The ITO, Ward-5(1), Ahmedabad V. Net Square Solution Pvt.Ltd., Ahmedabad

ITA 3145/AHD/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6466 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 26-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G S SOURYAWANSI
• Assessee Lawyers: MUKESH M PATEL
• Keywords: Reopening of assessment; Audit objection; Earning of tax free income
• Section: 143(3); 14A; 10B; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : AH MEDABAD ( BEFORE HONBLE SHRI T.K.SHARMA, J.M. & HONBLE SHRI A.N.PAHUJA, A.M.) I.T.A.NO. 3145 & 3146/AHD./2010 : ASSESSMENT YEARS 2004-05 & 2005-06 I.T.O., WARD-5(1), AHMEDABAD VS- N ET SQUARE SOLUTIONS PVT. LTD., ABAD (PAN : AAACE 8262F) (APPELLANT) (RESPONDE NT) APPELLANT BY : SHRI G.S.SOURYAWANSI, D.R. RESPONDENT BY: SHRI MUKESH M. PATEL, A.R. O R D E R PER SHRI T.K.SHARMA, JUDICIAL MEMBER : THESE TWO APPEALS ARE FILED BY THE REVENUE AGAINST THE TWO SEPARATE ORDERS OF LD. CIT(A)-XI, AHMEDABAD DATED 28.09.2010 AND 29.0 9.2010 FOR THE ASSESSMENT YEARS 2004-2005 AND 2005-06 RESPECTIVELY. IN THESE TWO APPEALS, COMMON ISSUES ARE RAISED AND THESE WERE ARGUED BY THE COMMON REPRESEN TATIVE. THEREFORE, THESE ARE DECIDED BY THIS COMMON ORDER FOR THE SAKE OF CONVEN IENCE. 2. THE EFFECTIVE GROUNDS RAISED BY THE REVENUE IN A PPEAL NO.3145/AHD/2010 FOR THE ASSESSMENT YEAR 2004-05 READ AS UNDER: 1. THE LD. COMMISSIONER OF INCOME-TAX (A) HAS ERRED IN LAW AND ON FACTS IN ANNULLING THE ASSESSMENT ORDER DATED 9/12/2009 PASS ED U/S.143(3) R.W.S. 147 OF THE ACT. 2. THE LD. COMMISSIONER OF INCOME-TAX (A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF PROPORTIONATE EXPENSES OF RS.10,18,445/- U/S. 14A AGAINST EXEMPT INCOME U/S.10B IS DELETED. 3. THE LD. COMMISSIONER OF INCOME-TAX (A) HAS ERRE D IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE U/S.14A WITH REFERENCE TO DIVIDEND INCOME OF RS.1,32,715/- EXEMPT U/S. 10(35). 2 ITA NO.3145 & 3146 OF 2010 2.1 THE EFFECTIVE GROUNDS RAISED BY THE REVENUE IN APPEAL NO.3146/AHD/2010 FOR THE ASSESSMENT YEAR 2005-06 READ AS UNDER: 1. THE LD. COMMISSIONER OF INCOME-TAX (A) HAS ERRED IN LAW AND ON FACTS IN ANNULLING THE ASSESSMENT ORDER DATED 9/12/2009 PASS ED U/S.143(3) R.W.S. 147 OF THE ACT. 2. THE LD. COMMISSIONER OF INCOME-TAX (A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF PROPORTIONATE EXPENSES OF RS.26,30,434/- U/S. 14A AGAINST EXEMPT INCOME U/S.10B. 3. THE LD. COMMISSIONER OF INCOME-TAX (A) HAS ERRE D IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE U/S.14A WITH REFERENCE TO DIVIDEND INCOME OF RS.8,271/- EXEMPT U/S. 10(35). 