Nova Petrochemicals Ltd., Ahmedabad V. The ACIT., Circle-5, Ahmedabad

ITA 2624/AHD/2004

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57189 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 5 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-02-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 17-01-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 02-09-2004
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA
• Assessee Lawyers: S N SOPARKAR
• Keywords: Unexplained cash credit; Unexplained expenditure; Capital asset; Business income; Depreciation; Corroborative evidences; Competent authority; Capital expenditure
• Section: 69C; 143(3); 244A; 234B; 115JB; 37

Judgement Text

-1- IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI D K TYAGI - JM AND SHRI A MOHAN ALANKAMONY - AM ITA NO.2624/AHD/2004 (ASSESSMENT YEAR:-2001-02) NOVA PETROCHEMICALS LTD., 71, CITY CENTRE, SWASTIK CHAR RASTA, NAVRANGPURA, AHMEDABAD V/S THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-5, AHMEDABAD PAN: AAACN 5419 K [APPELLANT] [RESPONDENT] ITA NO.3261/AHD/2004 (ASSESSMENT YEAR:-2001-02) THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-5, AHMEDABAD V/S NOVA PETROCHEMICALS LTD., 71, CITY CENTRE, SWASTIK CHAR RASTA, NAVRANGPURA, AHMEDABAD PAN: [APPELLANT] [RESPONDENT] ITA NO.2181/AHD/2009 A N D ITA NO.4205/AHD/2007 (ASSESSMENT YEARS:-2002-03 & 2003-04) THE DEPUTY / ASSISTANT COMMISSIONER OF INCOME- TAX, CIRCLE-5, AHMEDABAD V/S NOVA PETROCHEMICALS LTD., 71, CITY CENTRE, SWASTIK CHAR RASTA, NAVRANGPURA, AHMEDABAD [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI S N SOPARKAR, AR REVENUE BY:- SHRI S K GUPTA, CIT DR 2 DATE OF HEARING:- 17-01-2012 DATE OF PRONOUNCEMENT:- 16-02-2012 O R D E R PER D K TYAGI (JM) :- THE CROSS APPEALS FOR ASSESSMENT YEAR 2001-02 HAVE BEEN FILED AGAINST THE ORDER DATED 06- 08-2004 PASSED BY THE LEARNED CIT(A)-XI, AHMEDABAD. THE REV ENUE HAS ALSO FILED TWO APPEALS FOR ASSESSMENT YEARS 2002-03 AND 2003- 04 I.E. ITA NO.2181/AHD/2009 AND ITA NO.4205/AHD/20 07 RESPECTIVELY AGAINST TWO SEPARATE ORDERS DATED 02-0 4-2009 AND 21-09-2007 PASSED BY THE LEARNED CIT(A)-XI, AHMEDAB AD. 2 SINCE CERTAIN GROUNDS RAISED BY THE ASSESSEE AND REVENUE ARE COMMON AND INTER-CONNECTED, THE APPEALS WERE HE ARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. FIRST WE ARE CONSIDERING THE CROSS APP EALS FILED BY THE ASSESSEE AND REVENUE I.E. ITA NO.2624/AHD/2004 AND ITA NO.3261/AHD/2004 FOR ASSESSMENT YEAR 2001-02. THE A SSESSEE HAS FILED CONCISE GROUNDS OF APPEAL WHICH ARE AS UN DER:- 1. ASSESSMENT ORDER U/S 143(3) IS VOID AND DESERVES TO BE CANCELLED FOR THE REASONS THAT IT WAS - (A) PASSED WITHOUT OBSERVING ELEMENTARY PRINCIPLE OF NA TURAL JUSTICE. (B) PASSED IN TOTAL DISREGARDS TO THE FUNDAMENTAL PRINC IPLES OF THE LAW OF EVIDENCE. (C) PASSED IN TOTAL DISREGARDS OF FUNDAMENTAL PRINCIPLE S OF PROOF. 2. LD. CIT(A) HAS ERRED IN CONFIRMING ADDITION OF R S.3,25,58,452/- IN RESPECT OF ALLEGEDLY UNEXPLAINED EXPENDITURE U/S 69C, ON THE GROUND THAT, AS COMPARED TO THE SUBSEQUENT TWO ASSE SSMENT 3 YEARS, I.E. AY 2002-03 AND 2003-04 THE APPELLANTS PROFIT & LOSS ACCOUNT FOR THE PRESENT ASSESSMENT YEAR WAS DE BITED WITH TOO LOW EXPENDITURE WHICH JUSTIFIED A CONCLUSION TH AT THE APPELLANT HAD INCURRED EXPENDITURE OUTSIDE THE BOOK S OF ACCOUNTS. 3. LD. CIT(A) WHILE DECIDING THE ISSUE INVOLVED IN FAVOUR OF THE APPELLANT, HAS ERRED IN GIVING DIRECTION, WHICH IS SUSCEPTIBLE TO MISINTERPRETATION AND CONSEQUENT TO FURTHER LITIGAT ION (EMPHASIS SUPPLIED)- 8.1 I HAVE CONSIDERED THE FACTS OF THE CASE SUBMI SSIONS OF THE AR OF THE APPELLANT CAREFULLY. THE ASSESSING OFFICE R HAS NOT GIVEN CREDIT U/S 115JAA OR CREDIT FOR TDS. THE ASSE SSING OFFICER IS DIRECTED THE APPELLANTS PLEA AS PER LAW WHILE GIVING EFFECT TO THIS ORDER. LD. CIT(A) OUGHT TO HAVE CATEGORICALLY DIRECTED FOR THE GRANT OF TAX CREDIT U/S 115JAA OR CREDIT FOR TDS SUBJECT MER ELY TO VERIFICATION OF RESPECTIVE AMOUNTS BY THE LD. AO. 4. LD. CIT(A) ERRED IN HOLDING THAT LEVY OF INTEREST U /S 234B & 234C IS MERELY CONSEQUENTIAL. INTEREST U/S 234C IS EVEN OTHERWISE NOT LEVIABLE SINCE RETURNED INCOME IS RS. NIL. 5. LD. CIT(A) ERRED IN HOLDING THAT WITHDRAWAL OF INTE REST EARLIER GRANTED TO IT U/S 244A IS MERELY CONSEQUENTIAL. 6. THE APPELLANT CRAVES LIBERTY TO ADD, ALTER, AMEND A ND/ OR WITHDRAW ANY GROUNDS OF APPEAL EITHER BEFORE OR AT THE TIME OF HEARING. THE REVENUE HAS FILED THE FOLLOWING GROUNDS OF APPE AL:- 1. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XI, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.10,00,25,968/- MADE U/S 68 OF THE AC T. 2. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XI, AHMEDABAD HAS ALSO ERRED IN NOT APPRECIATING THE FA CT THAT THE 4 ASSESSEE HAD NO TECHNICAL AND INFRASTRUCTURE FACILI TIES TO PRODUCE THE SOFTWARE ALLEGEDLY EXPORTED BY IT. 3. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XI, AHMEDABAD HAS FURTHER ERRED IN HOLDING THAT THE ASS ESSEE IS ENTITLED TO EXEMPTION U/S 10A OF THE ACT. 4. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XI, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.4,93,768/- ADDED BY THE AO BEING THE INTEREST RELATED TO THE AMOUNT BORROWED FOR THE EXPANSION OF EXISTING BUSINESS. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XI, AHMEDABAD OUGHT TO HAVE UPHELD THE ORDER OF THE AO TO THE ABOVE EXT ENT. 6. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) MAY BE SET-ASIDE TO THE ABOVE EXTENT AND THAT OF THE AO BE RESTORED. 3 AT THE OUTSET, THE LEARNED COUNSEL OF THE ASSESSE E DID NOT PRESS GROUND NOS.1 AND 3 AND THEREFORE, THE SAME AR E NOT REQUIRED TO BE ADJUDICATED AND ARE BEING DISMISSED, AS NOT PRESSED. 4 AS REGARDS GROUND NO.2 RAISED BY THE ASSESSEE AND GROUND NOS.1 TO 3 IN THE REVENUES APPEAL, THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY FILED ITS RETURN OF INCOM E FOR THE YEAR UNDER APPEAL ON 31-10-2001 SHOWING TOTAL INCOME AT RS. NIL. THE ASSESSEE FURNISHED STATUTORY AUDITED ACCOUNTS UNDER THE COMPANIES ACT AS WELL AS AUDIT REPORT IN FORM 3CA A ND 3CD ALONG WITH THE RETURN OF INCOME. THE ASSESSEE ALSO FURNISHED FORM NO.10CCAC FOR CLAIMING DEDUCTION U/S 80HHC, FO RM 5 NO.56F FOR CLAIMING DEDUCTION U/S 10A OF THE INCOME -TAX ACT, 1961 AND FORM NO.29B REGARDING COMPUTATION OF PROFI T U/S 115JB OF THE ACT. 5 THE AO FOUND THAT THE ASSESSEE COMPANY HAS CLAIME D PROFIT OF SOFTWARE DIVISION AS EXEMPT U/S. 10 A OF THE ACT AMOUNTING TO RS.10,00,25,968/-. FOR CLAIMING THIS DEDUCTION THE ASSESSEE HAS FURNISHED FORM NO. 56 F WHICH IS TO BE SUBMITTED FO R CLAIM U/S.10A ALONG WITH THE RETURN OF INCOME COMPUTING T HE DEDUCTION AT THE ABOVE AMOUNT. THIS DEDUCTION IS ALLOWABLE IN RESPECT OF NEWLY ESTABLISHED UNDERTAKING IN FREE-TRADE ZONE, E TC. ACCORDING TO THIS SECTION, DEDUCTION OF CERTAIN PROFIT AND GA INS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICL ES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF 10 CONSECUTIVE AS SESSMENT YEARS BEGINNING WITH THE A.Y. RELEVANT TO THE PREVI OUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PROD UCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CAS E MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE. T HIS DEDUCTION IS SUBJECT TO CERTAIN CONDITION AS ENUMERATED IN SU B-SECTION 2 OF SECTION 10 A OF THE ACT. THESE ARE AS UNDER:- (I) IT HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUC E AARTICLE OR THINGS OR COMPUTER SOFT WANT DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR COMMENCIN G ON OR AFTER THE FIRST DAY OF APRIL, 1994 IN ANY SPE CIAL ECONOMIC ZONE. (II) IT IS NOT FORMED BY THE SPLITTING UP, OR THE RECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE: 6 PROVIDED THAT THIS CONDITION SHALL NOT APPLY IN RES PECT OF ANY UNDERTAKING WHICH IS FORMED AS A RESULT OF T HE RE-ESTABLISHMENT, RECONSTRUCTION OR REVIVAL BY THE ASSESSES OF THE BUSINESS OF ANY SUCH UNDERTAKING AS IS REFERRED TO IN SECTION 33B, IN THE CIRCUMSTANCES AN D WITHIN THE PERIOD SPECIFIED IN THAT SECTION; (III) IT IS NOT FORMED BY THE TRANSFER TO A NEW BUS INESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. EXPLANATION: THE PROVISIONS OF EXPLANATION 1 AND EXPLANATION 2 TO SUB SECTION (2) OF SECTION 80-I SH ALL APPLY FOR THE PURPOSES OF CLAUSE (III) OF THIS SUB- SECTION AS THEY APPLY FOR THE PURPOSES OF CLAUSE (I I) OF THAT SUB-SECTION. 