IBM India Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1151/BANG/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5534 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 16-06-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 04-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G V GOPALA RAO CITI
• Assessee Lawyers: SRIRAM SHESHADRI
• Keywords: Bad and doubtful debts
• Section: 14A; 10B

Judgement Text

ITA.1151/BANG/2009 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI. A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER I.T.A NO.1151BANG/2009 (ASSESSMENT YEAR : 2002-03) IBM INDIA P. LTD., BANNERGHATTA MAIN ROAD, BANGALORE .. APPELLANT V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 11(1), BANGALORE .. RESPONDENT APPELLANT BY : SHRI. SRIRAM SHESHADRI, CA RESPONDENT BY : SHRI. G. V. GOPALA RAO, CIT-I O R D E R PER GEORGE GEORGE K, JUDICIAL MEMBER : 1. THE INSTITUTION OF THIS APPEAL OF THE ASSESSEE COMPANY IS DIRECTED AGAINST THE IMPUGNED ORDER OF THE LD. CIT (A)-I, BANGALORE IN ITA NO.42/DC-11(4)/A-I/07-08 DATED 5.10.2009 FOR TH E ASSESSMENT YEAR 2002-03. 2. THE ASSESSEE COMPANY [THE ASSESSEE IN SHORT] HAD RAISED SIXTEEN GROUNDS IN AN ILLUSTRATIVE AND NARRATIVE MA NNER. GROUND NO.1 BEING GENERAL IN NATURE WHICH REQUIRES NO ADJUDICAT ION. GROUND NOS.8 AND 9 RELATE TO THE CIT(A)S STAND THAT THE BENEFIT U/S 10A ALLOWABLE ONLY AFTER SET OFF OF BROUGHT FORWARD LOS SES ETC., WAS NOT PRESSED DURING THE COURSE OF HEARING AND, THEREFORE , THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 2.1. THE REMAINING GROUNDS ARE REFORMULATED , FOR THE SAKE OF CLARITY, IN A CONCISE MANNER, AS UNDER: ITA.1151/BANG/2009 PAGE - 2 (1) GROUND NOS. 2 TO 7 : THE LD. CIT (A) HAD ERRED IN DENYING THE CLAIM OF RELIEF U/S 10A OF THE ACT ON ACCOUNT OF NON-MAINTENANCE OF SEPARATE BOOKS OF ACCOUNT; (2) GROUND NOS. 10 TO 11 : THE LD. CIT (A) ERRED IN HOLDING THAT THE ASSESSE E IS INELIGIBLE TO CLAIM RELIEF U/S 10A OF THE ACT IN RE SPECT OF WORK SUB-CONTRACTED AS THE ASSESSEE HAD PROVIDED DISCLAIMERS TO SUCH CONTR ACTORS ETC., (3) GROUND NOS.12 TO 14 : THE LD. CIT (A) ERRED IN HOLDING THAT THE ASSESSE E TO REDUCE EXPENSES PERTAINING TO FREIGHT, INSURANCE AN D COMMUNICATION CHARGES FROM EXPORT TURNOVER IN COMPUTING RELIEF U/S 10A OF THE ACT; & (4) GROUND NOS.15 & 16 : THE CIT(A) ALSO ERRED IN SUSTAINING THE AOS STA ND IN DISALLOWING BAD DEBTS OF RS.12.72 CRORES HOLDING TH AT THEY HAVE NOT BECOME IRRECOVERABLE. 3. BRIEFLY STATED, THE ASSESSEE, IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE FOR EXPORT, MAINTENANCE OF COM PUTER EQUIPMENT, CONSULTANCY IN INFORMATION TECHNOLOGY SY STEMS INTEGRATION ETC., FOR THE AY UNDER CHALLENGE, HAD FURNISHED ITS RETURN OF INCOME, ADMITTING AN INCOME OF RS.2.21 CRORES AFTER CLAIMIN G DEDUCTION U/S 10A OF THE ACT. HOWEVER, THE LD. AO, FOR THE REASON S RECORDED IN HIS IMPUGNED ORDER, DETERMINED THE ASSESSEES INCOME AT RS.64.46 CRORES THEREBY MAKING ADDITIONS OF RS.12.72 CRORES ON ACCOUNT OF BAD DEBTS AND RS.101.51 CRORES AS DISALLOWANCE OF CLAIM U/S 10A OF THE ACT. 4. AGGRIEVED, THE ASSESSEE TOOK UP THE IS SUES WITH THE LD. CIT (A) FOR SOLACE. AFTER DUE CONSIDERATION OF THE ASS ESSEES CONTENTIONS, EXTENSIVELY QUOTING VARIOUS CASE LAWS AND ALSO ANAL YZING THE ISSUES IN DEPTH, THE LD. CIT (A) HAD RECORDED HIS FINDINGS WHICH ARE EXTRACTED AS UNDER: ITA.1151/BANG/2009 PAGE - 3 (I) NON-MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS : EXTENSIVELY QUOTING THE AMENDM ENT TO S. 10A(1) OF THE ACT, IT WAS OBSERVED THAT 10.3. THUS, I CONCLUDE THAT EVEN IF THE ACT DOES N OT STIPULATE FOR SEPARATE BOOKS FOR EACH