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS A CO MPANY CARRYING ON BUSINESS OF SOFTWARE DEVELOPMENT FOR DOMESTIC AS WELL AS EXPORT PURPOSES. FOR BOTH THE ASSESSMENT YEARS UNDER APPEAL, THE ASSESSEE FILED T HE RETURN OF INCOME CLAIMING DEDUCTION UNDER SECTION 80IB. THE DETAILS OF INCOME DECLARED AND ASSESSED ARE AS UNDER: A.Y. INCOME RETURNED DEDUCTION U/S.10B CLAIMED ASSESSMENT ORDER DT. ASSESSED INCOME U/S.143(3) 2004-05 82880 1337469 28.11.2006 495308 2005-06 830490 4197345 28.03.2007 830490 2.1 FOR THE ASSESSMENT YEAR 2004-05, THE INCOME WAS REVISED TO THE TUNE OF RS.361561/- U/S. 154 DATED 19.12.2006 AND THEREAFTE R IT WAS REVISED AT RS.82781/- AS PER ORDER DATED 23.02.2007 GIVING EFFECT TO LD. CIT (A) ORDER DATED 15.02.2007. FOR THE ASSESSMENT YEAR 2005-06, THERE WAS NO CHANGE IN ASS ESSED INCOME. 2.2 THEREAFTER, THERE WAS AUDIT OBJECTION ISSUED BY THE AUDIT PARTY FOR ASSESSMENT YEAR 2004-05 (PLACED AT PAGE NOS.31 AND 32 OF THE P APER BOOK). IN THE SAID AUDIT NOTE IT IS MENTIONED THAT PROPORTIONATE EXPENSES OF RS.1 018445/- AND RS.132715/- INCURRED IN RELATION TO INCOME EXEMPT UNDER SECTION 10B AND SECTION 10(35) RESPECTIVELY WAS NOT DISALLOWED AS PER PROVISIONS OF SECTION 14A OF THE ACT. SIMILARLY, THERE WAS AUDIT OBJECTION FOR THE ASSESSMENT YEAR 2005-06 (PLACED A T PAGE 85 OF THE PAPER BOOK). IT 3 ITA NO.3145 & 3146 OF 2010 WAS OBSERVED THAT PROPORTIONATE EXPENSES OF RS.2630 434/- INCURRED IN RELATION TO INCOME EXEMPT UNDER SECTION 10B WAS NOT DISALLOWED AS PER PROVISIONS OF SECTION 14A OF THE ACT. 2.3 THE ITO DID NOT ACCEPT THE AUDIT OBJECTION AND REPLIED TO AUDIT OBJECTION THAT INCOME FROM SOFTWARE DEVELOPMENT FORMS PART OF TOTA L INCOME AND DEDUCTIONS UNDER SECTION 10B IS ALLOWED FROM SUCH TOTAL INCOME, THUS PROVISIONS OF SECTION 14A ARE NOT APPLICABLE. HOWEVER, THE AUDIT PARTY DID NOT ACCEPT THE REPLY OF THE ITO AND BASED ON AUDIT OBSERVATION, THE AO ISSUED NOTICE UNDER SECTI ON 148 DATED 23.06.2008 FOR THE ASSESSMENT YEAR 2004-05 (PLACED AT PAGE 33 OF THE P APER BOOK) AND SIMILARLY ISSUED NOTICE UNDER SECTION 148 FOR THE ASSESSMENT YEAR 20 05-06 (PLACED AT PAGE 58 OF THE PAPER BOOK). 