6 THE AO OBSERVED THAT THIS SECTION WOULD APPLY TO THE UNDERTAKING IF THE SALE PROCEEDS OF ARTICLE OR THIN G OR COMPUTER SOFTWARE EXPORTED OUT OF INDIA ARE RECEIVED IN OR B ROUGHT TO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE WIT HIN A PERIOD OF 6 MONTHS FROM THE END OF THE PREVIOUS YEAR OR WI THIN SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. THE ASSESSEE WAS REQUIRED TO FURNISH THE PR ESCRIBED FORM 56-F AS WELL AS AUDITED ACCOUNTS ALONG WITH THE RET URN OF INCOME. THE ASSESSEE SATISFIES THE ABOVE CRITERIA AND THE S AME ARE, THEREFORE, NOT SUBJECT TO FURTHER DISCUSSION. THE O THER REQUIREMENTS MENTIONED AT SECTION 10 A(6) TO 10 A(9 ) ARE ALSO NOT HAVING MUCH IMPORTANCE IN THIS CASE AND, THEREF ORE, NEED NOT REQUIRE ANY FURTHER DISCUSSION. 7 THE ASSESSEE HAS CLAIMED THE EXEMPTION OF INCOME UNDER SECTION 10A FOR THE FIRST TIME THOUGH THE ASSESSEE COMPANY WAS INCORPORATED IN 1995. THE ASSESSEE HAS CREATED A SE PARATE UNIT 7 VIZ. SOFTWARE DIVISION FOR THE ABOVE PURPOSE AND RE GISTERED THIS UNIT WITH STPI, GANDHINAGAR ON 29/3/2000 WHICH IS A N AUTHORIZED SOCIETY UNDER THE MINISTRY OF TECHNOLOGY, GOVT. OF INDIA. THE FLOOR PLAN WAS ALSO APPROVED. THE ADDRESS GIVEN FOR THE ABOVE UNIT IS AT A-L, FIRST FLOOR, CHIRIPAL HOUSE, B/H. M ARUTI COMPLEX, SATELLITE, AHMEDABAD. THE SAID PREMISE WAS TAKEN ON LEASE FROM SHANTI EXPORT PVT. LTD ON 24.3.2000. THE AFORESAID UNIT IS THEREAFTER STATED TO HAVE COMMENCED ITS WORK REGARD ING DEVELOPMENT OF SOFTWARE. THE ASSESSEE COMPANY HAS C LAIMED TO HAVE DEVELOPED TWO TYPES OF SOFTWARE I.E. (A) FINAN CIAL ACCOUNTING SOFTWARE AND (B) STOCK AND INVENTORY CON TROL SYSTEM. IT IS STATED THAT 4 PERSONS WERE WORKING AS SOFTWARE ENGINEERS IN THE UNIT. AS INFRASTRUCTURE THE ASSESS EE COMPANY HAS STATED TO HAVE EMPLOYED 8 COMPUTER AND OTHER PERIPH ERALS REQUIRED THEREFOR. DURING THE YEAR UNDER CONSIDERAT ION THE ASSESSEE COMPANY HAS SOLD SOFTWARES TO ABOUT 20 FOR EIGN PARTIES IN VARIOUS COUNTRIES. ACCORDING TO THE ASSESSEE, TH E MAIN SOFT- WARES EXPORTED/TRANSMITTED THROUGH INTERNET WERE AS UNDER:- (I) ATTENDANCE CONTROL SYSTEM (II) STOCK AND INVENTORY CONTROL SYSTEM. (III) FINANCIAL ACCOUNTING SOFTWARE. FROM THE AFORESAID EXPORT THE ASSESSEE HAS SHOWN SA LE REALIZATION OF US $ 22,66,850 AMOUNTING TO RS.10,28.88.952/-. O N THIS AMOUNT THE DEDUCTION HAS BEEN COMPUTED IN THE AUDIT REPORT (FORM NO. 56 F) AT RS.10,00,25.968/-. DEDUCTION OF THE INCOME IS STATED TO BE COVERED BY THE PROVISIONS OF SECTION 1 0 A OF THE ACT. 8 8 THE AO OBSERVED THAT IN VIEW OF THE EXTREMELY LOW COST OF PRODUCTION ENQUIRIES WERE MADE TO EXAMINE THE CLAIM OF THE ASSESSEE. THE EXCERPTS FROM THE STATEMENT OF SHRI S HYAM GUPTA, MANAGING DIRECTOR OF THE ASSESSEE COMPANY SUMS UP A LL THAT THE ASSESSEE HAS IN SUPPORT OF THE MANUFACTURING AND EX PORT OF THE SOFTWARE PROGRAMME WHICH AS PER ASSESSEE'S CLAIM FE TCHED RS.10,28,88,952/-. 'AT THE OUT SET, I WOULD BRING TO YOUR KIND NOTICE THE SOFTWARE DIVISION WAS SET UP AT A LEASED PREMISES ON THE FIR ST FLOOR OF THE CHIRIPAL HOUSE WITH NECESSARY FURNITURE & FIXTURES, ELECTRIC INSTALLATION AND OFFICE EQUIPMENTS. THEREAFTER THE MAIN EQUIPMENT FOR SOFTWARE DIVISION I.E. COMPUTERS AND ITS PERIPHERAL S WERE PURCHASED BY THE COMPANY IN THE YEAR 2000 (THIS IS REFLECTED IN THE CAPITAL WORK IN PROGRESS IN OUR AUDITED ACCOUNTS) AND, THEREAFTER F URTHER PURCHASES WERE MADE IN THE F.Y. 2000-2001. OUR TOTAL INVESTME NT IN HARDWARE OF SOFTWARE UNIT IS TO THE TUNE OF RS.574005 AND A DET AILED STATEMENT OF THESE ITEMS IS BEING SUBMITTED HEREWITH. THE PHOTOC OPIES OF BILLS OF COMPUTER PURCHASE HAVE ALREADY BEEN SUBMITTED TO YO UR GOOD OFFICE VIDE OUR LETTER DATED 16 TH FEBRUARY, 2004 (POINT NO. 8 TO THE SAID LETTER REFERS). THE LIST OF PROFESSIONALS EMPLOYED BY THE COMPANY I S REFLECTED IN THE TABLE BELOW: SR. NO. NAME OF THE EMPLOYEE APPOINTED APPOINTED BY WHOM TOTAL SALARY PAID 1 NITIN MEHTA M.D. SHYAM GUPTA 78,686 2 CHIRAG PATEL EDP IN-CHARGE 50,655 3 NILESH DESHPANDE EDP IN-CHARGE 57,314 4 MANISH PATEL EDP IN-CHARGE 51,902 BESIDES THE ABOVE PROFESSIONALS EMPLOYED ON THE COM PANY'S PAYROLL ONE MR. RAKESH PATE WAS HIRED AS RETAINER WITH THE COMPANY. 9 THE ENTIRE TEAM COMPRISING THE ABOVE MENTIONED PERS ONS WERE INSTRUMENTAL IN MANUFACTURE SOFTWARE AT THE PREMISE S OF THE SOFTWARE DIVISION. I VERY MUCH RECALL THAT I WAS ALSO ASKED REGARDING THE APPOINTMENT OF THE SOFTWARE ENGINEER AND HIS SALARY TO WHICH I WOU LD LIKE TO STATE THAT I HAD APPOINTED SKRI NITIN MEHTA AS E.D.P. IN-CHARG E AND THEREAFTER HE BEING THE IN-CHARGE OF THE E.D.P. DEPARTMENT I.E. S OFTWARE DIVISION HAD APPOINTED DIE OTHER PROFESSIONALS. AS REGARDS T HE SALARY OF THE SAID PROFESSIONALS THE ABOVE TABLE SHOWS THE SALARY PAID TO THESE PROFESSIONALS. I WOULD FURTHER LIKE TO ADD THAT YOUR GOOD SELF WAS UNDER DOUBT THAT AS TO WHY I HAD NAMED MR. CHIRAG PATEL AS THE HEAD OF SOFTWARE DIVISION?. I HERE AGAIN TAKE THIS OPPORTUNITY AND C LARIFY YOUR DOUBT THAT I HAD NAMED MR. CHIRAG PATEL AS THE HEAD OF TH E SOFTWARE DIVISION AS OF DATE AND FURTHER WOULD LIKE TO INFOR M YOU THAT MR. NITIN MEHTA HEADED THE SOFTWARE DIVISION BEFORE MR. CHIRA G PATEL. IT IS FURTHER STATED THAT MR. NITIN MEHTA HAD LEFT THE CO MPANY IN THE MONTH OF NOVEMBER, 2002 AND THEREAFTER MR. CHIRAG PATEL S UCCEEDED HIM. 4. I WAS CONFRONTED -WITH CERTAIN EXCERPTS FROM MR. VIKRAM OZA GM. FINANCE'S STATEMENT TO WHICH I HAD GIVEN A SATI SFACTORY REPLY COMPLYING WITH THE SAID CONFRONTATIONS HOWEVER I EM PHATICALLY FEEL THAT IF I AM SUPPLIED THE COPY OF MR. OZA'S STATEME NT ALL THE AMBIGUITIES / DOUBTS OF THE DEPARTMENT COULD BE RES OLVED AND PUT TO AN END. THIS WILL ENABLE YOUR GOOD SELF IN THE JUDICIO US ASSESSMENT. 5. IN MY STATEMENT DATED 17 TH MARCH, 2004 I HAD STATED THAT I - WOULD BE SUBMITTED THE SOFT COPIES OF THE SOFTWARES EXPORTED BY THE COMPANY. AS PROMISED KINDLY FIND ENCLOSED HEREWITH THE SOFT COPIES IN THE FORM OF C.D FOR YOUR RECORD. THIS ALSO INCLU DES THE ANSWER TO THE QUESTION NO. __ DATED 17.3.2004 WHEREIN YOU HAD ASKED ABOUT THE DESCRIPTION OF SOFTWARE EXPORTED. ALL THE DESCRIPTI ON, OF OUR SOFTWARES ARE HOSTED ON OUR WEBSITE. NEEDLESS TO MENTION THAT THESE SOFTWARES WERE HOSTED ON OUR WEB SITE AND I TAKE THIS OPPORTU NITY TO SUBMIT DIGITALLY PRINTED WEB SITE, WHICH WOULD STRENGTHEN OUR SOFTWARE EXPORTS. KINDLY APPRECIATED THAT WE HAD SUBMITTED ALL THE SO FTEX FORMS VIDE COMPANY'S LETTER DATED 27 TH JANUARY 2004. REGARDING THE MAN-HOURS USED IN THE MANUFACTURING OF EACH SOFTWARE. 10 6. THE SOFTWARE WERE EXPORTED THROUGH THE INTERNET FACILITY MADE AVAILABLE TO US BY M/S ICENET, THE SERVICE PROVIDER S FROM TELEPHONE NOS.6424659, 6424660, 6424661, 6424662 & 6424663. K INDLY APPRECIATE THAT THIS IS IN RESPONSE TO ONE OF THE Q UESTION POSED TO ME. 7. TO MY SUBMISSION THAT WE DO NOT HAVE ANY SYSTEM OF MAINTAINING THE RECORDS FOR MOVEMENT OF MATERIAL FR OM ONE UNIT TO THE OTHER YOU HAD RAISED THE QUERY AS TO HOW THE COMPUT ERS GOT TRANSFERRED FROM PLANT TO THE SOFTWARE DIVISION AT CHIRIPAL HOU SE? IN THIS CONNECTION, I -WOULD LIKE TO SUBMIT THAT SINCE WE D O NOT HAVE ANY SUCH SYSTEM OF MAINTAINING RECORDS FOR THE INTER-DEPARTM ENTAL TRANSFERS. HOWEVER AS AN ESTABLISHED PROCEDURE OF THE COMPANY ALL THE MOVABLES EXCEPT POST AND COURIER ARE FIRST RECORDED AT THE P LANT AND THERE-FROM TRANSFERRED/ DISPATCH TO DIFFERENT DEPARTMENTS/ UNI TS. AS REGARD TRANSFER OF COMPUTERS IT -WAS TRANSFERRED IN THE COMPANY'S T RANSPORT VEHICLE. 8. KINDLY FIND ENCLOSED HEREWITH A COMPLETE BUNCHY OF DOCUMENTS STARTING FROM PURCHASE / EXPORT ORDER, INVOICE ALON G WITH SOFTWARE DESCRIPTION SHEETS, SOFTEX FORMS, STPI 'S CERTIFICA TE AND BANK REALIZATION CERTIFICATES AS DESIRED BY YOUR GOOD SE LF. LAST BUT NOT THE LEAST KINDLY APPRECIATE THAT IT IS A GENUINE BUSINESS UNDERTAKEN BY THE COMPANY AND I WOULD REQUEST YOUR GOOD SELF TO FINALIZE THE ASSESSMENT PROCEEDINGS AS PER THE RETU RN FILED IN THE INTEREST OF JUSTICE '. 9 THE AO AFTER CONSIDERING THE AFORESAID SUBMISSION S, HELD AS UNDER:- 10. THE CONTENTIONS OF THE ASSESSEE HAVE BEEN CARE FULLY BEEN CONSIDERED. THE FOLLOWING DISCREPANCIES HAVE BEEN N OTICED:- (I) AS PER THE PROVISION OF SECTION 10A(2)(I), THE COMPANY IS REQUIRED TO BEGIN THE MANUFACTURING OF COMPUTER SOF TWARE DURING THE PREVIOUS YEAR COMMENCING ON OR AFTER THE FIST DAY O F APRIL, 1994 IN ANY ELECTRONIC HARDWARE TECHNOLOGY PARK OR AS THE C ASE MAY BE SOFTWARE TECHNOLOGY PARK. HOWEVER, IN THE INSTANT C ASE, IT IS NOTICED THAT ASSESSEE HAS MADE CONTRACT WITH M.S. TECHNOLOG Y ON 18,3.2000 AND VIDE INVOICE DATED 18-3/2000; THE SOFTWARE RELA TING TO ATTENDANT 11 CONTROL SYSTEM WAS TRANSMITTED DURING THE PERIOD RE LATING TO A.Y. 2000-01. THUS, THE DEVELOPED SOFTWARE WAS ALREADY I N POSSESSION OF THE ASSESSEE IN THE PRECEDING PREVIOUS YEAR AND PRI OR TO THE ASSESSEES REGISTRATION WITH THE STPI ON 29.3.2000 AND TAKING POSSESSION OF BUSINESS PREMISES IN CHIRIPAL HOUSE ON 24.3.2000 AS WELL AS BEFORE SETTING UP INFRASTRUCTURE REQUIRED FOR THE ABOVE DE VELOPMENT OF SOFTWARE. THUS, THE CONDITION IS CLEARLY NOT SATISF IED IN ASSESSEE'S CASE. ASSESSEE COMPANY HAS FURNISHED A DETAILED CHART OF EXPORT OF SOFT WARE PACKAGES THROUGH INTERNET. SIMILARLY, THE A SSESSEE COMPANY HAD MADE A CONTRACT BEARING NO. MSTI/016/2000-01 DA TED 29.3.2000 WITH M. S. TECHNOLOGY, USA AND EXPORTED THE SOFTWAR E RELATING TO FINANCIAL ACCOUNTING SOFTWARE DULY TRANSMITTED THRO UGH INTERNET. BOTH THESE CONTRACTS AND TRANSMISSION WERE MADE PRI OR TO ANY DEVELOPMENT OF THE SOFT WARE BY THE ASSESSEE'S SOFT WARE DIVISION SET UP ONLY AFTER 29.3.2000. THIS FACT ALSO ESTABLISHES TH AT THE ASSESSEE COMPANY WAS HAVING A SOFTWARE WITH IT PRIOR TO ITS COMMENCEMENT OF NEW VENTURE WHICH THE ASSESSEE TRIED TO ESTABLISH M AT THE SAME WAS DONE ONLY AFTER COMPLETION OF ALL FORMALITIES WITH STPI AND OTHER DEPARTMENT LIKE EXCISE, RBI, ETC. IN VIEW OF THIS F ACT, THE ASSESSEE'S CLAIM CANNOT FOUND IN ORDER WITH REFERENCE TO THE P ROVISION RELATING TO SECTION 10 A OF THE ACT AS THE CONDITION U/S. 10A(2 )(I) IS NOT SATISFIED. 11. THE ASSESSEE DID NOT HAVE ADEQUATE PROFESSIONAL COMPETENCE TO MANUFACTURE THE SAID SOFTWARE AS CAN BE SEEN FROM T HE DISCUSSION BELOW:- THE ASSESSEE ON REQUEST FURNISHED THE LIST OF PROFE SSIONAL, EMPLOYED FOR THE DEVELOPMENT OF SOFT WARE. THE ASSESSEE HAS FURNISHED 4 NAMES WHO WERE REGULARLY EMPLOYED FOR THE ABOVE WORK IN A DDITION TO ONE MR. RAKESH PATEL WHO WAS DOING RETAINER SHIP WITH T HE COMPANY. THE DETAILS OF EMPLOYEES ARE AS UNDER:- SR. NO. NAME OF THE EMPLOYEE APPOINTED APPOINTED BY WHOM TOTAL SALARY PAID 1 NITIN MEHTA M.D. SHYAM GUPTA 78,686 2 CHIRAG PATEL EDP IN-CHARGE 50,655 3 NILESH DESHPANDE EDP IN-CHARGE 57,314 4 MANISH PATEL EDP IN-CHARGE 51,902 THE BRIEF FACTS OF EACH EMPLOYEE IS AS UNDER:- 12 (A) SHRI NITIN MEHTA - HE WAS EMPLOYED IN THE YEAR 1995 HAVING POST GRADUATE DIPLOMA IN SYSTEM AND MANAGEMENT HIS SERVICE WAS UTILIZED IN ACCOUNTS DEPARTMENT AS COMPUTER OPE RATOR, AS RECOMMENDED BY THE DIRECTOR AT A MEAGRE SALARY. FRO M HIS BIO- DATA CAN BE REASONABLY CONCLUDED THAT HE HAD NO KNO WLEDGE OF DEVELOPMENT OF SOFTWARE. (B) SHII CHIRAG PATEL - HE IS A POST GRADUATE DIPLO MA HOLDER HAVING KNOWLEDGE OF ORACLE BBA FROM CONCOURSE INFORMATION TECHNOLOGY LTD AND EMPLOYED AS MANAGER (IT ) FROM 1 8.8. 2000. (C) SHRI NILESH DESHPANDE AND SHRI MANISH PATEL - N O DETAILS HAVE BEEN FURNISHED REGARDING THEIR PROFESSIONAL QUALIFI CATION AS WELL AS REGARDING JOINING TO THE COMPANY, ETC. FROM THE ABOVE QUALIFICATION, IT IS NOTICED THAT NO NE OF THE EMPLOYEES POSSESSED THE PROFESSIONAL QUALIFICATION REQUIRED F OR DEVELOPING SOFTWARE ON SUCH A LARGE SCALE, WHICH CAN REALIZE M ORE MAN RS. 10 CRORES WITHIN A SHORT SPAN. IN ADDITION TO ME ABOVE , SHRI CHIRAG PATEL WAS EMPLOYED ONLY ON 18.8.2000 WHEREAS PRIOR TO HIS ENTRY INTO THIS DIVISION, THE COMPANY HAD STATED TO EXPORT SOFTWARE , WHICH SHRI CHIRAG PATEL STATED TO HAVE DEVELOPED ALONG WITH OT HERS. THIS COULD BE HAPPEN ONLY IF THE COMPANY PURCHASES SUCH SOFTWARE FROM OPEN MARKET AND SOLD IT TO THE OUTSIDER. THE ASSESSEE FA ILS TO PROVE THE PROFESSIONAL SKILL OF THE EMPLOYEE AS WELL AS THE D EVELOPMENT OF THE SOFTWARE SOLD. THE CONDUCT OF THE ASSESSEE OF NOT F URNISHING FULL DETAILS REGARDING SHRI NILESH DESHPANDE AND SHRI MA NISH PATEL EMPLOYED BY THE COMPANY AND CONFLICTING INFORMATION ABOUT MEMBERS AND IDENTITY OF PERSONS EMPLOYED ALSO CREATES DOUBT ABOUT ASSESSEE'S CAPACITY TO MANUFACTURE THE SOFTWARE. IN THE STATEM ENT RECORDED OF SHRI CHIRAG PATEL AT QUESTION NO. 7, IT WAS REPLIED MAT THE OTHER PERSONS WORKING WITH HIM WERE SHRI RAKESH PATEL, SH RI BITESH PATEL, SHRI MONTU PATEL AND SHRI MEHUL PANCHOLI. HOWEVER, THE ASSESSEE COMPANY SPEAKS NOTHING ABOUT ME EMPLOYMENT OF THESE PERSONS. WHEREAS SHRI CHIRAG PATEL HAD NOT MENTIONED ABOUT T HE EMPLOYMENT OF SHRI NUESH DESPANDE AND SHRI MANISH PATEL. 12. THE STPI OFFICIALS ARE REQUIRED TO VISIT THE UN ITS SET UP UNDER STPI DURING PRODUCTION. SHRI AJAY SHARMA, DIRECTOR OF STPI IN REPLY 13 TO Q.NO.5 OF HIS STATEMENT DTD. 10/3/04 ADMITTED TH AT NO RECORDS ABOUT THE DATES OF VISIT AND ME OFFICIALS WHO VISITED IS NOT MAINTAINED. HENCE BY REFERRING TO THEIR VISITS AT THE FACTORY OF PROD UCTION CAN NOT BE VERIFIED. STPIS VIDE LETTER 3/3/2004 HAS EVADED TO REPLY TO THE POINTS AT PARA 2(B), (C) AND (D). THE STATEMENT OF SHRI NITIN MEHTA, SHRI CHIRAG PATEL, SHRI RAKESH PATEL, SHRI VTKRAM OZA AND SHRI SHYAM GUPTA, DIRECTOR OF THE COMPANY WERE RECORDED DURING THE CO URSE OF ASSESSMENT PROCEEDINGS. ALL THESE PERSONS ARE ASSOC IATED WITH THIS NEW SOFTWARE DIVISION. SHRI NITIN MEHTA, SIM CHIRAG PAT EL AND SHRI RAKESH PATEL ARE STATED TO HAVE BEEN EMPLOYED FOR DEVELOPM ENT OF THE SOFTWARE WHEREAS SHRI VIKRAM OZA BEING MANAGER (FIN ANCE) WAS LOOKING AFTER AIL ADMINISTRATIVE MATTERS, SHRI SHYA M GUPTA, MANAGING DIRECTOR WAS MONITORING ALL AFFAIRS OF THIS DIVISIO N. ON VERIFICATION OF THE ABOVE STATEMENT IT IS CONCLU DED THAT THE REPLY OF ALL THE PERSONS REGARDING INSTALLATION OF SOFT WARE INFRASTRUCTURE, TIME TAKEN TO DEVELOP VARIOUS SOFTWARE EXPORTED, THE PER SONS WHO ARE ACTUALLY WORKING WITH THEM, HOW AND WHEN THE SOFTWA RE WERE TRANSMITTED, HOW THE MODIFICATION REQUIRED AS PER T HE CUSTOMERS REQUIREMENTS IN THE SOFTWARE EXPORTED AS WELL HOW T HEY ARE BEING INFORMED FOR MODIFICATION IN THE SOFTWARE DIVISION, HOW THE NEGOTIATION WITH THE CUSTOMERS AND WHO IS NEGOTIATI NG WITH THE CUSTOMERS FOR THE VALUE AND THE TIME OF TRANSMISSIO N, WHO IS APPROVING THE SOFTWARE AND VALUATION THEREOF WITH STPI, GANDH INAGAR AS WELL AS REALIZATION OF VALUE ARE DIFFERENT AND CANNOT BE RE LIED UPON. 13. THE EXAMINATION OF SHRI AJAY SHARMA, DIRECTOR S TPI WHO ISSUED THE CERTIFICATE OF EXPORT AND VALUATION CLEA RLY SHOWS THAT THE CERTIFICATE IS BASED ON WHATEVER INFORMATION THE AS SESSEE GAVE. THE STPI OFFICIALS DID NOT GIVE THIS CERTIFICATE AFTER VERIFICATION AS TO FACT OF EXPORT AND VALUE OF SOFTWARE. 14. IT MAY ALSO BE MENTIONED THAT THE COST OF PRODU CTION IN THE NEXT YEAR OF EXPORTED SOFTWARE IS RS.1.65 CRORES WHEREAS EXPORT VALUE / REALIZATION IS RS.4.65 CRORES. THE SOFTWARE BEING T HE SAME HOW COULD THE COST OF THIS YEAR BE RS.25 LACS. THIS ALSO INDI CATE THAT THE CLAIM OF PRODUCTION OF THE SOFTWARE IS NOT GENUINE. 15. IN THE LIGHT OF AFORESAID DISCUSSION MADE, THE FINAL POSITION REGARDING ASSESSEE'S CLAIM UNDER SECTION 10 A EMERG ES THE FOLLOWING POINTS BEFORE TAKING ANY DECISION ON THIS ISSUE:- 14 (I) AS MENTIONED EARLIER, IN THE PRECEDING PARA THE ASSESSEE COULD NOT SATISFY THE CONDITION ENUMERATED UNDER SECTION 10 A(2) OF THE ACT AS STATED AT PARA 10 ABOVE. (II) AVAIL ABILITY OF THE EQUIPMENTS AND OTHER INFR ASTRUCTURE NOT PROVED. (III) THE ASSESSEE HAS PRODUCED THE REGIS TRATION CERTIFICATE FROM STPL WHEREIN THE DIRECTOR OF STPI HAS APPROV ED THE LAY- OUT PLAN OF THEIR PREMISES AS PER THE MAP ENCLOSED TO THE CERTIFICATE AND FOR COMPLETION OF THE CUSTOM BONDIN G REQUIRED. HOWEVER, NO SUCH FLOOR PLANNING WAS COMPLETED AS NO RELATED EXPENSES HAVE BEEN DEBITED TO THIS ACCOUNT. ALSO NO PROOF HAS BEEN PRODUCED REGARDING APPROVAL FROM CUSTOM BONDIN G REQUIREMENTS. (IV) THE PROFESSIONAL QUALIFICATION OF THE PERSONS STATED TO BE DEPLOYED HAS BEEN GONE THROUGH. THE OPINION OF THE EXPERTS HAS BEEN TAKEN WHETHER WITH THE SKILL OF THE PERSONS EM PLOYED CAN BE CAPABLE OF DEVELOPING SUCH SOFTWARE. IT IS GATHE RED THAT FROM SUCH PROFESSIONAL SKILL IT IS NOT POSSIBLE TO DEVEL OP THE SOFTWARE, WHICH COULD FETCH A HIGHER STANDARD OF SOFTWARE, WH ICH COULD BE MARKETABLE ON THE INTERNATIONAL STANDARD. THUS, THE ASSESSES COMPANY HAS NO POTENTIAL OF DEVELOPING A HIGH QUALI TY SOFTWARE (V) THE SOFTWARE STATED TO BE EXPORTED LIKE FINANCI AL ACCOUNTING SOFTWARE (FAS) AND STOCK AND INVENTORY CONTROL SYST EM (SICS) ARE VERY OLD AND AVAILABLE IN THE OPEN MARKE T EVERY WHERE BEFORE 10 YEARS. IT WAS WRITTEN IN OLD LANGUA GE AND WAS RUN ON 386 COMPUTERS. FURTHER, THIS SOFTWARE ACCORD ING TO THE OPINION GATHERED COULD NOT BE DOWNLOADED ON INTERNE T AT THE PURCHASER'S PLACE ABROAD, (VI) THE ASSESSEE HAD