STPI UNIT, THE LEGISLATIVE INTENTION OF AMENDM ENT BROUGHT IN BY FA 2000 W.E.F. 1.4.2001, IN S.10A(1) OF THE I.T. ACT IS THAT FOR Q UANTIFICATION OF ELIGIBLE DEDUCTION SUCH MAINTENANCE IS INDISPENSABLE. SECONDLY, BY ADMITTE D NON-MAINTENANCE OF SEPARATE BOOKS, SINCE THE CONDITION LAID DOWN BY THE DEPARTM ENT OF ELECTRONICS IS NOT ADHERED TO THE APPROVAL IS SEEMED TO BE WITHDRAWN. IN OTHER W ORDS, THE SAME BECOMES NON-STPI UNITS AND, HENCE, NOT ELIGIBLE FOR ANY DEDUCTION U/ S 10A OF I.T. ACT. IN FACT, IN ORDER TO GET THE ELIGIBLE DEDUCTION, IT HAS MAINLY TO DEAL W ITH THREE AUTHORITIES VIZ., AUTHORITIES OF STPI/DEPARTMENT OF ELECTRONICS TO GET THE APPROVAL TO COMMENCE EXPORT BUSINESS, THE RBI TO RECEIVE THE SALE PROCEEDS IN FOREIGN CURRENC Y TO RUN THE BUSINESS AND THIRDLY IT AUTHORITIES TO GET THE BENEFIT OF DEDUCTION OR INCE NTIVE FOR DOING EXPORT BENEFIT OR IMPROVING THE BALANCE OF PAYMENT OF THE COUNTRY. T HUS, IT HAS TO ADHERE TO THE CONDITIONS STIPULATED BY ALL THE THREE AUTHORITIES SIMULTANEOUSLY SO AS TO COMMENCE, RUN AND IMPROVE ITS BUSINESS OF EXPORT AND IF ANY O F SUCH STIPULATION IS NOT CONFIRMED OR VIOLATED, THE BENEFIT IS GONE. IN VIEW OF SUCH TOTALITY OF SITUATION, I DISMISS THESE GROUNDS AND HOLD THAT SINCE THE QUANTUM IS NOT EXA CT AND BASED ON GUESS WORK AND ALSO A CONDITION LAID DOWN BY DEPARTMENT OF ELECTRO NICS HAS BEEN VIOLATED, THE APPELLANT IS NOT ELIGIBLE FOR CLAIMING DEDUCTION U/ S 10A OF I.T. ACT. (II) RELIEF U/S 10A OF THE ACT IN RESPECT OF SUB -CONTRACTED WORK : ELABORATELY QUOTING HIS FINDING IN THE CASE OF JAIP URIA SILK MILLS (P) LIMITED, THE LD. CIT (A) OF THE VIEW THAT - 13.2. I FIND THAT ITAT HAS GIVEN RELIEF TO APPELL ANT BECAUSE NO SPECIFIC CONTRACTOR COULD BE NAMED WHO IS INVOLVED IN AVAILING DOUBLE B ENEFIT OF S.10A/80HHC. IN FACT, THE WORD EXPORT MEANS DIRECT EXPORT AND THE BEN EFIT OF DEDUCTION IS ALWAYS GIVEN TO THE DIRECT EXPORTER. THERE SHOULD NOT BE ANY DOUBL E CLAIM OF SUCH ALLOWANCE. THIS IS THE VIEW OF THE SUPREME COURT IN THE CASES OF (I) S EA PEARL INDUSTRIES AND OTHERS V. CIT (2001) 247 ITR 578 (SC) AND (II) M.M.T.C V. R.C. MI SHRA (1993) 201 ITR 851 (SC) 13.3. AFTER THE SURVEY THOUGH CONDUCTED IN FY 200 2-03 I.E., AY 2003-04, SPECIFIC FINDINGS HAVE BEEN GIVEN BY THE AO THAT SUB-CONTRAC TORS ARE NOT ONLY DOING THE MANUFACTURE OF SOFTWARE PACKAGES, BUT, ALSO EXPORTI NG THEM OUT OF INDIA ON RECEIPT OF FOREIGN EXCHANGE, THEREFORE APPELLANT IS NOT ENTITL ED FOR ANY DEDUCTION ON SUCH SUB- CONTRACT WORK DONE BY THE SUB-CONTRACTOR U/S 10AOF I.T. ACT. THUS FACTS BEFORE CIT (A) AND ITAT WHILE DECIDING THE APPEAL OF AY 2000-2 001 HAS CHANGED. ON CHANGED FINDING OF FACT BY THE AO, THE GROUNDS THAT THE APP ELLANT IS ENTITLED FOR RELIEF EVEN ON SUB-CONTRACTED PROJECT ARE DISMISSED. ITA.1151/BANG/2009 PAGE - 4 (III) WITH REGARD TO REDUCE EXPENSES ON FREIGHT, INSURANCE CHARGES ETC., FROM EXPORT TURNOVER : FOLLOWING HIS EARLIER FINDING AND ELABORATELY EXTR ACTING THE SAME IN THE CASE OF JAIPURIA SILK MILLS (P) LTD., CIT (A) H AD CONCLUDED THUS 14.2. THE SUM AND SUBSTANCE OF THE ABOVE IS THAT SS.80HHC/80HHE WHEREIN THE TERM TOTAL TURNOVER HAS BEEN EXPLAINED CANNOT BE IMPOR TED TO S.10A OF I.T. ACT BECAUSE THESE SECTIONS OPERATE IN DIFFERENT FIELDS AND HAVE DIFFERENT DENOTATIONS AND CONNOTATIONS AND ALSO CONTEXTUALLY DIFFERENT. 14.2.1. THE LEGISLATIVE INTENTION OF THE SUBSTITUT ION BROUGHT OUT IN S.10A OF I.T. ACT BY THE FA 2000 W.E.F. 1.4.2001 WAS THAT EVEN THE 100% EOUS MUST PAY SOME TAX ON THE EXPORT PROFIT EARNED BY THEM. THIS IS ONLY POSSIBL E WHEN THE NUMERATOR EXPORT TURNOVER AND DENOMINATOR TOTAL TURNOVER ARE NOT EQ UAL OR SAME EVEN IN CASE OF AN UNDERTAKING DOING ONLY EXPORT BUSINESS AND NO DOMES TIC SALES AT ALL. IN SUCH A SITUATION, THE NUMERATOR AND DENOMINATOR WILL NOT B E EQUAL IF THE REIMBURSED FREIGHT, INSURANCE AND TELECOMMUNICATION CHARGES ARE NOT INC LUDED IN THE EXPORT TURNOVER I.E., NUMERATOR WHICH HAS BEEN SPECIFICALLY PROVIDED IN E XPLANATION 2(IV) OF S. 10A AND THE SAME ITEMS ARE INCLUDED IN THE TOTAL TURNOVER. IF SUCH ITEMS ARE NOT INCLUDED IN BOTH EXPORT AS WELL AS TOTAL TURNOVER HEN THE LEGISL ATIVE INTENTION OF PAYMENT OF SOME TAX AND NOT EXEMPTION BUT DEDUCTION GETS DEFEATE D. THIS IS WHY NO SPECIFIC EXPLANATION AS TO WHAT IS MEANT BY TOTAL TURNOVER H AS BEEN INTENTIONALLY PROVIDED IN S.10A /10B OF IT ACT. (IV) BAD DEBTS : PLACING STRONG RELIANCE ON THE RULINGS OF THE H ONBLE MADRAS HIGH COURT IN THE CASE OF SOUTH INDIA SURGIC AL CO. LTD. V. ACIT (2006) 287 ITR 62 (MAD) AND THE HONBLE RAJAST HAN HIGH COURT IN THE CASE OF KASHMIR TRADING CO. V. DCIT (2007) 2 91 ITR 228 (RAJ), THE LD. CIT (A) TOOK A STAND THAT 15.5. THE ACT SPEAKS OF A SIMPLE WRITE OFF. THE J URISDICTIONAL ITAT ALSO CONFIRMS HE SAME. BUT THE MANNER OF WRITE OFF HAS NOT BEEN ELA BORATED TO JUSTIFY THAT SUCH WRITE OFF IS CORRECTLY DONE TO QUALIFY FOR ALLOWANCE U/S 36(1 )(VII) OF I.T. ACT. EARLIER THE ASSESSEE WERE DEBITING THE BAD DEBT A/C AND CREDITING THE PR OVISION FOR BAD DEBT A/C. THEREFORE, AN EXPLANATION WAS INSERTED IN S. 36(1)(VII) BY FA 2001 W.R.E.F 1.4.1989 STATING THAT SUCH ENTRY WOULD NOT BE AN ALLOWABLE CLAIM AS BAD D EBT. THE PROPER PROCEDURE, I OBSERVE IS TO DEBIT THE BAD DEBT A/C AND CREDIT THE A/C OF THE DEBTOR AND ALSO INFORM THE ITA.1151/BANG/2009 PAGE - 5 DEBTOR THAT IT IS NO LONGER REQUIRED TO REPAY THE D EBT AMOUNT. EXAMINATION OF BOOKS SHOW SUCH HAS NOT BEEN DONE. THUS, EVEN ON THE BAS IS OF LACK OF ADOPTION OF PROPER PROCEDURE OF WRITE OFF, THE CLAIM DESERVED TO BE RE FUSED. HENCE, THE DISALLOWANCE OF THE CLAIM OF BAD DEBT IS UPHELD. 5. DISILLUSIONED WITH THE TREATMENT HAN DED DOWN BY THE LD. CIT (A), THE ASSESSEE HAS COME UP BEFORE THIS BENCH WITH THE PRESENT APPEAL. IT WAS THE CASE OF THE ASSESSEE TH AT (I) THE PROVISIONS OF S.10A OF THE ACT DO NOT REQUI RE THAT SEPARATE BOOKS OF ACCOUNT BE MAINTAINED FOR EACH OF THE SOFTWARE TECHNOLOGY PARK [STP] UNITS AS LONG AS THE TAX- PAYER IS ABLE TO ARRIVE THE PROFIT/LOSS OF EACH OF THE STP UNITS FROM ITS CONSOLIDATED BOOKS OF ACCOUNT; - THE AO HAD NOT DISPUTED THE TRACEABILITY OF DIRECT EXPENSES TO STP UNITS AND NON-STP UNITS AND THE ONLY MATTER DISPUTED BY THE A O WAS ON THE ALLOCATION OF INDIRECT COSTS BETWEEN UNITS ON THE BASIS OF TURNOV ER. IT WOULD BE CLEAR FROM FORM 56F AND THE P & L A/C THAT THE ASSESSEE HAD MA INTAINED THE ACCOUNTS UNIT-WISE; THAT IT WAS THE ADMITTED POSITION OF THE AO THAT THE DIRECT EXPENSES HAVE BEEN PROPERTY RECORDED AND IT WAS SIMILAR TO T HE EARLIER YEARS ASSESSMENT POSITION OF THE ASSESSEE. THE ONLY GRIEVANCE OF THE AO WAS THAT THE INDIRECT COSTS ARE BEING ALLOCATED ON THE BASIS OF UNIT-WISE TURNOVER. HOWEVER, IT WAS CLEAR FROM THE UNIT-WISE PROFIT AND LOSS ACC OUNT THAT THE PROFITS HAVE BEEN COMPUTED UNIT-WISE AND THAT THE HONBLE TRIBUNAL IN ASSESSEES OWN CASE HELD THAT ALLOCATION OF THE INDIRECT COSTS ON THE B ASIS OF TURNOVER COULD BE THE ONLY REASONABLE BASIS FOR ARRIVING AT THE UNIT-WISE PROFITS AND, THUS, THE CASE OF THE ASSESSEE STANDS SQUARELY COVERED BY THE EARLIER YEARS DECISION; - TO COUNTER THE LD. CIT (A)S OBSERVATION THAT BEFOR E THE AMENDMENT IN APRIL, 2001, THE REQUIREMENT WAS TO COMPUTE THE PROFITS FO R THE WHOLE BUSINESS AND, THEREFORE, THERE WAS NO REQUIREMENT