2.4 THE AO FRAMED THE ASSESSMENT UNDER SECTION 143( 3)/147 OF THE I.T. ACT, 1961 FOR THE ASSESSMENT YEAR 2004-05 ON 09.12.2009 WHERE IN HE DISALLOWED THE PROPORTIONATE EXPENSES UNDER SECTION 14A OF RS. U/S.14A RS.1018445/- FOR EARNING INCOME U/S. 10B AND RS.132715/- FOR EARNING INCOME U/S.10(35) AGGREGATING TO RS.1151160/-. SIMILARLY, THE A.O. PASSED ORDER U/S.143(3)/147 DT .09.12.2009 FOR ASSESSMENT YEAR 2005-06 DISALLOWING PROPORTIONATE E XPENSES U/S.14A OF RS.2630434/- FOR EARNING INCOME U/S. 10B AND RS.827 1/- FOR EARNING INCOME U/S.10(35) AGGREGATING TO RS.2638705/-. 3. ON APPEAL, IN THE IMPUGNED ORDER, THE LD. CIT(A) ANNULLED ASSESSMENTS FOR BOTH THE ASSESSMENT YEARS AND ON MERIT ALSO HE HELD THAT NO DISALLOWANCE UNDER SECTION 14A IS CALLED FOR. FOR BOTH THE ASSESSMENT YEARS, T HE LD. CIT(A) HAS GIVEN THE IDENTICAL FINDINGS EXCEPT VARIANCE IN AMOUNT. THEREFORE, THE REASONING GIVEN FOR THE ASSESSMENT YEAR 2004-05 IS REPRODUCED HEREUNDER: 4.2. I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE A. R. OF THE APPELLANT AND THE OBSERVATIONS OF THE ASSESSING OFFICER IN THE AS SESSMENT ORDER. BRIEFLY STATED THE CONTENTIONS OF THE LEARNED A. R. ARE AS FOLLOW. EXEMPTION U/S. 10B WAS ALLOWED AFTER EXCLUDING THE EXPENSES RELATED TO SUC H INCOME. THE SAID EXEMPTION WAS QUANTIFIED IN 4 ITA NO.3145 & 3146 OF 2010 ACCORDANCE WITH SEC. 10B(4). THEREFORE APPLYING THE PROVISIONS OF SEC. 14A RESULTS IN DUPLICATING THE EXERCISE AND IS NOT CALL ED FOR. I AM INCLINED TO AGREE WITH THESE CONTENTIONS. FURTHER IT IS SEEN THAT SIM ILAR ISSUE ROSE IN THE A. Y. 2003-04. MY PREDECESSOR VIDE THE ORDER DATED 20-09- 2006 IN APPEAL NO. CIT(A)-XI/79-3/2006-07, HELD AS UNDER :- 'WHILE COMPUTING THE DEDUCTION U/S. 10B THE A. O. H AS ALREADY REDUCED THE EXPENSES RELATING TO SUCH EXEMPTED INCOME. IN O THER WORDS THE ASSESSING OFFICER HIMSELF HAS - WORKED OUT THE BUSI NESS PROFIT AFTER CONSIDERING THE EXPENSE WHICH INCLUDES THE EXPENSES WHICH ARE ADDED BY THE A. O. HENCE, THESE EXPENSES ARE ALREADY ACCE PTED BY THE A. O. AND WORKED OUT THE BUSINESS PROFIT. THEREFORE, NO F URTHER DISALLOWANCE CAN BE MADE ON ACCOUNT OF EXPENSES PERTAINING TO TH E EXEMPTED INCOME. IN THESE CIRCUMSTANCES, I AM OF THE VIEW THAT THE A . O. IS NOT JUSTIFIED IN MAKING FURTHER DISALLOWANCE OF RS. 66,951/- BY APPL YING PROVISIONS OF SEC. 14A OF THE ACT. THEREFORE THE A. O. IS DIRECTE D TO DELETE THE ADDITION MADE BY HIM. 4.2.1. IN VIEW OF THE ABOVE DISCUSSION, THE DISALLOWANCE M ADE BY A. O. U/S. 14A W.R. TO INCOME EARNED U/S.10B OF RS.10,18,445/- IS DELETED. AS REGARDS THE DISALLOWANCE U/S.14A W.R.TO INCOME EARNED U/S. 10(3 5), IT IS SEEN THAT NO BORROWED MONEY IS INVESTED AND ACCORDINGLY NO INTER EST EXPENDITURE IS INCURRED. THE INVESTMENTS WERE OUT OF OWN FUNDS. T HEREFORE NO DISALLOWANCE IS CALLED FOR. DISALLOWANCE OF RS.1,32,715/- IS DELETE D. THESE GROUNDS OF APPEALS ARE ALLOWED. 4. AGGRIEVED WITH THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEALS BEFORE THE TRIBUNAL. 5. AT THE TIME OF HEARING BEFORE US, SHRI G.S.SOURY AWANSI, D.R. APPEARED ON BEHALF OF THE REVENUE AND RELYING ON THE REASONING GIVEN BY THE AO IN THE ASSESSMENT ORDER, CONTENDED THAT THE REOPENING WAS RIGHTLY DON E AND THE LD. CIT(A) IS NOT JUSTIFIED IN ANNULLING THE SAME. ON DISALLOWANCE MA DE UNDER SECTION 14A, THE LD. D.R. POINTED OUT THAT DISALLOWANCE WAS RIGHTLY DONE AND LD. CIT(A) IS NOT JUSTIFYING IN DELETING THE SAME FOR BOTH THE ASSESSMENT EYARS. 6. ON THE OTHER HAND, SHRI MUKESH M. PATEL, A.R., A PPEARING ON BEHALF OF THE ASSESSEE, VEHEMENTLY SUPPORTED THE ORDER OF THE LD. CIT(A). THE COUNSEL OF THE ASSESSEE SUBMITTED THAT ASSESSMENTS FOR BOTH THE AS SESSMENT YEARS WERE COMPLETED UNDER SECTION 143(3) AND THE REOPENING IS BAD IN LA W, KEEPING IN VIEW THE JUDGMENT BY 5 ITA NO.3145 & 3146 OF 2010 THE HONBLE SUPREME COURT IN THE CASE OF EASTERN NE WSPAPERS SOC. VS. CIT REPORTED IN 119 ITR 996(SC). THE LD. CIT(A) CALLED THE REMAN D REPORT AND THE AO, IN THE REMAND REPORT, SUBMITTED THAT THE REOPENING WAS DON E TO COMPLY WITH THE OBJECTION RAISED BY THE AUDIT PARTY. THE COUNSEL OF THE ASSES SEE EXPLAINED THAT MERELY ON THE BASIS OF THE AUDIT OBJECTION, REOPENING OF ASSESSME NT CANNOT BE DONE. IN SUPPORT OF THIS, HE RELIED ON THE JUDGMENT OF THE HONBLE GUJA RAT HIGH COURT IN THE CASE OF ADANI EXPORTS VS- DCIT(ASSESSMENT) REPORTED IN 240 ITR 224 (GUJ). THE COUNSEL OF THE ASSESSEE SUBMITTED THAT THE VIEW TAKEN BY THE LD. C IT(A) ANNULLING THE RE-ASSESSMENT FOR BOTH THE ASSESSMENT YEARS IS IN CONFORMITY WITH THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF ADANI EXPORTS ( SUPRA ). THEREFORE, THE VIEW TAKEN BY THE LD. CIT(A), IN ANNULLING THE REOPENING, BE UPHE LD. ON MERIT, FOR BOTH THE ASSESSMENT YEARS, THE COUNSEL OF THE ASSESSEE DREW OUR ATTENTION TO THE REASONING GIVEN BY THE LD. CIT(A) IN PARA 4.2, WHICH HAS BEEN REPRODUCED HEREINABOVE. FINALLY, FOR DELETING THE DISALLOWANCE OF RS.1,32,715/- AND RS. 8,271/- FOR THE ASSESSMENT YEAR 2004-05 AND 2005-06 RESPECTIVELY UNDER SECTION 14A IN RESPECT OF DIVIDEND INCOME, THE COUNSEL OF THE ASSESSEE DREW OUR ATTENTION TO T HE REASONING GIVEN BY THE LD. CIT(A) IN PARA 4.2.1 OF THE IMPUGNED ORDER, WHICH I S REPRODUCED HEREINABOVE, WHEREIN HE HELD THAT INVESTMENTS WERE OUT OF OWN FU NDS. TO FORTIFY THE VIEW TAKEN BY THE LD. CIT(A), THE COUNSEL OF THE ASSESSEE RELIED ON THE DECISION DATED 28/03/2011 OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT-V S- GUJARAT POWER CORPORATION LTD. IN TAX APPEAL NO.1587 OF 2009 WHEREIN IT WAS H ELD THAT UNLESS INVESTMENTS WERE MADE OUT OF BORROWED FUNDS FOR EARNING THE EXEMPT I NCOME, NO DISALLOWANCE OF INTEREST UNDER SECTION 14A CAN BE MADE. 7. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT THE REOPENING OF ASSESSMENT FOR BOTH THE ASSESSMENT YEARS WAS DONE ON THE BASIS OF AUDIT OBJ ECTION. NO INDEPENDENT REASONS WAS RECORDED BY THE A.O. THEREFORE, THE RATIO OF DE CISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF ADANI EXPORTS IS SQUARELY APPL ICABLE TO THE FACTS OF ASSESSEES CASE. WE ARE, THEREFORE, OF THE VIEW THAT THE LD. C IT(A) IS FULLY JUSTIFIED IN ANNULLING 6 ITA NO.3145 & 3146 OF 2010 THE ASSESSMENTS FOR BOTH THE ASSESSMENT YEARS. HENC E, GROUND NO.1 FOR BOTH THE ASSESSMENT YEARS IS REJECTED. 7.1 WITHOUT PREJUDICE TO ABOVE, WE ARE CONVINCED TH AT FOR BOTH THE ASSESSMENT YEARS, THE LD. CIT(A) HAS GIVEN THE COGENT REASON F OR HOLDING THAT NO DISALLOWANCE UNDER SECTION 14A CAN BE CALLED FOR BECAUSE EXEMPTI ON UNDER SECTION 10B WAS ALLOWED AFTER EXCLUDING THE EXPENSES RELATED TO SUC H INCOME. THE SAID EXEMPTION WAS QUANTIFIED, IN ACCORDANCE WITH SECTION 10B OF THE A CT. THEREFORE, APPLYING THE PROVISIONS OF SECTION 14A, RESULTING IN DUPLICATING THE EXERCISES, IS NOT CALLED FOR. WE, THEREFORE, INCLINE TO UPHOLD THE ORDER OF THE LD. C IT(A) IN THIS REGARD AND DISMISS THE GROUND NO.2 FOR BOTH THE ASSESSMENT YEARS. 7.2 FINALLY, WITH REGARD TO DELETION OF DISALLOWANC E UNDER SECTION 14A FOR EARNING INCOME EXEMPT UNDER SECTION 10(35), WE ARE CONVINCE D THAT NO DISALLOWANCE CAN BE MADE, UNLESS THE ASSESSEE HAS INVESTED OUT OF BORRO WED FUNDS FOR EARNING EXEMPT INCOME. SINCE, IN THIS CASE, INVESTMENTS WERE MADE OUT OF OWN FUNDS, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. ON THIS G ROUND, THE GROUND NO.3 FOR BOTH THE ASSESSMENT YEARS IS ALSO REJECTED. 8. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE A RE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 10.06.2011 SD/- SD/- (A.N.PAHUJA) (T.K.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 10/06/2011 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE 2) THE DEPARTMENT 3) CIT(A) CONCERNED 4) CIT CONCERNED 5) D.R., ITAT, AHMEDABAD TRUE COPY BY ORDER DEPUTY REGISTRAR, ITAT, AHMEDABAD TALUKDAR/SR.P.S.