SOLD THE SOFTWARE TO M.S. TEC HNOLOGY, USA RELATING TO FAS FOR US S 26,000 AND SICS FOR US $ 2 3750 WHEREAS THE SIMILAR SOFTWARE OF FAS AND SICS WERE S OLD TO SOFTWARE MANAGEMENT, INC, USA FOR US $ 1,32,000 AND US $ 1,23,000 RESPECTIVELY. THIS TRANSACTION STATED TO H AVE TAKEN PLACE IN THE MONTHS OF SEPTEMBER AND OCTOBER, 2000 MEANS ALMOST IN THE SIMILAR PERIOD. THUS, THERE IS A WIDE VARIATION OF THE SALE VALUE OF SIMILAR SOFTWARE IN THE OPEN MARK ET OF USA 15 ITSELF. THIS ABNORMAL PRICE DIFFERENCE / FLUCTUATIO N SHOWS THE UNEVEN COMMERCIAL CONSIDERATION AND THEREBY IT CAN BE CONCLUDED THAT THE TRANSACTIONS ARE NON-GENUINE AND MIGHT BE SETTLED OTHERWISE THAN EITHER SOFTWARE OR MANAGED F OR EARNING/ CLAIMING THE FOREIGN CONVERTIBLE EXCHANGE BEARING I N MIND THE PROVISION OF SECTION 10 A. (VII) THE ASSESSEE, DURING THE COURSE OF ASSESSMENT PROCEEDING, VIDE LETTER DATED 15.3.2004 VIDE PARA 2 (II) AND 2 (III) STATED THAT THEY HAVE DEVELOPED THE SOFTWARE AND EXPORTED DIRECTLY T RANSMITTED TO THE END USERS ABROAD. IT WAS STATED THAT THEY HA VE FOUND OUT THE CUSTOMERS DIRECTLY THROUGH ADVERTISEMENT ON WEB SITE DEVELOPED BY THE COMPANY. HOWEVER, VIDE LETTER .DAT ED 18.3.2004 HAS CLEARLY STATED THAT THE COMPANY HAD H OSTED A WEBSITE ON INTERNET AND THE COMPANY WAS LOOKING FOR A SUITABLE PARTNER /DEALER /AGENT ABROAD WHO COULD LOOK AFTER SELLING AND MARKETING OF SOFTWARE PRODUCT WORLDWIDE. AS A RESUL T, ONE MR. LAMBA, PRESIDENT OF M.S. TECHNOLOGY, INC, USA HAS E NTERED INTO MOU FOR DEVELOPMENT OF THE BUSINESS IN OTHER C OUNTRIES. THIS HAS TAKEN PLACE PRIOR TO THE REGISTRATION OF A SSESSEE'S BUSINESS OF SOFTWARE. HOWEVER, NO RECORDS IS MAINTA INED FOR E- MAIL CORRESPONDENCE AND TELEPHONIC TALKS, HENCE THE ASSESSES HAS NOT ESTABLISHED THE FACTS OF CONTACTING/NEGOTIA TING WITH THE BUYERS. THEREFORE, THE ASSESSEE'S CLAIM OF DIRECT D EALING WITH THE CUSTOMERS ABROAD ON WEBSITE IS FALSE. IN OTHER WORDS, THE SOFTWARE STATED TO HAVE EXPORTE D IS OF A COMMON QUALITY AND BEING USED UNIVERSALLY AND, THER EFORE, CANNOT FETCH A HIGH VALUE IN THE INTERNATIONAL MARK ET, AS GATHERED FROM THE OPINION FE THE MARKET. PERHAPS, I T HAS NO VALUE IN THE INTERNATIONAL MARKET. THEREFORE, THE A SSESSEE MIGHT NOT EXPORTED ANY SUCH SOFTWARE BUT MIGHT EXPORT ANY THING ELSE ONLY DOCUMENTATION OF EARNING FROM EXPORT OF SOFTWA RE IS PREPARED. 16. IN THE LIGHT OF THE DISCUSSION MADE IN THE PREC EDING PARA, IT CAN BE CONCEDED THAT THE BUSINESS TRANSACTION SHOWN IS SHA M TRANSACTION AND CANNOT BE ACCEPTED AS REAL TRANSACTION, WHICH CAN B E TREATED AS BUSINESS OF SOFTWARE EXPORT. ON THIS SCORE ALSO, TH E ASSESSEE'S CLAIM UNDER SECTION 10 A OF THE ACT IS NOT FOUND IN ORDER AND, THEREFORE, IT IS REJECTED. IN THE LIGHT OF THE AFORESAID DISCUSSION, IT IS REVEALED THAT IN 16 FACT NO SOFTWARE IS BEING DEVELOPED BY THE ASSESSEE COMPANY OR TRANSMITTED THROUGH INTERNET TO FOREIGN COUNTRY. IN LETTER DATED 15/3/2004 THE ASSESSEE CATEGORICALLY STATED THAT TH E BUYERS WILL NOT GIVE ANY INFORMATION LIKE THEIR I. T. ASSESSMENTS, ANNUAL ACCOUNTS IN WHICH THE AMOUNT FOR PURCHASE OF THE SOFTWARE HAS B EEN DEBITED ETC. IN FACT, THE MONEY RECEIVED FROM ABROAD IS NOT CONSIDE RATION FOR EXPORT OF SOFTWARE. IT WAS THUS RECEIVED OTHERWISE THAN IN CO NSIDERATION OF EXPORT OF SOFTWARE. THEREFORE, THE AMOUNT RECEIVED BY THE ASSESSEE COMPANY REMAINS UNEXPLAINED CASH CREDITS IN THE BOO KS AS THE ASSESSEE HAS FAILED TO ESTABLISH THE IDENTITY OF TH E PARTIES AND ESTABLISH GENUINENESS OF THE TRANSACTION. THEREFORE, THE ENTR Y REMAINED UNEXPLAINED AND THE SAME IS TAXED U/S. 68 OF THE AC T. 17. WITHOUT PREJUDICE TO THE ABOVE, IT MAY NOT BE O UT OF PLACE TO MENTION THAT DURING THE YEAR UNDER CONSIDERATION TH E ASSESSEE HAS SHOWN TOTAL SALES ABROAD AT RS.10.28 CRORES FROM TH IS NEW DEVELOPED SOFTWARE. YET, TOTAL EXPENSES UNDER THE HEAD PAYMEN T TO EMPLOYEES, OPERATION EXPENSES AS WELL AS FINANCIAL CHARGE OF O NLY RS.25 LACS. WHEREAS IN THE IMMEDIATELY SUCCEEDING YEAR THE ASSE SSEE COMPANY HAD EXPORTED SIMILAR GOODS AT RS.4.65 CRORES AND EX PENDED RS.1.65 CRORES UNDER THE VARIOUS HEADS. IT MEANS THE EXPENS ES IS ALMOST 35% OF THE GROSS RECEIPT IT MEANS, FOR EARNING RS.10 CR ORES FOR THE SIMILAR BUSINESS FOR THE FIRST TIME OBVIOUSLY NEEDS MORE EX PENSES YET THE ASSESSEE HAS SHOWN THE EXPENSES OF MEAGRE AMOUNT JU ST TO REALIZE MORE NON TAXABLE PROFIT FROM THE SO CALLED BUSINESS CARRIED OUT DURING THE YEAR UNDER CONSIDERATION. NATURALLY, THE EXPENS ES IS MORE OR LESS FROM ANY BUSINESS WOULD NOT FLUCTUATE FROM 0,25% TO ALMOST 35%. THUS THE BOOK RESULT SHOWN IS QUITE ABNORMAL AND CA NNOT BE ACCEPTED. ON SUCH A LARGE VARIATION IN INCURRING EXPENSES COU LD ONLY BE POSSIBLE IF THE ASSESSEE MANAGED FOR INCURRING THE EXPENSES OTHERWISE THAN THE BOOK ENTRY. FROM THIS POINT OF VIEW ALSO THE ASSESS EE'S BUSINESS SHOWN FROM SOFTWARE DIVISION APPEARS TO BE FALSE AND LIAB LE TO BE REJECTED. 10 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE F ILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. THE LE ARNED CIT(A) CONFIRMED THE ADDITION OF RS.3,25,58,452/- ON ACCOU NT OF UNEXPLAINED EXPENDITURE U/S 69C OF THE ACT WITH THE FOLLOWING OBSERVATIONS:- 17 6.2 I HAVE CONSIDERED THE FACTS OF THE CASE, SUBMI SSIONS OF THE AR OF THE APPELLANT CAREFULLY. I HAVE ALSO GONE THROUG H THE DECISIONS RELIED UPON BY THE A. R. AND THE OBSERVATIONS OF THE ASSES SING OFFICER IN THE ASSESSMENT ORDER AND THEN IN THE REMAND REPORT. THE ASSESSING OFFICER HAS CONCLUDED THAT THE APPELLANT COULD NOT SATISFY CONDITIONS OF SECTION 10A(2), AVAILABILITY OF EQUIPMENTS AND INFRASTRUCTU RE IS NOT PROVED. I FIND THAT THE AO'S CONTENTIONS ARE MAINLY THAT THE APPELLANT HAD NOT EXPORTED SOFTWARE AND ONLY DOCUMENTATION OF EARNING FROM EXPORT OF SOFTWARE WERE PREPARED, THE TRANSACTIONS WERE NOT G ENUINE AND MIGHT HAVE BEEN SETTLED OTHERWISE THAN EXPORT OF SOFTWARE OR MANAGED FOR CLAIMING THE FOREIGN CONVERTIBLE EXCHANGE IN VIEW O F SECTION 10A. THE PROFESSIONAL QUALIFICATIONS OF PERSONS NOT PROVED, THE OPINION OF THE EXPERTS GATHERED BY HIM WAS THAT IT WAS NOT POSSIBL E TO THE APPELLANT TO DEVELOP SOFTWARE WITH SUCH PERSONS, THE SOFTWARE WE RE VERY OLD AND AVAILABLE IN THE OPEN MARKET FOR MORE THAN 10 YEARS . BASED ON THIS, HE HAS CONCLUDED THAT THE APPELLANT MIGHT NOT HAVE EXP ORTED ANY SOFTWARE AND ONLY THE DOCUMENTATION OF EARNING FROM EXPORT O F SOFTWARE IS PREPARED. IN THE FURTHER CONCLUSION OF THE ASSESSIN G OFFICER THE APPELLANT COULD NOT PROVIDE THE INCOME-TAX ASSESSME NT DETAILS AND ACCOUNT OF THE PURCHASER OF SOFTWARE AND THEREFORE, THE RECEIPTS ARE UNEXPLAINED CASH CREDITS. PERUSAL OF THE CASE RECOR DS, VARIOUS DOCUMENTS DIED BY THE APPELLANT DURING THE APPELLAT E PROCEEDINGS, THE COPY OF WHICH WAS SENT TO THE ASSESSING OFFICER FOR HIS COMMENTS, DISCUSSION WITH THE ASSESSING OFFICER AND THE AUTHO RIZED REPRESENTATIVE OF THE APPELLANT REVEALED THE FOLLOWING FACTS (A) REGARDING THE ASSESSING OFFICER'S CONTENTION TH AT THE APPELLANT HAD NOT SATISFIED THE CONDITIONS U/S. 10A(2), IT IS TO BE STATED THAT I HAVE PERUSED VARIOUS RELEVANT DOCUMENTS. THE BANK CERTIFICATE OF EXPORT AND REALIZATION (FORM NO.1) SHOWS THE DAT E OF INVOICE AS 30-03-2000, THE DATE OF EXPORT PROMOTION COPY OF BILL AUTHENTICATED BY CUSTOMS IS ALSO SHOWN AS 30-03-200 0. A CERTIFICATE FROM SOFTWARE TECHNOLOGY PARKS OF INDIA, GANDHINAGAR ALSO AUTHORIZES THE APPELLANT CO MPANY TO EXPORT SOFTWARE OF THE VALUE OF US $ 2,000.00 ON 30 -03-2000. THE INVOICE DATED 30-03-2000 GIVES THE DESCRIPTION OF GOODS SOLD AS ATTENDANCE CONTROL SYSTEM (ACS) FOR AN AMOU NT OF US $ 2000.00. THUS, IN VIEW OF THESE DOCUMENTS IT IS V ERY CLEAR THAT THE APPELLANT EXPORTED ITS FIRST SOFTWARE THROUGH I NTERNET ON 30- 03-2000. THIS IS AFTER OBTAINING CERTIFICATE FROM S OFTWARE 18 TECHNOLOGY PARKS OF INDIA, GANDHINAGAR DATED 29-03- 2000. THE ASSESSING OFFICER HAS, IN HIS ASSESSMENT ORDER STAT ED THAT 'THE ASSESSES HAD MADE CONTRACT WITH M.S. TECHNOLOGY ON 18-03- 2000 AND VIDE INVOICE DATED 18-03-2000, THE SOFTWAR E RELATING TO ATTENDANT CONTROL SYSTEM WAS TRANSMITTED DURING THE PERIOD RELEVANT TO A.Y. 2000-01.' THE ASSESSING OFFICER HA S ERRED IN MAKING THIS OBSERVATION THAT THE FIRST SALE (SOFTWA RE EXPORT) WAS MADE BEFORE THE APPELLANT GOT APPROVAL FROM SOFTWAR E TECHNOLOGY PARKS OF INDIA, GANDHINAGAR ON 29-03-200 0 AS THE DATE OF INVOICE IS NOT 18-03-2000 BUT 30-03-2000 WH ICH IS LATER THAN THE DATE OF CERTIFICATE ISSUED BY STPI, GANDHI RRAGAR. THE ASSESSING OFFICER IS RIGHT IN OBSERVING THAT THE MS TECHNOLOGY INC. PLACED PURCHASE ORDER ON 18-03-2000. BUT, IF A N ASSESSEE GETS ORDER BEFORE HE HAS ACTUALLY PRODUCED/DEVELOPE D THE SOFTWARE PRIOR TO OBTAINING CERTIFICATE FROM STPI, IT DOES NOT VIOLATE THE PROVISIONS OF SECTION 10A. THERE IS NO DIRECT EVIDENCE TO PROVE THAT THE SOFTWARE UNDER QUESTION WAS PRODUCED BEFORE THE DATE OF ISSUE OF CERTIFICATE BY THE STPI, GANDHINAGAR. THIS IS THE PRESUMPTION OF THE ASSESSI NG OFFICER THAT SINCE THE ORDER WAS PLACED BY MS TECHNOLOGY IN C. ON 18- 03-2000, THE APPELLANT MUST BE HAVING A SOFTWARE WI TH IT BEFORE HAND. THE APPELLANT CANNOT BE DENIED THE BENEFIT OF SECTION 10A WHICH IS A SPECIAL PROVISION IN RESPECT OF NEWLY ES TABLISHED UNDERTAKING IN FREE TRADE ZONE AND SOFTWARE TECHNOL OGY PARKS MERELY ON THE BASIS OF PRESUMPTION. MOREOVER, THE D ATE OF FIRST INVOICE IS 30-03-2000 AND NOT 18-03-2000 AS STATED BY THE ASSESSING OFFICER, (B) ON PERUSAL OF COPIES OF VARIOUS DOCUMENTS INCLU DING THE AUDIT REPORT, LEGAL AGREEMENT WITH STPI DATED 29-03-2000, THE CERTIFICATE DATED 27-05-2000 IN RESPECT OF CUSTOM B ONDING ARRANGEMENT OF THE APPELLANT'S EXPORT UNDERTAKING A ND THE DETAILS OF PAYMENTS RECEIVED FROM THE VARIOUS PARTI ES (REALIZATION OF EXPORT), FT IS SEEN THAT ALL THE AM OUNTS HAVE BEEN RECEIVED THROUGH BANKING CHANNEL ONLY AND THE RECEI PTS ARE AS PER RULES OF 1HE FOREIGN EXCHANGE FORMED BY THE RES ERVE BANK OF INDIA. THIS FACT HAS NOT EVEN BEEN DISPUTED BY T HE ASSESSING OFFICER. (C) THE BANK CERTIFICATE OF EXPORT AND REALIZATION (FORM NO.1) HAS ALSO BEEN PERUSED. THE APPELLANT HAS ALSO FURNI SHED AUDIT REPORT IN THE PRESCRIBED FORM AS PER SECTION 10A. A PART FROM 19 MAT THE APPELLANT HAD ALSO FURNISHED NAMES AND ADDR ESS OF THE PARTIES TO WHOM THE SOFTWARE WAS EXPORTED. THE RECE IPTS AGAINST THE EXPORTS ARE SUPPORTED BY DOCUMENTARY EVIDENCES WHICH HAVE NOT BEEN PROVED BOGUS BY THE ASSESSING OFFICER . IT IS AN ESTABLISHED FACT MAT THE APPELLANT HAS RECEIVED THE FOREIGN EXCHANGE ON EXPORT OF SOFTWARE AND IT CANNOT BE HEL D THAT THE APPELLANT DID NOT EXPORT THE SOFTWARE. (D) AFTER HAVING GONE THROUGH THE DOCUMENTS ISSUED BY SOFTWARE TECHNOLOGY PARKS OF INDIA, GANDHINAGAR WHICH IS AUT ONOMOUS SOCIETY UNDER MINISTRY OF INFORMATION TECHNOLOGY, G OVERNMENT OF INDIA, AGREEMENT FOR SOFTWARE TECHNOLOGY PARK OF INDIA DATED 29-03-2000, THE LETTER ISSUED BY DY. COMMISSI ONER OF CENTRAL EXCISE, DEPARTMENT OF REVENUE DATED 17-05-2 000, BANK CERTIFICATE ETC., I AM OF THE VIEW THAT ALL TH ESE DOCUMENTS AND GOVERNMENT/BANK AUTHORITIES SIGNING THESE DOCUM ENTS CAN NOT BE TREATED BOGUS NOR THE TRANSACTIONS NARRATED THEREIN CAN BE TREATED SHAM UNLESS THERE IS CLINCHING EVIDENCE TO PROVE, THAT ALL OF THEM HAD CONNIVED AND FABRICATED THE EVIDENCES. THERE IS NO SUCH EVIDENCE TO PROVE AIL THESE DOCUMENTS WRONG. N ONE OF THE AUTHORITIES HAVE DENTED THE AUTHENTICITY OF THESE D OCUMENTS. IN VIEW OF THESE FACTS, IT CAN NOT BE SAID THAT THE APPELLANT HAS NOT EXPORTED THE SOFTWARE AND IT IS NOT ENTITLED FOR EX EMPTION UNDER SECTION 10A IN RESPECT OF SUCH EXPORTS. FURTHER, IN VIEW OF THE ABOVE DISCUSSION, THE ASSESSING OFFICER IS NOT JUSTIFIED IN MAKING ADDITION U/S.68. 6.2.1 APART FROM THE ABOVE EVEN IF THE SECOND PRES UMPTION OF THE ASSESSING OFFICER THAT IT IS NOT EXPORT OF SOFT WARE BUT SOMETHING ELSE, IT IS NOT ESTABLISHED THAT IT WAS SO. IN ANY CASE HE HAS TO ESTABLISH THAT THE AMOUNT RECEIVED BY THE APPELLANT IS NOT TH E EXPORT OF GOODS BUT APPELLANT'S OWN FUND WHICH RECEIVED BACK. IN TH IS REGARD THE APPELLANT'S A. R. REFERRED TO THE DECISION OF THE G UJARAT HIGH COURT IN THE CASE OF CIT VS. M. K. BROTHERS 163 ITR 249. THE APPELLANT ALSO REFERRED TO THE DECISION OF THE GUJARAT HIGH COURT IN THE CASE OF AADINATH INDUSTRIES 252 VTR 476. THE GUJARAT HIGH C OURT IN THESE CASES UPHELD THE DECISION OF THE TRIBUNAL HOLDING T HAT NO ADDITION COULD BE MADE MERELY ON THE BASIS OF SUSPICION AND CONJECTURE THOUGH THERE WERE SOME SUSPICIOUS FEATURES. 20 6.2.2 IT IS CLEAR FROM THE ABOVE THAT JUST ON THE BASIS OF PRESUMPTION THE SATES OF THE COMPANY CANNOT BE TREA TED AS UNEXPLAINED CASH CREDITS. THERE SHOULD BE SOME EVID ENCE TO PROVE THAT THE PARTIES TO WHOM EXPORTS HAVE BEEN MADE ARE NOT GENUINE AND THE TRANSACTIONS ARE BOGUS. THE ASSESSING OFFICER HAS N OT BROUGHT OUT ANY EVIDENCE TO PROVE THAT THE IDENTITY OF THE FOREIGN PARTIES IS NOT ESTABLISHED OR THEY ARE BOGUS PARTIES. IN THESE CIR CUMSTANCES, IT CAN NOT BE HELD THAT THE ADDITION MADE BY THE AO U/S. 68 IS JUSTIFIED AND THE A. O. IS DIRECTED TO DELETE THE SAME. IT MAY NOT BE OU T OF PLACE TO MENTION THAT IN HIS REMAND REPORT, THE ASSESSING OFFICER HA S STATED THAT THE CIT- III, AHMEDABAD VIDE LETTER DATED 23-03-2004 WAS REQ UESTED TO TAKE UP THE MATTER WITH THE FTD OR OBTAINING DETAILS OF THE PARTIES TO WHOM THE SOFTWARE WERE SOLD AND REPLY IN THE MATTER IS AWAIT ED. IT IS CLEAR THAT SO FAR NOTHING ADVERSE WITH REGARD TO THESE FOREIGN CO NCERNS HAS BEEN RECEIVED. THE ASSESSING OFFICER CAN TAKE APPROPRIAT E ACTION AS AND WHEN HE RECEIVES REPLY FROM FTD. 6.2.3 FURTHER, WHILE DEALING WITH THIS ISSUE, I AP PRECIATE THE CONTENTIONS OF THE ASSESSING OFFICER WITH REGARD TO THE EXPENSES ON DEVELOPMENT OF SOFTWARE IN SO FAR AS PARA 17 OF THE ORDER ARE CONCERNED. IF THE RECEIPTS OF THE APPELLANT IN CONV ERTIBLE FOREIGN EXCHANGE ARE WELL DOCUMENTED AND ACCEPTED THAT DOES NOT MEAN THAT THE BOOK RESULTS OF THE APPELLANT ARE TO BE ACCEPTE D AS SUCH. A DETAILED SCRUTINY OF THE APPELLANT'S EXPENSES FOR THE YEAR U NDER CONSIDERATION AND FOR THE SUBSEQUENT YEARS REVEALS THAT THE APPEL LANT COULD NOT HAVE PRODUCED SOFTWARE FOR SUCH A LOW COST AS SHOWN IN 1 HE PROFIT & LOSS ACCOUNT. THE QUALIFIED PERSONS TIKE SOFTWARE ENGINE ER COULD NOT HAVE BEEN ENGAGED FOR SUCH LOW SALARY AS SHOWN IN THE P & L. A/C. DEVELOPING OF SOFTWARE REQUIRES MUCH OF EFFORTS AND INTELLIGENCE. THE APPELLANT HAS SOLD SOFTWARE WORTH RS.10.28 CRORES W HEREAS TOTAL EXPENSES UNDER THE HEAD PAYMENT TO EMPLOYEES, OPERA TION EXPENSES AND FINANCIAL CHARGES ARE ONLY RS.25 LACS THE APPEL LANT HAS CLAIMED THE EXPENSES TO THE EXTENT OF 0.25% OF THE PROFIT F OR THE YEAR UNDER CONSIDERATION WHEREAS IN THE SUBSEQUENT YEAR FT HAS INCURRED EXPENDITURE OF 35.60% IN A.Y. 2002-03 AND 33.30% IN A.Y. 2003-04. IN VIEW OF TILTS, THE APPELLANT, VIDE ORDER SHEET E NTRY DATED 22-07-2004, WAS ASKED TO EXPLAIN AS TO WHY SHOULD THE AVERAGE E XPENDITURE IN THE NEXT TWO YEARS (WHICH IS MORE THAN 35% OF THE RECEI PTS) BE NOT TREATED AS UNEXPLAINED EXPENDITURE U/S.69C INCURRED DURING THE YEAR AS THE EXPENDITURE SHOWN IS SO LOW THAT IT CANNOT BE ACCEP TED. 21 6.2.4 IN RESPONSE TO THE ABOVE QUERY, THE APPELLAN T FILED A LETTER DATED 03-08-2004 AND CONTENDED THAT THE BUSINESS OF SOFTWARE DEVELOPMENT IS NOT TIKE BUSINESS OF MANUFACTURE OF GOODS WHEREIN IT MAY BE POSSIBLE TO EXPECT EXISTENCE OF DIRECT RELAT IONSHIP BETWEEN THE CONSUMPTION OF RAW MATERIALS AND PRODUCTION OF .FIN ISHED GOODS. THE APPELLANT'S ANOTHER ARGUMENT IS IT CAN NOT EVEN BE COMPARED WITH SERVICE INDUSTRIES AND THE VERY NATURE OF THIS BUSI NESS ITSELF THAT IT DOES NOT GIVE IN TO THE SIMPLE ARITHMETIC RULE OF THREE. THE APPELLANT ALSO OBJECTED THE PROPOSED ESTIMATION OF EXPENSES ON LEG AL GROUND THAT THERE IS NO CONCLUSIVE PROOF TO ESTABLISHED UNACCOU NTED EXPENDITURE RELYING UPON DISSENTING JUDGEMENT OF JUSTICE MUKHI IN J, S. PARKAR VS. V. B. PALEKAR (1974) 94ITR 616,644). 6.2.5 AFTER HAVING CONSIDERED THE APPELLANT'S ABOV E CONTENTIONS, I AM OF THE VIEW THAT THE OBJECTIONS R AISED BY THE APPELLANT ARE NOT CORRECT. THE APPELLANT HAS NOT BE EN ABLE TO EXPLAIN OR ESTABLISH HOW IT WAS POSSIBLE FOR FT TO HAVE EXPORT ED SOFTWARE WORTH RS.10.28 CRORES BY SPENDING RS.25 LACS WHICH IS NOT EVEN 0.25% OF THE TOTAL RECEIPTS WITHOUT THE HELP OF QUALIFIED SOFTWA RE ENGINEERS. THE FACTS NARRATED IN PARA 11 OF THE ASSESSMENT ORDER C ANNOT BE IGNORED. THE APPELLANT COMPANY HAS DEBITED NOMINAL EXPENSES UNDER THE HEAD SALARY AND WAGES (0.044% OF THE TOTAL RECEIPTS) AS AGAINST 1.12% OF TOTAL RECEIPTS IN NEXT ACCOUNTING YEAR. SIMILARLY, UNDER THE HEAD SOFTWARE DEVELOPMENT & LEGAL/PROFESSIONAL THE APPEL LANT HAS DEBITED EXPENSES WHICH ARE 0.45% OF THE TOTAL RECEIPTS AS A GAINST 11.58% IN THE ASST. 2002-03 AND 11.58% IN THE ASST. YEAR 2003 -04. WITHOUT INCURRING EXPENDITURE ON SOFTWARE HOW CAN ONE DEVEL OP SOFTWARE, IT IS NOT UNDERSTOOD. I DO AGREE WITH THE APPELLANT THAT THE SOFTWARE BUSINESS IS DIFFERENT FROM NORMAL MANUFACTURING BUS INESS OR SERVICE INDUSTRY, BUT IN NO CASE OF SOFTWARE EXPORT WE HAVE EVER COME ACROSS SHOWING SO LESS EXPENSES. WHEN THE APPELLANT ACCEPT S THE EXPORTS HAVE BEEN MADE, THE CORRESPONDING EXPENSES ALSO MUS T BE DEBITED TO THE PROFIT & LOSS ACCOUNT. THE BEST COMPARABLE CASE CAN NOT BE ANY OTHER THAN THE APPELLANT'S OWN CASES FOR THE SUCCEE DING ASSESSMENT YEARS I.E. 2002-03 AND 2003-04. THE ASSESSING OFFIC ER HAS RIGHTLY MADE OUT A CASE IN THE ASSESSMENT ORDER THAT THE APPELLA NT HAS NOT DEBITED THE EXPENSES NORMALLY INCURRED IN DEVELOPING SOFTWA RE AND THIS IS SUPPORTED BY THE APPELLANT'S OWN CASE FOR THE NEXT TWO YEARS. ONCE IT IS ESTABLISHED THAT THE APPELLANT COULD NOT HAVE EX PORTED SOFTWARE WITHOUT INCURRING THESE EXPENSES WHICH ARE BARE MIN IMUM AND SUCH EXPENSES ARE NOT DEBITED TO THE PROFIT & LOSS A/C, THEN IT IS ALSO ESTABLISHED THAT THE APPELLANT HAS MADE THESE EXPEN SES OUTSIDE THE 22 BOOKS OF ACCOUNT AND THEREFORE, THE PROVISIONS OF S ECTION 69C ARE ATTRACTED. THE APPELLANT HAS CLAIMED THE EXPENSES T O THE EXTENT OF 0.25% OF THE PROFIT FOR THE YEAR UNDER CONSIDERATIO N WHEREAS IN THE SUBSEQUENT YEARS IT HAD INCURRED EXPENDITURE OF 35. 60% IN A.Y. 2002- 03 AND 33.30% IN A.Y. 2003-04. IF ONE CONSIDERS FIN ANCE CHARGES AND ALL THE EXPENSES OF THE DIVISION IN RATIO TO TOTAL RECEIPTS THE EXPENSES ARE AS UNDER- A.Y. 2001-02. 2.45 % A.Y.2002-03. 35.3 % A.Y.2003-04. 35.58 % THE INCURRING OF EXPENSES IN THE YEAR UNDER CONSIDE RATION IS TOO LOW AND IN RESPONSE TO THE QUERY THE APPELLANT HAS NOT BEEN ABLE TO EXPLAIN THE SOURCE OF THE EXPENSES MADE BY IT WHICH ARE NOT RECORDED IN THE BOOKS OF ACCOUNT, FT IS ESTABLISHED HEREINABOVE THA T WITHOUT INCURRING THESE EXPENSES LIKE SOFTWARE DEVELOPMENT EXPENSES, THE APPELLANT COULD NOT HAVE DEVELOPED AND EXPORTED THE SOFTWARE. CONSIDERING EXPENSES OF SUBSEQUENT YEAR, IT WOULD BE REASONABLE TO DETERMINE SUCH EXPENSES AT 35% OF RECEIPTS. THEREFORE IN MY VIEW F T CAN BE REASONABLY HELD THAT THE APPELLANT HAS INCURRED FUR THER EXPENSES OF DIFFERENCE BETWEEN 35% AS AGAINST 2.45% OF THE RECE IPTS, FT IS THIS EXPENDITURE WHICH THE APPELLANT HAS INCURRED OUTSID E THE BOOKS. THEREFORE, I DETERMINE SUCH EXPENDITURE AT 35% OF T HE TOTAL RECEIPT OF RS.10,00,25,968/- I.E. RS.3,50,09,088/-- AS AGAINST THE EXPENSES OF RS.24.50.636/-. THE DIFFERENCE BETWEEN THESE TWO FI GURES AMOUNTING TO RS.3,25,58,452/- IS LIABLE TO BE CONSIDERED AS U NEXPLAINED EXPENDITURE U/S.69C. THE ASSESSING OFFICER IS DIREC TED ACCORDINGLY. 11 BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT( A), THE ASSESSEE IS NOW IN APPEAL BEFORE US. THE LEARNED C OUNSEL OF THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A). 12 THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. THE LEARNED DR FURTHER VIDE WRITTEN SUBMISSIONS HAS SUBMITTED AS UNDER:- 23 IN RESPECT TO THE GROUND NO. L, IT IS STATED THAT THIS GROUND IS REGARDING ACTION OF THE CIT(A) HOLDING THAT THE ASSESSEE IS E NTITLED TO EXEMPTION U/S. 10A AND DELETING THE ADDITION OF RS.10,00,25,9 68/- MADE U/S.68. ALL THE THREE GROUNDS ARE TO BE CONSIDERED TOGETHER . IT IS SUBMITTED THAT NEITHER BEFORE THE A.O. NOR DURING CIT(A) AND NOR D URING THE PROCEEDINGS BEFORE ITAT, THE APPELLANT HAS BEEN ABL E TO EXPLAIN HOW THE SOFTWARE WAS MANUFACTURED . THE A.O. HAS DISCUSSED THE DISALLOWANCE OF CLAIM U/S. 10(A) AND CONSEQUENT ADD ITION U/S.68 FROM PARA 6 TO 16 OF THE ASSESSMENT ORDER (PAGES 3 TO 13 ). (I) AS ARGUED DURING THE PROCEEDINGS BEFORE THE HON 'BLE BENCH, IT HAS BEEN POINTED OUT BY THE A.O. THAT T HE ASSESSEE HAS MADE SALES OF RS.10,28,88,952/- WHEREAS THE TOT AL EXPENDITURE INCURRED IS RS.28.53 LAC ONLY . (II) FURTHER, IT WAS POINTED OUT THAT AS IS SEEN FR OM THE PAGE OF THE ASSESSMENT ORDER, THE ASSESSEE HAS MADE PAYMENT S TO EMPLOYEES WHO ARE NOT QUALIFIED FOR DESIGNING THE S OFTWARE AND THE SALARY PAID IS NOT MORE THAN RS.4000/- TO 7000/ - PER MONTH. EMPLOYEES WITH SUCH MEAGER SALARY CANNOT BE COMPETE NT TO DESIGN A SOFTWARE WHICH CAN BE SOLD FOR MORE THAN R S.10 CRORE . (III) IT WAS FURTHER POINTED OUT THAT THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE REGARDING THE PREPARATION OF FLOW CHARTS, WRITING TO SOFTWARE, TESTING OF SOFTWARE AN D RE-BEGINNING OF SOFTWARE. NONE OF THESE DETAILS ARE AVAILABLE IN THE ASSESSMENT ORDER AND CIT(A)'S ORDER. THESE DETAILS HAVE NOT BEEN PROVIDED EVEN DURING THE COURSE OF HEARING BEF ORE THE HON'BLE TRIBUNAL. WITHOUT THESE DETAILS, ASSESSEE C ANNOT PROVE MANUFACTURING OF SOFTWARE . (IV) IT WAS FURTHER POINTED OUT THAT THE QUALIFICAT ION OF THE EMPLOYEES AS DETAILED IN PARA 11 ON PAGE 8-9 OF THE ASSESSMENT ORDER ARE SUCH THAT THEY WERE EMPLOYED ONLY FOR ACC OUNTS WORK AND CANNOT DESIGN THE SOFTWARE . 2. THE A.O. HAS POINTED OUT VARIOUS REASONS IN PARA 15 OF THE ASSESSMENT ORDER (PAGES 10- 12) TO SHOW THAT THE SO FTWARE COULD NOT HAVE BEEN MANUFACTURED ON THE BASIS OF THE EVIDENCE GIVEN BY THE ASSESSEE. 24 3. IT WAS SUBMITTED BY THE COUNSEL OF THE APPELLANT THAT STPI, SOFTWARE TECHNOLOGY TASKS OF INDIA) IS A GOVT. BODY . THIS STATEMENT IS NOT FULLY CT BECAUSE THE WEBSITE OF STPI SHOWS T HAT THE STPI WAS ESTABLISHED REGISTERED AS AUTONOMOUS SOCIETY THOUGH WORKING UNDER THE DEPARTMENT OF INFORMATION AND TECHNOLOGY. HENCE , IT IS NOT A GOVERNMENT BODY. IT IS AN AUTONOMOUS SOCIETY UNDER A GOVT. DEPARTMENT . ITS CERTIFICATES ETC. THEREFORE, DO NOT CARRY THE SAME WEIGHT AS THAT OF A DEPARTMENT. 4. IT WAS FURTHER POINTED OUT THAT THE EXPENDITURE INCURRED IS SO SMALL THAT THE MANUFACTURING COULD HAVE BEEN DONE W HICH IS ALSO CLEAR FROM THE FACT THAT THE NEXT ASSESSMENT YEAR, THE AS SESSEE HAS INCURRED AN EXPENDITURE OF 5 CRORE ON A TURNOVER OF RS.4.65 CRORE WHICH IS 35% OF THE TOTAL RECEIPTS. THE ACTION OF THE CIT(A) TO SAY THAT THE MANUFACTURING MIGHT HAVE BEEN DONE AND THEREBY ESTI MATING THE EXPENDITURE ON THE BASIS OF THE SUBSEQUENT YEAR IS NOT CORRECT ESPECIALLY BECAUSE IN THE ABSENCE OF ANY EVIDENCE. EXPENSES CANNOT BE ASSUMED. FURTHER, IN THE ABSENCE OF MANUFACTURING. THE ASSESSEE CANNOT GET DEDUCTION U/S. 10A. THEREFORE, THE PRESU MPTION ON THE PART OF THE CIT(A) THAT THE MANUFACTURING MIGHT HAVE BEE N DONE AND IN THE ABSENCE OF ANY EVIDENCE PROVIDED BY THE ASSESSEE AN D ESTIMATING THE EXPENSES ON THE BASIS OF THE SUBSEQUENT YEAR IS NOT CORRECT . 5. IN VIEW OF THE ABOVE REASONS AND FOR THE DETAILE D DISCUSSION IN THE ASSESSMENT ORDER, THE DISALLOWANCE ON DEDUCTION U/S. 10A MAY KINDLY BE CONFIRMED. 13 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE R ECORDS AND FIND THAT THE AO DID NOT ACCEPT THE ASSESSEES CLAI M OF PROFIT OF SOFTWARE DIVISION AS EXEMPT U/S 10A OF THE ACT AMOU NTING TO RS.10,00,25,968/- ON THE GROUND THAT THE ASSESSEE H AD NOT EXPORTED SOFTWARE AND ONLY DOCUMENTATION OF EARNING FROM EXPORT OF SOFTWARE WERE PREPARED BY HIM. ACCORDING TO HIM, THE TRANSACTIONS WERE NOT GENUINE AND THE DOCUMENTS WER E MANAGED FOR CLAIMING THE FOREIGN CONVERTIBLE EXCHANGE IN VI EW OF SECTION 10A OF THE ACT. THE SUSPICION ABOUT THE GENUINENES S OF THE 25 TRANSACTIONS AROSE IN THE MIND OF THE AO WHEN HE FO UND THAT THE ASSESSEE HAS SPENT ONLY RS.25 LACS TO GET EXPORT TU RNOVER OF RS.10,00,25,968/-. THE AO ALSO DOUBTED THE PROFESS IONAL QUALIFICATIONS OF THE PERSONS WHO ACCORDING TO THE ASSESSEE HAD MANUFACTURED / DEVELOPED THIS SOFTWARE. HE WAS AL SO OF THE VIEW THAT SOFTWARE WERE VERY OLD AND WERE AVAILABLE IN THE OPEN MARKET FOR MORE THAN 10 YEARS. HE, THEREFORE, FORM ED AN OPINION THAT THE ASSESSEE HAS NOT EXPORTED ANY SOFTWARE AND ONLY THE PAPER WORK HAS BEEN DONE TO CLAIM EXEMPTION U/S 10A FOR MAKING EXPORT OF SOFTWARE. THE AO HAS FURTHER HELD THAT S INCE THE ASSESSEE DID NOT PROVIDE THE INCOME-TAX ASSESSMENT DETAILS AND ACCOUNTS OF THE PURCHASERS OF THE SOFTWARE, THE REC EIPTS WERE UNEXPLAINED CASH CREDITS. WHEN THESE FINDINGS OF T HE AO WERE CHALLENGED BY THE ASSESSEE BEFORE THE LEARNED CIT(A ) WITH SUPPORTING EVIDENCES, THE LEARNED CIT(A) CALLED FOR THE REMAND REPORT FROM THE AO AND AFTER TAKING INTO CONSIDERAT ION ALL THE MATERIAL AVAILABLE BEFORE HIM AND FOR THE REASONS G IVEN BY HIM IN PARA 6.2(A) OF HIS ORDER (PAGE-18 OF THIS ORDER), H AS HELD THAT THE ASSESSEE HAS SATISFIED THE CONDITIONS AS LAID DOWN IN SECTION 10A(2) OF THE ACT. WE HAVE ALSO GONE THROUGH THE D OCUMENTS ON THE BASIS OF WHICH THE LEARNED CIT(A) HAS GIVEN THI S FINDING. WE FURTHER FIND THAT THE ASSESSEE HAS PRODUCED ALL THE RELEVANT DETAILS / DOCUMENTS IN SUPPORT OF EXPORT OF SOFTWARE MADE B Y HIM. THESE DOCUMENTS INCLUDE THE CERTIFICATE ISSUED BY S OFTWARE TECHNOLOGY PARKS OF INDIA, GANDHINAGAR WHICH IS AUT ONOMOUS SOCIETY UNDER THE MINISTRY OF INFORMATION AND TECHN OLOGY, GOVT. OF INDIA, LETTER ISSUED BY THE DEPUTY COMMISSIONER OF CENTRAL EXCISE, MINISTRY OF REVENUE, BANK CERTIFICATES OF E XPORT AND 26 REALIZATION. DETAILS OF PAYMENT RECEIVED FROM THE V ARIOUS PARTIES SHOW THAT AMOUNTS HAVE BEEN RECEIVED THROUGH BANKIN G CHANNELS AND AS PER RBI RULES OF THE FOREIGN EXCHANGE. AS RE GARDS AOS DOUBT ABOUT THE CAPACITY OF THE ASSESSEE TO MANUFAC TURE / DEVELOP THE SOFTWARE WHICH CAN FETCH AN AMOUNT OF RS.10,00, 35,968/- IN THE MARKET, WE FIND THAT DURING THE ASSESSMENT PRO CEEDINGS THE ASSESSEE PRODUCED THE SOFT COPY OF THE SOFTWARE DEV ELOPED BY THE ASSESSEE IN THE FORM OF C.D. BUT THE AO JUST IGNORE D THIS VITAL PIECE OF EVIDENCE GIVEN BY THE ASSESSEE IN SUPPORT OF ITS CLAIM THAT HE DID MANUFACTURE / DEVELOP A SOFTWARE WHICH WAS EXPORTED. THE AO HAS NOT REBUTTED THIS CLAIM OF THE ASSESSEE. WE FURTHER FIND THAT THE AO HAS ALSO DOUBTED THAT THE SOFTWARE DEVELOPED BY THE ASSESSEE CAN BE DOWNLOADED ON INTERNET OF PURCH ASER PLACED ABROAD. IN REPLY TO THIS DOUBT OF THE AO, THE ASSE SSEE OFFERED TO ARRANGE DOWNLOADING OF THE SOFTWARE AT ANY PLACE OF AOS CHOICE TO SHOW THAT DOWNLOADING OF SOFTWARE WAS POSSIBLE O N INTERNET BUT SURPRISINGLY WE FIND THAT WITHOUT ACCEPTING THI S OFFER OF THE ASSESSEE, THE CONTENTION OF THE ASSESSEE WAS DISBEL IEVED BY THE AO. THE FACT THAT THE REVENUE HAS ACCEPTED THAT SA ME MATERIAL WAS EXPORTED BY THE ASSESSEE IN SUBSEQUENT YEARS AL SO STRENGTHENS THE CASE OF THE ASSESSEE THAT EXPORT DI D TAKE PLACE DURING THE YEAR UNDER APPEAL ALSO. IN VIEW OF THE A FORESAID DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT T HE LEARNED CIT(A) HAS RIGHTLY HELD THAT THE ASSESSEE HAS EXPOR TED THE SOFTWARE MANUFACTURED BY IT AND WAS THEREFORE ENTIT LED FOR EXEMPTION U/S 10A OF THE ACT. 27 14 WE FURTHER FIND THAT AFTER HOLDING AS ABOVE THAT THE ASSESSEE EXPORTED THE SOFTWARE AND HAS RIGHTLY CLAIMED EXEMP TION U/S 10A, THE LEARNED CIT(A) ALSO OBSERVED THAT THE ASSESSEE HAD MADE EXPORT WORTH RS.10,00,25,968/- BY SPENDING ONLY RS. 25 LACS WHICH COMES TO ONLY 0.25% OF TOTAL RECEIPTS IN COMP ARISON TO EXPENDITURE OF 35.60% IN AY 2002-03 AND 33.30% IN A Y 2003- 04. HE, THEREFORE, SHOW CAUSED THE ASSESSEE TO EXP LAIN AS TO WHY SHOULD THE AVERAGE EXPENDITURE IN THE NEXT TWO YEAR S WHICH IS MORE THAN 35% OF THE RECEIPTS, BE NOT TREATED AS UN EXPLAINED EXPENDITURE U/S 69C OF THE ACT. THE EXPLANATION OFF ERED BY THE ASSESSEE WAS NOT FOUND SATISFACTORY BY THE LEARNED CIT(A) AND HE FOUND IT REASONABLE TO DETERMINE SUCH EXPENSES AT 3 5% OF THE RECEIPTS AND ACCORDINGLY TREATED THE SUM OF RS.3,25 ,58,452/- AS LIABLE TO BE CONSIDERED AS UNEXPLAINED EXPENDITURE U/S 69C OF THE ACT. NOTHING SUBSTANTIAL WAS BROUGHT ON RECORD IN SUPPORT OF THE ARGUMENT ON BEHALF OF THE ASSESSEE TO DEVIATE US FR OM THE ABOVE FINDING OF THE LEARNED CIT(A). WE ACCORDINGLY UPHOL D THE FINDING OF THE LEARNED CIT(A) IN THIS REGARD ALSO. 15 IN THE RESULT, GROUND NO.2 OF THE ASSESSEES APP EAL AND GROUND NOS. 1 TO 3 OF THE REVENUES APPEAL ARE DISM ISSED. 16 GROUND NO.4 IN THE ASSESSEES APPEAL RELATES TO LEVY OF INTEREST U/S 234B AND 234C OF THE ACT. THIS GROUND IS CONSEQUENTIAL. 17 GROUND NO.5 RELATES TO WITHDRAWAL OF INTEREST EA RLIER GRANTED TO THE ASSESSEE U/S 244A OF THE ACT. THIS GROUND I S ALSO CONSEQUENTIAL. 28 18 NOW COMING TO GROUND NO.4 IN THE REVENUES APPEA L, THE FACTS OF THE CASE AS NOTED BY THE LEARNED CIT(A) AR E THAT THE ISSUE HAS BEEN DEALT WITH BY THE ASSESSING OFFICER AT PAR A-5 OF THE ASSESSMENT ORDER, IT IS SEEN THAT DURING THE YEAR U NDER CONSIDERATION THE ASSESSEE COMPANY HAS REDUCED THE TOTAL INCOME BY RS.4,93,768/- ON ACCOUNT OF INTEREST WHICH WAS, ACCORDING TO THE AO ATTRIBUTABLE TO EXPANSION OF EXISTING BUSINE SS CAPITALIZED IN THE BOOKS OF ACCOUNT AND CLAIMED AS REVENUE EXPE NDITURE. IT WAS STATED BY THE ASSESSING OFFICER IN THE ASSESSME NT ORDER THAT AS PER EXPLANATION 8 TO SECTION 43, WHERE THE AMOUNT O F INTEREST PAYABLE IS IN CONNECTION WITH THE ACQUISITION OF AS SETS, THE AMOUNT WHICH IS RELATABLE TO ANY PERIOD AFTER SUCH IS PUT TO USE SHALL NOT BE INCLUDED IN THE ACTUAL COST OF ASSET. ACCORDING TO THE ASSESSING OFFICER INTEREST PAID PRIOR TO THE ASSET WHICH HAS BEEN FIRST PUT TO USE SHALL BE CAPITALIZED AND SHOULD BE INCLUDED IN THE ACTUAL COST. IT WAS STATED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER THAT IN THE INSTANT CASE, THE ASSE SSEE HAS CORRECTLY CAPITALIZED THE INTEREST ON THE ASSETS, W HICH WERE NOT PUT TO USE AND SHOWN AS WORK-IN-PROGRESS YET, WHILE COMPUTING THE TOTAL INCOME CLAIMED THE EXPENSES AS REVENUE EX PENSES, WHICH WAS ITSELF CAPITALIZED BY THE ASSESSEE IN THE BOOKS. THEREFORE, AFTER DISCUSSING THE ISSUE AT LENGTH IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER REJECTED THE ASSESSEE S CLAIM AND DISALLOWED THE SUM OF RS.4,93,768/- AND ADDED TO TH E TOTAL INCOME OF THE APPELLANT COMPANY TREATING THE SAME A S CAPITAL IN NATURE. 29 29 ON APPEAL, THE ASSESSEE MADE THE FOLLOWING SUBMI SSIONS BEFORE THE FIRST APPELLATE AUTHORITY: 5.1 DURING THE COURSE OR APPELLATE PROCEEDINGS, TH E AR OF THE APPELLANT FILED WRITTEN SUBMISSIONS. IN CONNECTION WITH THE ABOVE ISSUE THE APPELLANT IN STATEMENT OF FACTS SUBMITTED THAT THE INTEREST HAS BEEN PAID BY THE APPELLANT ON CAPITAL BORROWINGS FOR THE EXPANSION OF ITS EXISTING BUSINESS. IT HAS BEEN SUBMITTED THAT INTER EST IS ADMISSIBLE U/S. 36(1)(III) IF THE CONDITIONS LAID DOWN IN THE SAID SECTION ARE FULFILLED, IRRESPECTIVE OF THE ENTRIES PASSED IN THE BOOKS OF ACCOUNT AND IRRESPECTIVE OF THE FACT THAT THE ASSESSES HAS USED THE BORROWED CAPITAL FOR CAPITAL EXPENDITURE. THE APPELLANT ALSO SUBMITT ED THAT THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE WITHOUT APPRECIAT ING THE ABOVE LEGAL POSITION AND WITHOUT CONSIDERING THE PRINCIPL ES LAID DOWN BY THE GUJARAT HIGH COURT IN THE CASE OF CORE HEALTH CARE LTD, 251 ITR 81. THE APPELLANT IN PARTICULAR REFERRED TO THE FOLLOWI NG PORTION FROM THE HEAD NOTES OF THE SAID DECISION: 'SECTION 36(1)(III) OF THE INCOME-TAX ACT, 1961, IS ABSOLUTELY CLEAR, IT PROVIDES THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS S HALL BE ALLOWED IN COMPUTING THE INCOME REFERRED TO IN SECT ION 28 OF THE ACT. IT IS THE SETTLED LEGAL POSITION THAT INTEREST PAID/PAYABLE HAS TO BE IN RESPECT OF CAPITAL BORROWED FOR THE PURPOS ES OF BUSINESS; THE SECTION NOWHERE STIPULATES THAT SUCH BORROWING HAS TO BE ONLY ON REVENUE ACCOUNT. THE ONLY REQUIRE MENT IS THAT THE INTEREST MUST HAVE BEEN INCURRED FOR THE PURPOS E OF CAPITAL BORROWINGS MADE FOR THE PURPOSE OF BUSINESS. THERE IS AN INHERENT INDICATION IN THE ACT THAT ANY EXPENDITURE WHICH IS IN THE NATURE OF CAPITA! EXPENDITURE WOULD NOT BE ALLO WABLE AS A DEDUCTION WHILE COMPUTING THE INCOME CHARGEABLE UND ER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' AS LAID DOWN IN SECTION 37 OF THE ACT; BUT IN THE SAME SECTION T HE PORTION IN PARENTHESES LAYS DOWN THAT SUCH EXPENDITURE HAS TO BE 'NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIO NS 30 TO 36'. THEREFORE, THERE IS A SPECIFIC PROVISION DEALING WI TH INTEREST PAID/PAYABLE IN RESPECT OF THE BORROWINGS INCURRED FOR THE PURPOSES OF BUSINESS AND HENCE THE GENERAL PROVISIO N, VIZ., SECTION 37 OF THE ACT CANNOT COME INTO PLAY. THEREF ORE, WHETHER THE INTEREST IS PAID FOR A BORROWING WHICH IS UTILI ZED FOR 30 ACQUISITION OF A CAPITAL ASSET OR WHICH IS UTILIZED FOR A REVENUE PURPOSE LOSES ITS DISTINCTION. THE VIEW THAT INTERE ST WHICH IS CAPITALIZED, AFTER THE COMMENCEMENT OF THE BUSINESS BUT BEFORE AN ASSET IS FIRST PUT TO USE CANNOT BE ALLOWED AS A REVENUE DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT IS AG AINST THE PLAIN LANGUAGE OF THE PROVISIONS OF THE ACT. WHERE THE LE GISLATURE WANTED TO RESTRICT ALLOWANCE/DEDUCTION TO A PARTICU LAR TYPE OF EXPENDITURE A SPECIFIC PROVISION HAS BEEN INCORPORA TED IN THE ACT, AS FOR EXAMPLE, THE PROVISIONS OF SECTIONS 37 AND 35D. THE SCOPE OF SECTION 36(1)(III) AND EXPLANATION 8 T O SECTION 43(1) ARE DIFFERENT. THEY OPERATE IN SEPARATE FIELD S AND THOUGH BOTH ARE RELATABLE TO COMPUTING INCOME UNDER SECTIO N 28 YET THE NATURE OF DEDUCTIONS ARE ENTIRELY DISTINCT FROM EAC H OTHER. THE CONCEPT AND THE MEANING OF 'ACTUAL COST WHICH IS TH E DEFINITION LAID DOWN IN SECTION 43(1) OF THE ACT IS FOR A LIMI TED PURPOSE, VIZ., AT A POINT OF TIME WHEN DEDUCTION IS TO BE GR ANTED FOR THE PURPOSE OF WEAR AND TEAR (SECTION 32) OR AN INCENTI VE FOR THE PURPOSE OF SETTING UP A SPECIFIED INDUSTRY (SECTION S 32A AND 33). THE TERM 'ACTUAL COST IS APPLICABLE ONLY IN RELATI ON TO AN ASSET AS AGAINST THE PHRASE 'CAPITAL BORROWED' USED IN CL AUSE (III) OF SECTION 36(1) OF THE ACT. THE TERM 'CAPITAL BORROWE D' IN THE SAID PROVISION IS OF A MUCH WIDER IMPORT THAN THE PHRASE 'ACTUAL COST'. EXPLANATION 8 ONLY LAYS DOWN THAT WHERE AN A MOUNT IS PAID / PAYABLE AS INTEREST IN CONNECTION WITH THE A CQUISITION OF AN ASSET, SO MUCH OF SUCH AMOUNT AS IS RELATABLE TO ANY PERIOD AFTER SUCH ASSET IS FIRST PUT TO USE, SHALL NOT BE INCLUDED IN THE ACTUAL COST OF SUCH ASSET. THE SCOPE AND AMBIT OF T HIS EXPLANATION ON A PLAIN READING IS RESTRICTED TO A S ITUATION WHERE AFTER THE ASSET IS FIRST PUT TO USE THE INTEREST WH ICH IS PAID / PAYABLE WOULD NEVER FORM A PART OF THE ACTUAL COST. THE EXPLANATION NOWHERE PROVIDES THAT INTEREST PERTAINI NG TO A PERIOD PRIOR TO AN ASSET BEING FIRST PUT TO USE WIL L NOT BE ALLOWED AS A DEDUCTION UNDER SECTION 36(1)(III). EXPLANAT ION 8 WAS INSERTED TO COUNTERACT TAX AVOIDANCE BY WAY OF CLAI MING DEPRECIATION, INVESTMENT ALLOWANCE, ETC., ON A LARG ER AMOUNT OF ACTUAL COST NEITHER IN THE NOTES ON CLAUSES NOR IN THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 1986, IS THERE ANY INDICATION THAT IN A CONVERSE SI TUATION INTEREST HAS TO BE CAPITALIZED AND FURTHER THAT SUCH INTERES T CANNOT BE CLAIMED AS DEDUCTION UNDER SECTION 36(1)(III) OF TH E ACT. IN FACT, THERE IS NO MENTION ABOUT THE DEDUCIBILITY OR OTHER WISE UNDER 31 SECTION 36(1)(III). SECTION 36(1)(III) DOES NOT MAK E ANY DISTINCTION BETWEEN THE BORROWING UTILIZED TO ACQUI RE A CAPITAL ASSET OR OTHERWISE, IN FACT, THE PHRASE USED IN THE SAID PROVISION IS 'CAPITAL BORROWED'. THEREFORE, THE DISTINCTION A BOUT THE INTEREST HAVING BEEN CAPITALIZED OR NOT LOSES ITS S IGNIFICANCE, INASMUCH AS IF THE CAPITAL IS BORROWED FOR THE PURP OSES OF BUSINESS, THE INTEREST IS ALLOWABLE AS A DEDUCTIBLE ITEM OF EXPENDITURE UNDER SECTION 36(1)(III) WHILE COMPUTIN G THE INCOME UNDER SECTION 28 OF THE ACT. THERE IS NO OTH ER PRESCRIPTION IN THE PROVISIONS. - -- - - - -- HELD, THAT THE TRIBUNAL WAS JUSTIFIED IN ALLOWING A S DEDUCTION UNDER SECTION 36(1)(III), INTEREST ON BORROWING MAD E FOR ACQUISITION OF THE CAPITAL ASSETS, THOUGH PERTAININ G TO THE PERIOD PRIOR TO THE COMMENCEMENT OF PRODUCTION.' THE ASSESSING OFFICER'S COMMENTS BEFORE ME ON THE A BOVE ISSUE ARE AGAIN RELYING UPON SAID EXPLANATION 8 TO SECTION 48 . 30 AFTER CONSIDERING THE AFORESAID SUBMISSIONS OF T HE ASSESSEE, THE LEARNED CIT(A) DELETED THE ADDITION WITH THE FO LLOWING OBSERVATIONS:- 5.2 I HAVE CONSIDERED THE FACTS OF THE CASE AND SU BMISSIONS OF THE APPELLANT RAISED THROUGH STATEMENT OF FACTS AND GRO UNDS OF APPEAL. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED UPON BY THE A. R. AND THE OBSERVATIONS OF THE ASSESSING OFFICER IN THE ASSESS MENT ORDER AND THEN IN THE REMAND REPORT. ST IS SEEN THAT THE ASSESSING OFFICER HAS MADE THE ADDITION MAINLY FOR THE REASON THAT THE INTEREST HA S BEEN CAPITALIZED IN THE BOOKS OF ACCOUNT AND IT IS INCURRED IN RESPECT OF THE BORROWINGS FOR EXPANSION OF THE BUSINESS OF THE APPELLANT. A SIMIL AR SITUATION HAS BEEN CONSIDERED BY THE GUJARAT HIGH COURT IN THE CASE OF CORE HEALTHCARE LTD 151 ITR 61. THE HON'BLE HIGH COURT HAS CONSIDER ED THE PROVISIONS OF EXPLANATION 8 BELOW SECTION 43(1) AND HELD THAT IF SUCH EXPENDITURE SS IN RESPECT OF THE EXPANSION OF THE B USINESS CARRIED OUT BY THE ASSESSEE, SUCH EXPENDITURE IS ADMISSIBLE U/S 36(1)(III)OF THE I. T. ACT. AT PAGE NO.78 OF THE ABOVE CITED ORDER THE HON 'BLE HIGH COURT HAS HELD THAT 'THERE WAS NO ERROR IN LAW COMMITTED BY THE TRIBUNAL IN ALLOWING AS DEDUCTION, INTEREST ON BORROWING FOR AC QUISITION OF CAPITAL 32 ASSETS, THROUGH PERTAINING TO A PERIOD PRIOR TO COM MENCEMENT OF PRODUCTION UNDER SECTION 36(1)(III) OF THE ACT.' 5.2.1 FURTHER IT CAN ALSO BE MENTIONED THAT THE SU PREME COURT OF INDIA IN THE CASE OF CIT V. ASSOCIATED FIBRE AND RUBBER INDUSTRIES (P) LTD. (1999) 236 ITR 471 HELD (AT PAGE NO .472) AS UNDER: WE FIND THAT THE REASONING OF THE TRIBUNAL IS CORR ECT. EVEN THOUGH THE MACHINERY HAS NOT BEEN ACTUALLY USED IN THE BUSINESS AT THE TIME WHEN THE ASSESSMENT WAS MADE, THE SAME HAD BEEN TREATED AS A BUSINESS ASSET AND IT WAS PURCHASED ON LY FOR THE PURPOSES OF THE BUSINESS. IN THE CIRCUMSTANCES, THE INTEREST PAID ON THE AMOUNT BORROWED FOR PURCHASE OF SUCH MACHINE RY IS CERTAINTY A AMOUNT. CONSEQUENTLY, THE VIEW TAKEN BY THE TRIBUNAL IS CORRECT.' RESPECTFULLY FOLLOWING THE DECISIONS OF HON'BLE SUP REME COURT IN THE CASE ASSOCIATED FIBRE AND RUBBER INDUSTRIES (P) LTD . AND GUJARAT HIGH COURT IN THE CASE OF CORE HEALTHCARE LTD., 1 DO NOT FIND JUSTIFICATION FOR DISALLOWANCE OF CLAIM OF INTEREST, AND THEREFOR E, THE ADDITION OF RS.4,93,768/- MADE BY THE ASSESSING OFFICER IS DELE TED. 31 THE REVENUE IS IN APPEAL BEFORE US AGAINST THE A FORESAID FINDING OF THE LEARNED CIT(A). THE LEARNED DR SUPPO RTED THE ORDER OF THE AO. 32 THE LEARNED COUNSEL OF THE ASSESSEE, ON THE OTHE R HAND, SUPPORTED THE FINDING OF THE LEARNED CIT(A) AND REI TERATED THE SUBMISSIONS MADE WHICH WERE MADE BEFORE HIM. THE L EARNED COUNSEL OF THE ASSESSEE RELIED ON THE DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF DEPUTY CIT VS. CORE HE ALTH CARE LTD. (2008) 198 ITR 194 (SC), WHEREIN THE HON'BLE A PEX COURT HAS AFFIRMED THE AFORESAID DECISION OF THE HONBLE GUJARAT HIGH COURT. THEREFORE, THE LEARNED COUNSEL OF THE ASSESS EE SUBMITTED 33 THAT THE ISSUE IS COVERED BY THE SAID DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF CORE HEALTH CARE LTD. 33 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE R ECORD. WE HAVE ALSO GONE THROUGH THE AFORESAID DECISION OF TH E HON'BLE SUPREME COURT IN THE CASE OF CORE HEALTH CARE LTD. AND FIND THAT THE LEARNED CIT(A) HAS FOLLOWED THE DECISION OF THE HONBLE GUJARAT HIGH COURT WHICH HAS BEEN AFFIRMED BY THE H ON'BLE SUPREME COURT. THEREFORE, FOLLOWING THE SAID DECISI ON, WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A) IN THIS REGARD. THE SAME IS HEREBY UPHELD IN THIS RESPECT. GROUND NO.4 OF THE REVENUES APPEAL IS THEREFORE DISMISSED. 34 GROUND NOS.5 AND 6 IN THE REVENUES APPEAL ARE G ENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 35 NOW, COMING TO THE REVENUES APPEALS I.E. ITA NO.2181/AHD/2009 AND ITA NO.4205/AHD/2007 FOR ASSES SMENT YEARS 2002-03 & 2003-04, GROUND NO.1 RAISED BY THE REVENUE IN BOTH THE APPEALS, READS AS UNDER:- ITA NO.2181/AHD/2009 FOR AY 2002-03 :- 1. THE LD. COMMISSIONER OF INCOME-TAX (A)-XI, AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF R S.2,99,76,040/- MADE ON ACCOUNT OF DISALLOWANCE OF EXEMPTION U/S 10A. ITA NO.4205/AHD/2007 FOR AY 2003-04 :- 34 1. THE LD. COMMISSIONER OF INCOME-TAX (A)-XI, AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWA NCE OF EXEMPTION OF RS.2,89,42,468/- UNDER SECTION 10A OF THE INCOME-TA X ACT, 1961. 36 IT WAS THE COMMON CONTENTION OF BOTH THE PARTIES THAT THE FACTS INVOLVED IN THESE TWO ASSESSMENT YEARS ARE SI MILAR IN THE CASE OF THE ASSESSEE AS THOSE IN ASSESSMENT YEAR 20 01-02 IN ITA NO.2624/AHD/2004 & ITA NO.3261/AHD/2004. WE HAVE DI SCUSSED THE ISSUE IN DETAIL ABOVE AND FOR THE REASONS MENTI ONED THEREIN, WE UPHOLD THE ORDERS OF THE LEARNED CIT(A) FOR THES E YEARS ALSO. THEREFORE, GROUND NO.1 IN THE REVENUES APPEALS IS DISMISSED. 37 GROUND NO.2 IN THE REVENUES APPEAL FOR AY 2002- 03 RELATES TO DELETION OF ADDITION OF RS.1,45,75,696/- MADE ON ACCOUNT OF INTEREST EXPENSES. WE FIND THAT ON SIMI LAR FACTS, THIS ISSUE HAS BEEN DISCUSSED BY US IN THE CASE OF ASSES SEE FOR AY 2001-02 IN ITA NO.3261/AHD/2004. FOR THE REASONS M ENTIONED ABOVE, WE UPHOLD THE ORDER OF THE LEARNED CIT(A) AN D DISMISS THE GROUND RAISED BY THE REVENUE. 38 IN THE RESULT, ALL THE APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 16-02-2012 SD/- SD/- (A MOHAN ALANKAMONY) ACCOUNTANT MEMBER (D K TYAGI) JUDICIAL MEMBER DATE : 16-02-2012 COPY OF THE ORDER FORWARDED TO: 35 1. NOVA PETROCHEMICALS LTD., 71, CITY CENTRE, SWAST IK CHAR RASTA, NAVRANGPURA, AHMEDABAD 2. THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-5, AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-XI, AHMEDABAD 5. DR, ITAT, AHMEDABAD BENCH-C, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD