 1 NOVEMBER 2002) TOWARD THE PRE MERGER CONTINGENCIES AND / OR ANY ME RGER RELATED MATTERS. THE LETTERS DATED 18.12.2008 AND 22.12.2008 (SUPRA) REITERATE THE SAME, BESIDES ADDING THAT THE ASSESSEE HAD ADJUSTED .717 LAKHS INCURRED TOWARD MERGER WITH RESERVE AND SURPLUS AND, FURTHER, NOT AVAILED OF DEDUCTION UNDER SECTION 35- DD. SURELY, IF THAT BE THE CASE, NO INFERENCE AS TO THE RECEIPT BEING INCOME ARISES DESPITE THE FACT THAT, EVEN AS STATED IN THE REASON RECORDED, THE MERGER PER SE WOULD NOT LEAD TO ANY CASH EXCHANGE BETWEEN THE COM PANIES UNDERGOING 4 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT AMALGAMATION AND, THUS, TO A CASH RECEIPT TO THE AM ALGAMATED (ASSESSEE) COMPANY. ALSO, THE AO CAN ONLY BE REGARDED AS HAVIN G CONSIDERED THE ASSESSEES REPLIES, SO THAT HIS DECISION NOT TO EFF ECT ANY ADJUSTMENT ON THIS COUNT IN ASSESSMENT IMPLIES HIS SATISFACTION WITH THE ASS ESSEES EXPLANATION. THE ASSESSEES CASE IS THUS UNEXCEPTIONAL; THE ONLY RID ER OR CAVEAT BEING THAT WHAT THE ASSESSEE HAS STATED IN THE ASSESSMENT PROCEEDIN GS IS FULL AND TRUE AND NOTHING MATERIAL HAS BEEN OMITTED TO BE DISCLOSED. THE REASON IS SIMPLE; WHERE NOT SO, THE CONDITION OF THE FIRST PROVISO TO S. 147 WOULD STAND SATISFIED AND, BESIDES, THE SATISFACTION OF THE AO ON THAT BASIS, I.E., INCOMPLETE OR UNTRUE FACTS, CAN HARDLY BE REGARDED AS A VALID SATISFACTION IN L AW SO AS TO ATTRACT THE CHARGE OF CHANGE OF OPINION. TOWARD THIS, WE FIND THE ASSES SMENT ORDER RECORDS THE FOLLOWING, AND WHICH STANDS ALSO REPRODUCED IN THE IMPUGNED ORDER (PARA 5): A) THE ASSESSEE HAS ALREADY CLAIMED PRE-MERGER EXPENDI TURE IN THE YEAR OF AMALGAMATION AS PER THE HIGH COURTS ORDER AND REDU CED THE AMOUNT FROM THE GENERAL RESERVE; B) DEDUCTION IS ALSO CLAIMED ON MERGER EXPENSES (AT TH E RATE OF 1/5 TH ) IN THE STATEMENT OF INCOME FROM ASSESSMENT YEAR 2003-04 ON WARDS; [ C) THE ASSESSEES ANNUAL REPORT FOR THE RELEVANT PREVI OUS YEAR (I.E., F.Y. 2004- 05) ADMIT RS. 7.50 CR. AS MISCELLANEOUS INCOME UNDE R THE HEAD OTHER INCOME. IT GOES ON TO STATE THAT UNDER THE CIRCUMSTANCES TH E ASSESSEE CANNOT NOW, I.E., AFTER TWO YEARS OF THE AMALGAMATION, CLAIM THE RECE IPT AS THE PAYMENT OF PRE MERGER CONTINGENCIES/ANY MERGER RELATED MATTERS, A S STATED IN THE NOTE B-18. AND, ACCORDINGLY, THAT POOLING OF INTEREST CANNOT R ESULT IN ANY CASH FOR THE AMALGAMATED COMPANY FROM THE AMALGAMATING COMPANY. THE ASSESSEE HAS NOT REBUTTED ANY OF THESE FACTS, WHICH CLEARLY CONTRA DICT WHAT STANDS STATED BY IT IN THE ASSESSMENT PROCEEDINGS. WHY, THE ACCOUNTS THEMS ELVES SPEAK OTHERWISE. THE MERGER EXPENSES STAND DEDUCTED FROM THE GENERAL RESERVE AND CLAIMED @ 1/5 TH FROM THE YEAR OF MERGER (I.E., AY 2003-04 ONWARDS) . IF THE ASSESSEE HAD INDEED RECEIVED THE IMPUGNED SUM (OF . 