TO MAINTAIN SEP ARATE BOOKS OF ACCOUNT AND AFTER THE AMENDMENT (FOR AY 2001-02 ONWARDS) BE CAUSE OF THE USE OF THE WORDS UNDERTAKING THERE IS NOW A REQUIREMENT TO M AINTAIN SEPARATE BOOKS OF ACCOUNT FOR EACH STP UNDERTAKING, IT WAS CONTENDED THAT IN FACT, THE SEQUENCE OF THE AMENDMENTS TO S.10A OF THE ACT WAS THE KEY ASPECT IN THIS CASE. WHEN THE EXEMPTION PROVISION WAS REPLACED BY A DEDUCTION PROVISION BY FINANCE ACT 2000 W.E.F 1.4.2 001, THERE WAS AN ANOMALY IN SUB-SECTION (4) OF S.10A WHERE THE REFER ENCE POINT WAS THE BUSINESS OF THE ASSESSEE AND NOT THE UNDER-TAKING O F THE ASSESSEE. HOWEVER, THE CIRCULAR NO.794 DT.9.8.2000 EXPLAINING THE AME NDMENTS OF F.A. 2000 ITSELF REFERS TO THE TURNOVER OF THE UNDERTAKING AN D NOT THE BUSINESS. THIS ITA.1151/BANG/2009 PAGE - 6 CLEARLY INDICATES THE INTENTION OF THE LEGISLATURE WAS TO MAKE IT UNDERTAKING SPECIFIC, BUT IT WAS INADVERTENTLY DRAFTED IN THE F A 2000 WITH REFERENCE TO THE BUSINESS OF THE ASSESSEE. HOWEVER, THIS ANOMALY WA S IMMEDIATELY CORRECTED BY THE PARLIAMENT IN THE FA 2001 W.E.F. 1.4.2001 IT SELF. IN OTHER WORDS, BEFORE THE EFFECTIVE DATE OF THE NEW SECTION 10A OF THE ACT, THIS ANOMALY WAS RECTIFIED. HENCE, THE LAW CAME INTO BEING ONLY WIT H SUB-SECTION (4) OF 10A OF THE ACT REFERRING ONLY TO UNDERTAKING WHICH WAS ALSO THE CASE PRIOR TO THE AMENDMENT. THE LD. CIT (A) HAD, HOWEVER, ASSUMED T HAT THE LAW HAS ONLY NOW BECOME UNDERTAKING SPECIFIC AND CONCLUDED THAT THE IMPLICIT ASSUMPTION OF LAW WAS THAT UNIT-WISE BOOKS OF ACCOUNTS SHOULD BE MAINTAINED. THEREFORE, THE PRE-AMENDED PROVISION CITED BY THE R EVENUE WAS NEVER CODIFIED AS LAW, AND, THUS, IT WAS INCORRECT TO ASS UME THAT THE PRE-AMENDED PROVISIONS DID NOT REQUIRE SEPARATE BOOKS OF ACCOUN T, BUT, THE POST- AMENDMENT SECTION DOES, AS THERE WAS NEVER A CHANGE IN THE LEGAL POSITION THAT THE TAX HOLIDAY WAS ALWAYS UNDERTAKING-SPECIFI C. THEREFORE, THE ITAT HAVING HELD (IN THE PRE-AMENDMENT YEAR AY 2000-01 I N THE ASSESSEES OWN CASE THAT THERE WAS NO REQUIREMENT TO MAINTAIN SEPA RATE BOOKS OF ACCOUNT FOR EACH UNDERTAKING AND THE SAME ANALOGY WILL CONTINUE TO APPLY EVEN FOR THE POST AMENDMENT YEARS I.E., AY 2001-02 ONWARDS; THAT THE HONBLE AHMEDABAD TRIBUNAL IN THE CASE OF ITO V. E-INFOCHIPS LTD. [124 TTJ 176] HELD [IN THE CONTEXT OF THE AMENDED P ROVISIONS OF S.10A OF THE ACT] THAT MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS WERE NOT REQUIRED TO BE MAINTAINED TO CLAIM RELIEF U/S 10B OF THE ACT - THAT THE QUALIFYING CONDITIONS ARE CODIFIED IN SUB- SECTION 2 OF S.10A OF THE ACT. THE SECTION STATES THAT ALL THE FOLLOWING CONDITI ONS ARE TO BE SATISFIED WHICH INDICATES THAT THE PROVISIONS ARE EXHAUSTIVE AND NO T INCLUSIVE OR ILLUSTRATIVE. WHEN THE REVENUE HAD NOT CODIFIED THAT THESE CONDIT IONS HAVE NOT BEEN COMPLIED WITH, NO OTHER CONDITIONS CAN BE IMPOSED I NTO THE LAW [TARULATA SHYAM 108 ITR 345 (SC)]; - THAT THE COMPLIANCE OF PROVISIONS OF THE STP SCHEME BY THE STP UNITS IS TO BE OVERSEEN BY THE STP AUTHORITIES AND IT WAS NOT FOR THE REVENUE AUTHORITIES TO DENY THE CLAIM OF TAX HOLIDAY ON ACCOUNT OF THE ALL EGED VIOLATION OF THE PROVISIONS OF THE STP SCHEME WITH RESPECT TO NON-MA INTENANCE OF BOOKS OF ACCOUNT, NON-MAINTENANCE OF PROJECT-WISE ACCOUNTS E TC., - RELIES ON THE CASE LAWS (A) GESTETNER DUPLICATORS PVT. LTD. V. CIT (117 ITR 1 ( SC); (B) ITO V. E-INFOCHIPS LTD. 124 TTJ 176) ITAT, AHMEDA BAD (II) WITH REGARD TO SUB-CONTRACTED WORK : - - ITA.1151/BANG/2009 PAGE - 7 - THE HONBLE EARLIER BENCH IN THE ASSESSEES OWN CAS E FOR THE AY 2000-01 IN ITA NO.3464/BANG/2004 DATED 31-10-2007 HAD GRANTED RELIEF U/S 10A OF THE ACT IN RESPECT OF THE WORK SUB-CONTRACTED BY THE ASSESS EE; (III) IN RESPECT OF EXCLUSION OF FOREIGN CURRENCY E XPENSES FROM EXPORT TURNOVER: - THAT THE EXCLUSION OF FOREIGN CURRENCY EXPENSES FRO M BOTH THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WAS TO BE DECIDED IN FAVO UR OF THE ASSESSEE. RELIES ON THE FINDING OF THE HONBLE SPECIAL BENCH OF CHENNAI IN THE CASE OF ITO V. SAK SOFT LIMITED REPORTED IN 313 ITR [AT] 35 3; (IV) WITH REGARD TO DEDUCTION ON BAD DEBTS : - THAT THE ASSESSEE WAS NOT REQUIRED TO ESTABLISH THA T THE DEBTS WRITTEN OFF WERE BAD IN ORDER TO CLAIM DEDUCTION UNDER THE PROVISION S OF S.36(1)(VII) OF THE ACT. RELIES ON THE RULING OF THE HONBLE SUPREME COURT I N THE CASE OF TRF LTD. V. CIT - 323 ITR 397(SC). 5.1. TO DRIVE HOME HIS POINTS, THE LD. A R CAME UP WITH A VOLUMINOUS PAPER BOOK CONSISTING OF 1 180 PAGES WHICH CONSIS T OF INTER-ALIA COPIES OF (I) RETURN OF INCOME WITH ANNEXURE, (II) CORRESPONDENCE WITH AUTHORITIES ETC., 5.2. ON HIS PART, THE LD. D R WAS VERY SPECI FIC IN HIS URGES THAT THE LD. CIT (A), AFTER ANALYZING THE ISSUES RAISED BY THE ASSES SEE COMPREHENSIVELY AND ALSO EXTENSIVELY QUOTING VARIOUS CASE LAWS, HAD ARRIVED AT A CONCLUSION IN A JUDICIOUS MANNER WHICH, ACCORDING TO HIM, REQUIRES NO INTERVE NTION OF THIS BENCH AT THIS JUNCTURE. IN FURTHERANCE, THE LD. D R HAD FURNISHE D A PAPER BOOK WHICH, PRIMARILY, CONSISTS OF COPIES OF (I) SURVEY REPOR T DT.25.2.2008; (II) FORM NO.10CCAF WITH ANNEXURE, SWORN STATEMENT OF CFO OF THE ASSESSEE ETC., 6. WE HAVE DECISIVELY CONSIDERED THE RIVAL SUBMISSIONS, DILIGENTLY PERUSED THE RELEVANT CASE RECORDS AND ALSO THE DOCUMENTARY EVIDENCES ADVANCED BY EITHER PARTY IN SUPPORT OF THEIR RESPECTIVE CLAIMS. ITA.1151/BANG/2009 PAGE - 8 6.1. WE SHALL PROCEED TO ANALYZE THE RIVAL CLAIMS IN A CHRONOLOGICAL MANNER AS UNDER: I. IT IS AN UNDISPUTED FACT THAT THE LD. AO HAD NOT DISPUTED THE TRACEABILITY OF DIRECT EXPENSES TO STP AND NON-STP UNITS AND THE ONLY ISSUE ON WHICH THE LD. AO OBJECTED TO, AS HIGH LIGHTED BY THE ASSESSEE IN ITS SUBMISSION, WAS THE ALLOCATION OF I NDIRECT COSTS BETWEEN UNITS ON THE BASIS OF TURNOVER. ON HIS PAR T, THE LD. CIT (A) TOOK A STAND THAT CONSEQUENT TO SUBSTANTIAL CHANGE IN THE PROVISIONS OF S.10A (1) OF THE ACT W.E.F. 1.4.2001, THE ASSESS EE WAS REQUIRED TO MAINTAIN SEPARATE BOOKS OF ACCOUNT WHICH IT HAD FA ILED TO DO SO AND, THUS, THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEDUC TION U/S 10A OF THE ACT. AS RIGHTLY POINTED OUT BY THE ASSESSEE, MAINTE NANCE OF SEPARATE BOOKS OF ACCOUNT WAS NOT A PRE-CONDITION FINDING A PLACE IN THE PROVISIONS OF S.10A OF THE ACT. THE COMMISSIONER OF INCOME-TAX(A)'S STATEMENT THAT THERE WAS SUBSTANTIVE CHANGE IN LAW W.E.F.1.4.2001 IS CORRECT . HOWEVER, HIS FURTHER OBSERVATION THAT LAW HAS MOVED TO 'UNDERTAK ING' SPECIFIC DEDUCTION, WHICH INDICATES THAT THE BOOKS OF ACCOUN TS SHOULD BE MAINTAINED UNIT WISE, IS WITHOUT ANY LEGAL BASIS. SECTION 10A TAX HOLIDAY PROVISIONS WERE ALWAYS 'UNDERTAKING' SPECIF IC (EVEN PRE- ITA.1151/BANG/2009 PAGE - 9 AMENDED PROVISIONS UP TO 2001). SUB-SECTION (1) OF SECTION 10A (PRIOR TO THE AMENDMENT BY FINANCE ACT, 2000 WAS AN EXEMPTION PROVISION WHICH ALSO CLEARLY REFERS TO THE PROFITS OF THE UNDERTAKING. HENCE, THE COMMISSIONER OF INCOME-TAX(A) HAS MISUND ERSTOOD THAT THE PROVISIONS WERE NOT 'UNDERTAKING' SPECIFIC. THE PRE-AMENDED PROVISIONS CITED BY THE REVENUE WAS NEVER CODIFIED AS THE LAW, (AS IT WAS OVERWRITTEN BY THE SUBSEQUENT AMENDMENT) (SEE A . N. IYER'S 'IT LAWS, 2001'). THEREFORE, THE REVENUE IS INCORRECT TO CITE THAT PRE- AMENDED PROVISIONS DID NOT REQUIRE SEPARATE BOOKS O F ACCOUNT