750 LACS) TOWARD MERGER EXPENSES, 5 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT STATED AT RS. 717 LACS, IT HAS RECOUPED THE ENTIRE EXPENDITURE INCURRED ON MERGER. THE SAME WOULD IMPLY THAT THE ASSESSEE HAS NOT INCU RRED ANY EXPENDITURE ON MERGER, IN-AS-MUCH AS THE SAME COULD ONLY BE RECKON ED AT NET OF THAT RECOVERED; RATHER, GENERATING A SURPLUS. IT WOULD, UNDER THE C IRCUMSTANCES, APART FROM NOT CLAIMING ANY EXPENDITURE (CLAIMED @ 1/5 TH , AS PROVIDED U/S. 35DD) FOR THE CURRENT YEAR, ALSO SURRENDER THAT CLAIMED FOR THE EARLIER YEARS, CITING THE RECEIPT FROM OBL ON THAT ACCOUNT. IN FACT, IF THERE WAS ANY SUCH UNDERSTANDING WITH OBL, IT WOULD NOT HAVE PREFERRED ANY CLAIM FOR MERG ER EXPENSES IN THE FIRST PLACE, DEBITING THE SAID EXPENDITURE TO THE ACCOUNT OF OBL IN ITS ACCOUNTS. IN ANY CASE, IT WOULD, ON ITS RECEIPT (OF MERGER EXPEN SES), TRANSFER BACK THE EXPENDITURE DEDUCTED FROM THE GENERAL RESERVE A/C (FALLING UNDER THE HEAD RESERVE & SURPLUS) IN ACCOUNTS AND ADJUST THE SAM E AGAINST THE SUM RECEIVED, I.E., CREDIT THE RESERVE ACCOUNT AND DEBIT THE ACCO UNT IN WHICH THE RECEIPT (FROM OBL) IS HELD. DOING SO WOULD RESULT IN ONLY THE EXC ESS RS. 33 LACS BEING REFLECTED IN THIS ACCOUNT, SO THAT IT IS THIS BALAN CE ONLY WHICH COULD BE TRANSFERRED DIRECTLY TO THE BALANCE SHEET. THIS ONL Y WOULD BE IN CONSISTENCE WITH WHAT IS BEING STATED IN THE NOTES TO THE ACCOUNTS. IN OTHER WORDS, THE ASSESSEES CLAIM IS CONTRADICTED BY ITS OWN ACCOUNTS AS WELL AS ITS RETURN OF INCOME. THE AO IS THUS JUSTIFIED IN HOLDING A HONEST BELIEF THA T WHAT IS BEING STATED IS NOT CORRECT, AND THAT THEREFORE INCOME HAD ESCAPED ASSE SSMENT. THE CONDITION OF THE FIRST PROVISO TO SECTION 147 IS SATISFIED. THE REASSESSMENT NOTI CE IS ACCORDINGLY VALID ON THIS COUNT. 3.3 THE THIRD REASON RECORDED FOR THE REOPENING OF ASSESSMENT IS WITH REFERENCE TO SCHEDULES VII AND VIII TO THE BALANCE SHEET (AS AT THE RELEVANT YEAR-END), WHICH ARE IN RESPECT OF LOANS & ADVANCE S AND CURRENT LIABILITIES RESPECTIVELY. THE SAME BEAR BALANCES UNDER THE ACC OUNT HEADS BILLING IN EXCESS OF REVENUE AND REVENUE IN EXCESS OF BILLING RESP ECTIVELY. THE REASON RECORDED 6 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT STATES THAT AS THE ASSESSEE IS FOLLOWING MERCANTILE METHOD OF ACCOUNTING, THE ENTIRE INCOME ACCRUED DURING THE YEAR IS TO BE OFFE RED AS INCOME FOR THAT YEAR. THERE IS NOTHING ON RECORD, OR REFERRED TO, TO SUGG EST THAT THE ACCOUNTS DO NOT REFLECT THE CORRECT POSITION IN THIS REGARD. IF THE AMOUNT BILLED IS IN EXCESS OF THE REVENUE, IMPLYING THAT CHARGEABLE ON THE BASIS OF THE SERVICES RENDERED, THE SAME IS LIABLE TO BE SHOWN AS A CURRENT LIABILITY. SIMILARLY, WHERE THE SERVICES RENDERED ARE IN EXCESS OF THAT BILLED, REVENUE HAS TO BE RECOGNIZED IRRESPECTIVE OF IT BEING NOT BILLED AS AT THE YEAR-END. THERE BE ING NO MATERIAL TO SUPPORT THE REASON, WHICH COULD ONLY BE VALID WHERE THE ACCOUNT S DO NOT STATE THE CORRECT POSITION, I.E., ON FACTS, THE SAME CANNOT HOLD. THE SAID REASON ACCORDINGLY FAILS. 3.4 AS WE HAVE UPHELD THE AOS ACTION QUA THE SECOND REASON, THE ASSESSEES CHALLENGE ON JURISDICTION FAILS. THE ASSESSEE STATI NG THAT THE REOPENING IS BASED ON AN AUDIT OBJECTION, WOULD, AGAIN, BE OF NO MOMEN T. REFERENCE IN THIS CONTEXT IS MADE TO THE DECISION IN CIT V. P.V.S. BEEDIES (P.) LTD. [1999] 237 ITR 13 (SC). THE MATTER IS FACTUAL, AND IT HAS BEEN SHOWN THAT THE ASSESSEE DID NOT DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS RELEVAN T FOR ITS ASSESSMENT. TO PUT SUCCINCTLY, THE ASSESSEE CLAIMS THE IMPUGNED RECEIP T TO BE AGAINST EXPENDITURE, SO THAT IT STANDS REIMBURSED, WHILE AT THE SAME TIM E HAS NOT ONLY CLAIMED DEDUCTION IN ITS RESPECT, SO THAT IT HAS BEEN BORNE BY IT , BUT ALSO CONTINUES TO DO SO (IN-AS-MUCH AS THE SAME IS ON AN AMORTIZED BASIS @ 1/5 TH FOR EACH YEAR), I.E., CLAIM DEDUCTION IN RESPECT OF REIMBURSED EXPENDITUR E EVEN AFTER REIMBURSEMENT - WHICH IS TWO YEARS HENCE, A TREATMENT SUPPORTED B Y ITS ACCOUNTS, I.E., BOOKING THE RECEIPT AS INCOME RATHER THAN ADJUSTING IT AGAI NST EXPENDITURE. IN OTHER WORDS, THERE IS A COMPLETE CONTRADICTION. WE CLARIF Y THIS AS AN EXPLANATION BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS WOUL D HAVE MEANT THAT THE REASSESSMENT PROCEEDINGS, AS FOR THE OTHER REASONS, WOULD NOT BE SUSTAINABLE. 7 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT 4. WE NEXT DISCUSS THE VARIOUS ISSUES ON MERITS. TH E FIRST ISSUE (GROUND 7) IS QUA DEDUCTION U/S. 10A. WE HAVE ALREADY STATED THAT TH E AO HAS TAKEN A VIEW IN THE MATTER. HE IS ACCORDINGLY PRECLUDED FROM VISITI NG THE MATTER AGAIN IN THE REASSESSMENT PROCEEDINGS INASMUCH AS HE HAS NO POWE R TO REVIEW HIS ORDER. EVEN OTHERWISE, THE MATTER IS SQUARELY COVERED BY T HE DECISION BY THE HON'BLE APEX COURT IN CIT VS. YOKOGAWA (INDIA) LTD. (IN CA NO. 8498 OF 2013 DATED 16.12.2016), RELIED UPON, CLARIFYING THAT DEDUCTION U/SS. 10A/10B IS TO BE ALLOWED WHILE COMPUTING THE GROSS TOTAL INCOME UNDE R CHAPTER-IV OF THE ACT AND NOT AT THE STAGE OF COMPUTING THE TOTAL INCOME UNDER ITS CHAPTER-VI. THE DEDUCTION U/S. 10A AS ALLOWED IN ASSESSMENT CANNOT ACCORDINGLY BE INTERFERED WITH. WE DECIDE ACCORDINGLY. 5. THE NEXT ISSUE (RAISED PER GROUNDS 8 AND 9) IS T HE ASSESSABILITY OR OTHERWISE IN LAW OF THE SUM OF .750 LACS RECEIVED BY THE ASSESSEE FROM OBL AS INCOME IN THE FACTS AND CIRCUMSTANCES OF THE CASE. IN OUR VIEW, THE FIRST ASPECT THAT NEEDS TO BE CONSIDERED IS IF IT IS INCOME. THE HEAD OF INCOME IS OF SECONDARY IMPORTANCE, RELEVANT FOR DETERMINING IF I T IS LIABLE FOR DEDUCTION U/S.10A OR S. 80 HHE, AS THE ASSESSEE CLAIMS IN THE ALTERNATIVE. SURELY, IF IT IS RECEIVED, AS CLAIMED, TOWARD MERGER EXPENSES, IT IS ONLY A CAPITAL RECEIPT IN THE ASSESSEES HANDS. THERE IS HOWEVER NO MATERIAL TO S UPPORT THIS. THERE IS IN FACT EVEN NO CORROBORATIVE EVIDENCE AS (SAY) COPY OF THE AGREEMENT PURSUANT TO WHICH IT WAS PAID; THE BOARD RESOLUTION OF OBL AUTH ORIZING THE PAYMENT OR A CERTIFICATE FROM ITS AUDITORS, ETC., TO THAT EFFEC T, ON RECORD. IN FACT, WHERE SO, THE ASSESSEES EXPLANATION, CLAIMING IT TO HAVE INCURRE D MERGER EXPENSES AT . 717 LACS, STANDS WHOLLY MET, SO THAT THERE IS NO QUESTI ON OF IT CLAIMING DEDUCTION U/S. 35 DD, WHICH THE AO STATES IS BEING CLAIMED REGULAR LY @ 1/5 TH SINCE AY 2003- 04 ONWARDS. HOW COULD, EVEN AS OBSERVED EARLIER, DE DUCTION BE CLAIMED IN RESPECT OF REIMBURSABLE OR REIMBURSED EXPENDITURE? IT IS IN FACT FOR THESE REASONS THAT THE REASSESSMENT STANDS UPHELD QUA JURISDICTION. EVEN IF THE AMOUNT IS 8 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT RECEIVED SUBSEQUENTLY, AND THERE WAS SOME UNCERTAIN TY WITH REGARD TO ITS RECEIPT, THERE OUGHT NOT TO BE ANY CLAIM (@ 1/5 TH ) FOR THE CURRENT YEAR, AS WELL AS THE DEDUCTION OF THE MERGER EXPENSES FROM THE GENERAL R ESERVE, WHICH IS AT . 467.25 LACS (REFER SCHEDULE-2 TO THE BALANCE SHEET) , WHICH WOULD STAND TO BE ADJUSTED AGAINST THE AMOUNT RECEIVED. AT THE SAME TIME, IT IS NOT CLEAR IF THE ASSESSEE HAS CLAIMED DEDUCTION U/S. 35DD IN RESPECT OF THE MERGER EXPENSES ADJUSTED AGA INST THE GENERAL RESERVE FOR THE CURRENT YEAR, I.E., . 467.25 LACS. IF NOT, FOR WHICH THE ASSESSEE IS A PPARENTLY ENTITLED, ITS CLAIM OF HAVING RECEIVED THE AMOUNT FROM OBL TOWARD THE SAME, COULD HAVE, PRIMA FACIE , SOME RELEVANCE. WE SAY SO, I.E., PRIMA FACIE , AS THE ASSESSEE HAS ITSELF IN ITS ACCOUNTS TREATED THE SAI D AMOUNT AS INCOME RATHER THAN TAKING IT TO THE BALANCE-SHEET. AS SUCH, TO THE EXT ENT THE ASSESSEE HAS NOT CLAIMED THE EXPENDITURE QUA MERGER EXPENSES, WHICH WE MAY THOUGH CLARIFY WOULD NOT INCLUDE PRE-MERGER EXPENSES, THE RECEIPT FROM THE O BL WOULD TO THAT EXTENT BE REGARDED AS A REIMBURSEMENT THEREOF AND, ACCORDINGL Y, ONLY A CAPITAL RECEIPT, NOT LIABLE TO TAX. THIS IS OF COURSE SUBJECT TO THE AS SESSEE PRODUCING SOME EXTERNAL MATERIAL TOWARD EVIDENCING THE NATURE OF THE RECEIP T, I.E., AS TOWARD MERGER EXPENSES. FURTHER, ITS CLAIM QUA THE BALANCE AMOUNT, I.E., RECEIVED IN EXCESS, BEING TREATED AS SO, CANNOT BE ACCEPTED; THERE BEIN G NO EXPENDITURE AGAINST WHICH THE SAME COULD BE CONSIDERED AS RECEIVED. ALS O, THE EXPENDITURE INCURRED, WHERE AND TO THE EXTENT CLAIMED AS A DEDUCTION, CAN NOT ALSO BE CONSIDERED AS HAVING BEEN RECOVERED, WHICH WOULD BE INCONSISTENT WITH THE ASSESSEES ACCOUNTS, DULY AUDITED, AND THE RETURNS, DULY VERIF IED, FURNISHED FOR THE CURRENT, PRECEDING AND EVEN SUCCEEDING YEAR/S. THE SAME IS, AS OTHER RECEIPTS, IN-AS- MUCH AS THERE IS NO CORRESPONDING OBLIGATION TO RET URN THE VALUE RECEIVED, EITHER IN CASH OR ANY KIND, ONLY IN THE NATURE OF INCOME, AND RIGHTLY ASSESSED AS SO AND, IN FACT, TO THAT EXTENT, RIGHTLY TAKEN IN ACCOUNTS TO THE INCOME ACCOUNT. REFERENCE IN THIS CONTEXT MAY BE MADE TO THE DECISIONS IN EMIL WEBBER V. CIT [1993] 200 ITR 483 (SC) AND CIT V. G.R.KARTHIKEYAN [1993] 201 ITR 866 (SC). AS REGARDS 9 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT THE ASSESSEES ALTERNATE CLAIM, THE AMOUNT IS NEITH ER IN RESPECT OF EXPORT NOR RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE AND, ACCOR DINGLY, THERE IS NO BASIS FOR ITS CLAIM FOR DEDUCTION U/S. 10A OR S. 80HHE IN IT S RESPECT. QUA QUANTUM, THE AO SHALL VERIFY THE ASSESSEES CLAIM IN THIS REGARD AND DECIDE ON THE FOREGOING TERMS ON THE BASIS OF HIS FACTUAL FINDINGS. THE ONU S TO PROVE ITS CLAIM/S, WE MAY ADD, WOULD BE ON THE ASSESSEE. THE ASSESSEES CLAIM IS PARTLY ALLOWED ON THE FOREGOING TERMS, DISPOSING THE AFORESAID GROUNDS OF THE APPEAL. 6. THE FINAL ISSUE RAISED IN APPEAL IS IN RESPECT O F DISALLOWANCE OF LEGAL AND PROFESSIONAL FEE, PAID OF . 13.53 LACS (VIDE GDS. 10 & 11). THE SAME, IT WAS OBSERVED BY THE AO WITH REFERENCE TO THE NOTES TO T HE ACCOUNTS TO THE ASSESSEES FINAL ACCOUNTS FOR AY 2009-10, IS PART O F THE LEGAL CHARGES PAID TO A LAW FIRM FOR ACQUISITION OF A US COMPANY BY THE NAM E DATA INC., USA (AT USD 6 LACS). THE EXPENDITURE BEING IN RESPECT OF ACQUIS ITION OF A COMPANY, WAS THUS CONSTRUED AS CAPITAL IN NATURE AND, ACCORDINGLY, DI SALLOWED IN COMPUTING THE ASSESSABLE INCOME. 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE PRIMARY FACTS ARE NOT DISPUTED; IN FACT, AT ANY STAGE, INCL UDING BEFORE US, BEING, RATHER, ARISING FROM THE ASSESSEES OWN AUDITED ACCOUNTS. W E ACCORDINGLY FIND NO INFIRMITY IN THE SAID DISALLOWANCE, AND CONFIRM THE SAME. WE DECIDE ACCORDINGLY. 8. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON APRIL 11, 2017 AT CHENNAI . SD/- SD/- ( . ) ( ) (G. PAVAN KUMAR) (SANJAY ARORA) ! /JUDICIAL MEMBER /ACCOUNTANT MEMBER 10 ITA NO.1053 /MDS/2014 (AY 2005-06) POLARIS FINANCIAL TECHNOLOGY LTD. V. ACIT /CHENNAI, . /DATED, APRIL 11, 2017. EDN / ( *!,01 21$, /COPY TO: 1. %& /APPELLANT 2. *+%& /RESPONDENT 3. 3, ( )/CIT(A) 4. 3, /CIT 5. 145 *!,! /DR 6. 56# 7 /GF