AS THERE WAS NO REFERENCE TO 'UNDERTAKING', BUT THE PO ST-AMENDED SECTION DOES. IN THIS CONNECTION, IT IS MOST APPROPRIAT E TO RECALL THE FINDING OF THE EARLIER BENCH IN AN IDENTICAL ISSUE IN THE ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT Y EAR [IN ITA NO.3464/BANG/2004 DATED 31.10.2007], WHEREIN THE HO NBLE BENCH, AFTER ANALYZING VARIOUS RULINGS OF THE HONBLE HIGH EST JUDICIARY OF THE LAND, PRIMARILY, IN THE CASES OF (I) CWT V. KRIPASH ANKAR DAYASHANKER WORAH (1971) 81 ITR 763, (II) IN PHILIP JOHN PLASK ET THOMAS V. CIT (1963) 49 ITR 97 (SC) AND (III) SMT.TARULATA SHYAM V. CIT (1977) ITA.1151/BANG/2009 PAGE - 10 108 ITR 345 (SC AND ALSO EXTENSIVELY QUOTING THE PR OVISIONS OF S.10A OF THE ACT, HAD OBSERVED THUS 17.THE LEARNED COMMISSIONER OF INCOME-TAX (A) .HE NOTED IN HIS ORDER THAT THE ASSESSEE COULD FALL WIT HIN THE AMBIT OF SECTION 10A OF THE ACT, ALL THAT IT TAKES TO SATISFY THE CONDITIONS LA ID DOWN THEREIN. FURTHER, THE ASSESSEE HAS SATISFIED AND FULFILLED THE CONDITIONS BASED ON WHICH IT WAS PERMITTED TO ESTABLISH STP UNITS AT BANGALORE, PUNE AND DELHI. HE FURTHER OBSERVED THAT EVEN THE ASSESSING OFFICER COULD NOT FIND ANYTHING WHICH WOULD GO TO S HOW THAT THE ASSESSEE HAS FAILED TO FULFILL THE CONDITIONS LAID DOWN U/S 10A(1)(2)(I), (II) AND (III) OF THE ACT. HE OBSERVED THAT INSOFAR AS THE SALES TURNOVER FROM THE STP UNI TS ARE CONCERNED, THE ASSESSING OFFICER IN HIS REMAND REPORT HAS ACCEPTED THAT IDENTIFICATION WAS POSSIBLE AND IT HAS BEEN CORRECTLY SHOWN BY THE ASSESSEE IN THE SUBMISS ION THAT WAS MADE BEFORE CIT (A) WHICH WAS FORWARDED TO THE AO FOR HIS REMAND REPORT . CONSIDERING THE SECOND OBJECTION OF THE AO, NAMELY, THAT SEPARATE BOOKS OF ACCOUNT HAVE NOT BEEN MAINTAINED FOR THE STP UNITS, HIS OBS ERVATION WAS THAT THE OBJECTION OF THE AO AROSE ON THE PREMISE THAT PART OF THE EXPEND ITURE WHICH COULD BE RELATED TO THE EXEMPTED INCOME WHICH IS NOT ALLOWABLE TO THE ASSES SEE BY VIRTUE OF THE PROVISIONS CONTAINED IN SECTION 14A OF THE ACT WHICH COULD BE DISGUISED AND ALLOWED TO BE SET OFF AGAINST TAXABLE INCOME AND, THUS, THE ASSESSEE WOUL D BE BENEFITED BY PAYING REDUCED TAX WHICH COULD HAVE BEEN AVOIDED. ON THIS ISSUE, THE OBJECTION OF THE AO AS IS SEEN FROM THE REMAND REPORT AND AS NOTED BY THE CIT (A) WAS WITH REGARD TO ALLOCATION OF THE OVERHEAD EXPENSES IN THE RATIO OF TURNOVER. TH E REASON GIVEN BY THE LEARNED CIT (A) FOR NOT ACCEPTING THE REASONING OF THE AO WAS A S THE ASSESSEE HAS THREE UNITS AT DIFFERENT PLACE, THE ONLY PLAUSIBLE MANNER AVAILABL E FOR ALLOCATION OF EXPENDITURE IS IN THE RATIO OF TURNOVER WHICH IS POSSIBLY THE ONLY IN DICATOR AVAILABLE AND IS A REASONABLE METHOD OF ARRIVING AT THE EXPENSES. FURTHER, WE VENTURE TO QUOTE THE RULI NG OF THE HONBLE SUPREME COURT IN THE CASE OF SMT. TARULATA SHYAM A ND OTHERS V. CIT REPORTED IN 108 ITR 345 (SC) WHEREIN IT HAS BEE N MADE IMPLICITLY CLEAR THAT - TO US, THERE APPEARS NO JUSTIFICATION TO DEPART FR OM THE NORMAL RULE OF CONSTRUCTION ACCORDING TO WHICH THE INTENTION OF THE LEGISLATURE IS PRIMARILY TO BE GATHERED FROM THE WORDS USED IN THE STATUTE. IT WILL BE WELL TO RECAL L THE WORDS OF ROWLATT J. IN CAPE BRANDY SYNDICATE V. INLAND REVENUE COMMISSIONERS [1 921] 1 KB 64 (KB) AT PAGE 71, THAT : ITA.1151/BANG/2009 PAGE - 11 '...... IN A TAXING ACT ONE HAS TO LOOK MERELY AT W HAT IS CLEARLY SAID. THERE IS NO ROOM FOR ANY INTENDMENT. THERE IS NO EQUITY ABOUT A TAX: THERE IS NO PRESUMPTION AS TO A TAX. NOTHING IS TO BE READ IN, NOTHING IS TO BE IMP LIED. ONE CAN ONLY LOOK FAIRLY AT THE LANGUAGE USED.' II. IN VIEW OF THE FACT THAT THE MAINTENANCE OF SEPARAT E BOOKS OF ACCOUNT FOR STP UNITS IS NOT A CONDITION LAID DO WN IN THE PROVISIONS OF S. 10A OF THE ACT AND ALSO IN CONFORMITY WITH TH E RULINGS OF THE HONBLE SUPREME COURT REFERRED SUPRA AND THE FINDIN G OF THE HONBLE BENCH IN THE ASSESSEES OWN CASE FOR THE IMMEDIATEL Y PRECEDING AY CITED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE LD. CIT (A) WAS NOT JUSTIFIED IN DENYING THE LEGITIMATE CLAIM OF T HE ASSESSEE U/S 10A OF THE ACT. IT IS ORDERED ACCORDINGLY. II. IT WAS THE VIEW OF THE LD. CIT (A) THAT THE ASSESSE E WAS NOT ELIGIBLE TO CLAIM RELIEF U/S 10A OF THE ACT IN RESP ECT OF THE WORK SUB- CONTRACTED AS THE ASSESSEE HAD PROVIDED DISCLAIMERS TO THE SUB- CONTRACTORS ON THE BASIS OF WHICH THE SUB-CONTRACTO RS WERE CLAIMING RELIEF UNDER THE SAID SECTION. THE EARLIER BENCH HAD AN OCCASION TO DEAL WITH A SIMILAR ISSUE TO THAT OF THE ISSUE ON HAND FOR ADJUDICATION . BRIEFLY ANALYZING THE ISSUE, THE HONBLE BENCH RECORDED ITS VIEWS THU S 22..WE ALSO FIND OURSELVES IN AGREEMENT WITH TH E CONCLUSION OF THE COMMISSIONER OF INCOME (A) THAT EXEMPTION U/S 10A T O THE ASSESSEE HAS TO BE GRANTED OR DENIED BY CONSIDERING THE FACTS OF THE ASSESSEE. THE FACT REMAINS THAT THE ASSESSEE HAD EXPORTED FROM STP UNITS AND THE ENGAGEMENT OF T HE SUB-CONTRACTORS BY THE ITA.1151/BANG/2009 PAGE - 12 ASSESSEE TO WHOM ASSESSEE PAID FROM ITS BANK ACCOUN T MAINTAINED ABROAD WHICH ONLY PROVIDED SERVICES TO THE ASSESSEE AND HAVE NOT EXPO RTED ANYTHING BY THEMSELVES AND IT WOULD NOT BE CONSIDERED AS EXPORTS, UNLESS PROVISIO N OF THOSE SERVICES FROM ONE STP UNIT TO ANOTHER UNIT THAT EXPORTS IS CONSIDERED AS EXPORTS WITHIN THE MEANING OF THE ACT. SINCE IT IS ACCEPTED THAT IT IS THE ASSESSEE WHO HA D EXPORTED COMPUTER SOFTWARE FOR WHICH IT WAS PAID, THE ENTITLEMENT OF EXEMPTION U/S 10A IS SATISFIED. AS OBSERVED EARLIER, IF THE SUB-CONRACTORS ALSO BECOME ELIGIBLE IF THEY ARE LOCATED IN STP, IT IS SOMETHING THAT THE ACT PROVIDES AND, THEREFORE, THE AO WHO IS MERELY AN IMPLEMENTER OF THE ACT, HAS TO NECESSARILY ONLY FOLLOW IT AND A LLOW THE EXEMPTION IF THE CIRCUMSTANCES SO WARRANT. IN CONFORMITY WITH THE REASONING OF THE HONBLE EARLIER BENCH CITED SUPRA, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS ENTITLED TO RELIEF U/S 10A OF THE ACT IN RESPECT OF THE WORK SUB- CONTRACTED BY IBM INDIA. IT IS ORDERED ACCORDINGLY . III. THE ASSESSEES CLAIM FOR EXCLUSION OF FOREIGN CURRE NCY EXPENSES FROM BOTH THE EXPORT TURNOVER AS WELL AS T OTAL TURNOVER WAS NEGATED BY THE LD. CIT (A) WHO BY EXTENSIVELY QUOTI NG HIS REASONING IN THE CASE OF M/S.JAIPURIA SILK MILLS (P) LTD. HOWEVER, THE EARLIER HONBLE BENCH IN THE CASE OF IGATE GLOBAL SOLUTIONS LIMITED V. ACIT REPORTED IN 112 TT J 1002 HAD OBSERVED THAT 9. RELIANCE WAS ALSO PLACED ON THE NUMBER OF JUDGM ENTS OF THE HIGH COURTS, VIDE WHICH, IT HAS BEEN HELD THAT EXCISE DUTY AND SALES- TAX SHOULD NOT BE INCLUDED IN THE TOTAL TURNOVER, AS THE SAME ARE NOT INCLUDIBLE IN T HE EXPORT TURNOVER. THE LEARNED APEX COURT IN THE CASE OF CIT VS. LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1 : (2007) 290 ITR 667 (SC) AND IN THE CASE OF CIT VS. CATAPHA RMA (INDIA) (P) LTD. (2007) 211 CTR (SC) 83 : (2007)292 ITR 641 (SC) HAS HELD THAT EXCISE DUTY AND SALES-TAX ARE NOT INCLUDIBLE IN THE TOTAL TURNOVER. IT WAS, THEREFORE , HELD IN THE CASES OF TATA ELXSI AND INFOSYS TECHNOLOGIES THAT EXPENDITURE INCURRED IN F OREIGN CURRENCY BY THE ASSESSEE SHOULD BE EXCLUDED FROM THE TOTAL TURNOVER, AS THE SAME IS NOT TO BE CONSIDERED IN EXPORT TURNOVER. FOLLOWING THE SAME REASONING, IT I S HELD THAT UP-LINKING CHARGES ITA.1151/BANG/2009 PAGE - 13 WHICH ARE REDUCED FOR ASCERTAINING THE EXPORT TURNO VER ARE ALSO NOT TO BE CONSIDERED FOR THE PURPOSES OF TOTAL TURNOVER, AS TOTAL TURNOV ER IS SUM TOTAL OF EXPORT TURNOVER AND INTERNAL TURNOVER. IN THE RECENT PAST, THE HONBLE SPE CIAL BENCH OF THE CHENNAI TRIBUNAL IN THE CASE OF ITO V. SAK SOFT LIM ITED REPORTED IN (2009) 313 ITR (AT) 353 (CHENNAI) [SB], HAD IN ITS WISDOM OBSERVED THUS 53..WE HOLD THAT FOR THE PURPOSE OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTION 10B, THE FREIGHT, TELECOM CHARGES OR INSURA NCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE IND IA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERV ICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TU RNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE FORMULA. WE ARE IN TOTAL AGREEMENT WITH THE OBSERVATIONS OF THE EARLIER BENCH AS WELL AS THE HONBLE SPECIAL BENCH OF CHENNAI TRIBUNAL ON THE ISSUE. IT IS ORDERED ACCORDINGLY . IV. BAD DEBTS : AT THE OUT-SET, WE WOULD LIKE TO POINT OUT THAT ONC E THE ASSESSEE HAD WRITTEN OFF DEBTS AS IRRECOVERABLE IN HIS/ITS ACCOUNTS, THE ASSESSEE NEED NOT BE REQUIRED TO PROVE THAT THE Y HAVE BECOME BAD ETC., OUR VIEW IS IN CONSONANCE WITH THE VARI OUS JUDICIAL PRONOUNCEMENTS ON THE ISSUE, CHIEFLY - ITA.1151/BANG/2009 PAGE - 14 (I ) IN THE CASE OF LAWLYS ENTERPRISES P. LTD. V. CIT REPORTED IN (2009) 314 ITR 297 (PATNA) THE HONBLE PATNA HIGH C OURT WAS PLEASED TO OBSERVE THAT - THE LAWS AS AMENDED WITH EFFECT FROM APRIL 1, 1989 , PERMITTED DEDUCTION OF THE AMOUNT OF ANY BAD DEBT OR PART THEREOF, WHICH WAS W RITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. TH E ASSESSEE HAVING WRITTEN OFF THE AMOUNT AS IRRECOVERABLE IN ITS ACCOUNTS FOR THE PRE VIOUS YEAR WAS ENTITLED TO DEDUCTION OF THE AMOUNT OF THE BAD DEBT. . (II ) THE HONBLE HIGH COURT OF HIMACHAL PRADESH IN THE CASE OF SURESH GAGGAL V. ITO REPORTED IN (2009) 222 CTR (HP ) 96 HAD HELD THAT - ONCE THE ASSESSEE WRITES OFF THE DEBT AS IRRECOVER ABLE, HIS CLAIM FOR DEDUCTION CANNOT BE REJECTED ON THE GROUND THAT THE DEBT HAS NOT BEEN ESTABLISHED TO HAVE BECOME IRRECOVERABLE. THE AFORESAID POSITION IS AL SO SUPPORTED BY THE AMENDMENT MADE TO S.36(2) W.E.F. 1 ST APRIL, 1989 AND ANY DOUBT, IF REMAINING, HAS BEEN CLARIFIED BY CIRCULAR NO.551 DATED: 23 RD JANUARY, 1990 . (III ) THE HONBLE BOMBAY HIGH COURT, IN THE CASE OF CIT V. STAR CHEMICALS (BOMBAY) P. LTD. REPORTED IN (2009) 313 I TR 126 (BOM), IN ITS WISDOM HAD HELD THAT UNDER SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961 AND CIRCULAR NO.551 DATED JANUARY, 23, 1990 IF THE ASSESSEE HAD WRITTEN OFF THE DEBT AS A BAD DEBT THAT WOULD SATISFY THE PURPO SE OF THE SECTION. ( IV) THE HONBLE HIGHEST JUDICIARY OF THE LAND IN ITS RECENT VERDICT IN THE CASE OF T.R.F. LTD. V. CIT REPORTED IN (2010 ) 323 ITR 397 (SC), OBSERVED THAT - ITA.1151/BANG/2009 PAGE - 15 AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE I NCOME-TAX ACT, 1961, WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO OBTAIN A DEDUCTION IN RE LATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, H AS BECOME IRRECOVERABLE; IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACC OUNTS OF THE ASSESSEE. ACCORDINGLY, WE HOLD THAT THE BAD DEBTS WRITTEN OFF BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT SHALL BE ALLOWED AS A DEDUC TION. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT , THE ASSESSEES APPEAL IS PARTLY ALLOWED AS INDICATED ABOVE . ORDER PRONOUNCED IN OPEN COURT ON 24 TH 06.2011, AT BANGALORE. SD/- SD/- (A. MOHAN ALANKAMONY) (GEOR GE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBE R COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE