Masibus Process Instruments Pvt. Ltd., Gandhinagar V. The ACIT., GNR Circle, Gandhinagar

ITA 551/AHD/2005

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9062 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 06-08-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 21-02-2005
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P M SHUKLA
• Assessee Lawyers: S N DIVETIA
• Keywords: Fair market value; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE SHRI P.K.BANSAL, ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.551 & 886/AHD/2005 ASSESSMENT YEAR:2001-02 DATE OF HEARING:6.8.09 DRAFTED:7.8.09 MASIBUS PROCESS INSTRUMENTS PVT. LTD., B/30 GIDC ELECTRONIC ZONE, SECTOR-25, GANDHINAGAR PAN NO.AAACM9906A ASSTT. COMMISSIONER OF INCOME-TAX (OSD), GANDHINAGAR V/S . V/S . ACIT, GANDHINAGAR, CIRCLE, GANDHINAGAR MASIBUS PROCESS INSTRUMENTS (P) LTD., (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI S.N.DIVETIA, AR REVENUE BY:- SHRI P.M. SHUKLA, SR. DR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THESE CROSS APPEALS ONE BY THE ASSESSEE AND ANOT HER BY THE REVENUE, ARE ARISING OUT OF THE ORDERS OF COMMISSIONER OF INCOME -TAX (APPEALS) GANDHINAGAR, AHMEDABAD IN APPEAL NO. CIT(A)/GNR/65/2004-05 DATED 30-11-2004. THE ASSESSMENT WAS FRAMED BY THE ACIT GANDHINAGAR CIRCL E, GANDHINAGAR U/S.143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO A S THE ACT) FOR THE ASSESSMENT YEAR 2001-02. FIRST WE WILL TAKE UP ASSESSEES APPEAL IN ITA NO.5 51/AHD/2005. 2. THE FIRST ISSUE IN THIS APPEAL OF THE ASSESSEE I S AGAINST THE ORDER OF CIT(A) IN CONFIRMING THE DISALLOWANCE OF FOREIGN TRAVEL EXPEN SES. FOR THIS, THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE GROUND:- ITA NO.551 & 886/AHD/2005 A.Y. 2001-02 MASIBUS PROCESS INST.P. LTD. V. ACIT GNR CIR. PAGE 2 2..1 THE LD. CIT(A) HAS ERRED IN LAW AND OR ON FA CTS IN CONFIRMING THE DISALLOWANCE OF FOREIGN TRAVEL EXPENSES OF RS.7,63, 415/-.. 2.2 THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) OUGHT NOT TO HAVE CONFIRMED THE DISALLOWANCE OF FOREIGN TRAVE L EXPENSES OF RS.7,63,415/-. 2.3 THE LD. CIT(A) HAS ERRED IN LAW AND OR ON FACTS IN HOLDING THAT THE FOREIGN TRAVEL EXPENSES RELATED TO AN ALTOGETHER DIFFERENT VENTURE OF FOREIGN AGENCY BUSINESS IN RESPECT OF WHICH NO BUSINESS HAD COMMEN CED DURING THE YEAR UNDER APPEAL. THE LD. CIT(A) OUGHT TO HAVE APPRECIA TED THAT THE FOREIGN TRAVEL EXPENSES PERTAIN TO THE SAME BUSINESS WHICH WAS BEI NG CARRIED ON BY THE APPELLANT AND IT WAS NOT A NEW BUSINESS. 3. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT THE ASSESSING OFFICER MADE THE DISALLOWANCE IN ACCORDAN CE WITH THE OBSERVATIONS IN PARA-3 OF THE ASSESSMENT ORDER AND OBSERVED THAT TH E ASSESSEE HAD CLAIMED DEDUCTION FOR FOREIGN TRAVEL EXPENSES OF RS.7,94,95 3/- AGAINST GROSS COMMISSION INCOME OF RS.10,03,011/-. THE AO DID NOT FIND ANY MERIT IN THE CLAIM OF THE ASSESSEE THAT THESE EXPENSES WERE PERTAINING TO TEC HNICAL EXECUTIVE DIRECTOR OF THE ASSESSEE-COMPANY WERE ALLOWABLE AS THEY WERE INCUR RED IN CONNECTION WITH FOREIGN AGENCY BUSINESS OF M/S. ROVSING DYNAMICS A/S. DENMA RK, EVEN THOUGH NO BUSINESS WAS GENERATED DURING THE RELEVANT PREVIOUS YEAR FRO M THE SAID PRINCIPAL. THE AO OBSERVED THAT AS PER ASSESSEES OWN ADMISSION THERE WAS NO BUSINESS PROCURED BY THE COMPANY FOR THE PRINCIPAL M/S. ROVSING DYNAMICS A/S. DENMARK AND THEREFORE THE AGREEMENT FOR AGENCY HAS NOT BEEN FOLLOWED IN L ETTER AND SPIRIT. THE AO RELIED ON THE DECISION OF APEX COURT IN THE CASE OF LACHMINARAYAN MADAN LAL V. CIT (1972) 86 ITR 439 (SC), WHEREIN IT WAS HELD THAT THE AO HA D THE POWER TO GO BEHIND THE AGREEMENT. THE ASSESSEE FAILED TO PROVIDE ANY DETAI LS OF BUSINESS PROCURED IN SUBSEQUENT YEAR ALSO AND SPECIFIC EFFORTS MADE DURI NG THE PREVIOUS YEAR TO SELL THE PRODUCTS OF THE PRINCIPAL. HE FURTHER REFERRED TO T HE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF ASSAM ROLLER FLOUR MILLS V. CIT (1997) 227 ITR 43 (RAJ), WHEREIN IT WAS HELD THAT SUBSEQUENT EVENTS MAY ALSO HAVE A BEARING ON THE ISSUE OF ALLOWABILITY OF EXPENDITURE. ASSESSING OFFICER THUS HELD THAT THE DEDUCTION COULD BE PERMITTED IN RESPECT OF ONLY THOSE EXPENSES, WHICH WERE INCURRED FOR EARNING THE INCOME. AS NO BUSINESS WAS PROCURED BY THE ASSESSEE IN THE RELEVANT PREVIOUS YEAR AND SUBSEQUENT YEAR AND NO EVIDENCE WAS GIVEN REGAR DING THE EFFORTS MADE TO ITA NO.551 & 886/AHD/2005 A.Y. 2001-02 MASIBUS PROCESS INST.P. LTD. V. ACIT GNR CIR. PAGE 3 LAUNCH THE PRODUCTS OF THE PRINCIPAL COMPANY IN IND IA, THE AO HELD THAT THE ARRANGEMENT / UNDERSTANDING BETWEEN THE ASSESSEE AN D M/S. ROVSING DYNAMICS A/S, DENMARK AS DEFUNCT AND REDUNDANT AND HE DISALL OWED THE FOREIGN TRAVEL EXPENSES TOTALING TO RS.7,63,415/-. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A) AND CIT(A) ALSO CONFIRMED THE ACTION OF THE ASSESSING OFFICER VIDE PARA-3.5 OF HIS APPELLATE ORDER AS UNDER:- 3.5 I HAVE CAREFULLY CONSIDERED THE RELEVANT FACT S AND PROVISIONS OF LAW WITH REGARD TO THE ISSUE INVOLVED. IT IS AN ADMITTED PO SITION THAT THE FOREIGN TRAVEL EXPENDITURE OF RS.9,94,953/- CLAIMED BY THE APPELLA NT HAS NO RELEVANCE TO THE INCOME EARNED DURING THE PREVIOUS YEAR BY THE APPEL LANT AGAINST WHICH THE DEDUCTION HAS BEEN CLAIMED. THE EXPENDITURE IS RELA TING TO AN ALTOGETHER DIFFERENT VENTURE OF FOREIGN AGENCY BUSINESS OF M/S . ROVSING DYNAMICS A/S, DENMARK, IN RESPECT OF WHICH NO BUSINESS IS DONE DU RING THE RELEVANT PREVIOUS YEAR. THE ACTUAL AGENCY BUSINESS WAS YET T O COMMENCE AND THE EXPENDITURE INCURRED BY THE APPELLANT IS BASICALLY IN THE NATURE OF PREOPERATIVE EXPENSES OF A PROPOSED NEW VENTURE AND SUCH EXPENSE S WERE NOT ALLOWABLE AS DEDUCTION. THIS SETTLED POSITION OF LAW HAS BEEN DULY ESTABLISHED THROUGH THE FOLLOWING JUDICIAL PRONOUNCEMENTS: 1) VAZIR SULTAN TOBACCO CO. VS. CIT (1987) 35 TAXMA N 406 (AP) 2) MODI INDUSTRIES LTD. VS. CIT (1977) 110 ITR 855 (ALL) 3) HYDERABAD ALLWYN METAL WORKS LTD. VS. CIT (1995) 98 ITR 555 (AP) 4) CIT VS. FLOUR & FOOD LTD. (1988) 170 ITR 469 (MP ) 5) AMBLCA MILLS LTD. VS. CIT (1964) 54 ITR 167 (GUJ ) 6) INDIAN OXYGEN LTD. VS. CIT (1987) 164 ITR 466 (C AL) I THUS FIND THAT THERE WAS HARDLY ANY MERIT IN THE APPELLANTS CLAIM OF SEEKING DEDUCTION OF FOREIGN TRAVEL EXPENSES, WHICH WERE NO T RETAINING TO INCOME EARNED BY THE APPELLANT FROM THE BUSINESS CARRIED O N BY THE APPELLANT DURING THE RELEVANT PREVIOUS YEAR. THE ASSESSING OFFICER W AS THUS FULLY JUSTIFIED IN DISALLOWING THE CLAIM OF THE APPELLANT. THE CORRESP ONDING DISALLOWANCE OF RS.7,63,415/- MADE BY THE ASSESSING OFFICER IS ACCO RDINGLY CONFIRMED. THIS GROUND OF APPEAL IS, THEREFORE, TREATED AS REJECTED . AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE US. 4. BEFORE US LD. COUNSEL FOR THE ASSESSEE, SHRI S .N. DIVETIA STATED THAT THE MAIN CONTENTION OF THE ASSESSING OFFICER WAS THAT THE AS SESSEE HAS NOT PROVIDED ANY DOCUMENTARY EVIDENCE OR PROVE TO SUGGEST THAT ANY E FFORT WAS MADE TO SALE THE PRODUCT OF THE FOREIGN COMPANY BUT DURING THE COURS E OF APPELLATE PROCEEDINGS BEFORE THE CIT(A), THE ASSESSEE NOT ONLY FILED WRIT TEN SUBMISSIONS FROM TIME TO TIME BUT ALSO VOLUMINOUS EVIDENCE TO PROVE THAT THE SAID EXPENSES WERE INCURRED FOR THE PURPOSE OF BUSINESS. IT WAS FURTHER CONTENDED BY T HE LD. COUNSEL THAT THE ASSESSEE ITA NO.551 & 886/AHD/2005 A.Y. 2001-02 MASIBUS PROCESS INST.P. LTD. V. ACIT GNR CIR. PAGE 4 FILED COPY OF REPORTS SENT TO THE FOREIGN COMPANY F ROM TIME TO TIME INTIMATING THE PROGRESS OF THE EFFORTS MADE WITH THE FOREIGN COMPA NIES. HE STATED THAT CIT(A) WRONGLY DISMISSED THIS ISSUE STATING THAT THE SAID EXPENDITURE RELATED TO AN ALTOGETHER DIFFERENCE VENTURE IN RESPECT OF WHICH N O BUSINESS WAS DONE DURING THE YEAR UNDER CONSIDERATION. ACCORDINGLY, THE CIT(A) H AS NOT ALLOWED THE EXPENSES BY HOLDING THAT IT WAS FOR A BUSINESS WHICH WAS YET TO COMMENCE. LD. COUNSEL FOR THE ASSESSEE DRAWN OUR ATTENTION TO PAGES-21 TO 99 OF ASSESSEES PAPER BOOK LETTER EXCHANGED FOR MARKETING THE PRODUCT OF ROVSING. IN VIEW OF THIS ARGUMENT, LD. COUNSEL URGED THE BENCH TO ALLOW THE CLAIM OF THE A SSESSEE. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 5. AFTER HEARING THE RIVAL CONTENTIONS AND GOING TH ROUGH THE CASE RECORDS AND THE FACTS OF THE CASE, WE FIND THAT THE ASSESSEE HAS MA DE SUBMISSIONS AND FILED LITERATURE RELATING TO THE PRODUCT OF ROVSING M/S . ROVSING DYNAMICS A/S. DENMARK REGARDING TRAINING PROGRAMME THE ASSESSEE COULD NOT SUBMIT ANY DETAILS THAT ANY NEGOTIATIONS TOOK PLACE WITH THE SAID COMPANY OR AN Y EFFORTS WERE MADE TO SALE THE PRODUCT TO THE FOREIGN COMPANY. EVEN BEFORE THE CIT (A), THE ASSESSEE HAS NOT ADDUCED ANYTHING. WE FIND THAT THE ASSESSEE HAS CL AIMED FOREIGN TRAVELING EXPENSES, WHICH IS NO RELEVANCE TO THE INCOME EARNE D DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE WANTED TO ENTER INTO NE W CONCERNING OF THE BUSINESS I.E. ALTOGETHER DIFFERENT VENTURE OF FOREIGN AGENCY BUSINESS, IN RESPECT OF WHICH NO BUSINESS SO DONE DURING THE RELEVANT YEAR. WE FIND THAT EVEN NOW BEFORE US THE ASSESSEE COULD NOT PRODUCE ANY EVIDENCE THAT THE BU SINESS WAS DONE DURING THE RELEVANT PREVIOUS YEAR. THE CONCURRENT FINDINGS OF THE LOWER AUTHORITIES ARE THAT ACTUALLY AGENCY BUSINESS HAS NOT COMMENCED AND THE EXPENDITURE INCURRED BY THE ASSESSEE IS BASICALLY IN THE NATURE OF PRE-OPERATIV E EXPENSES FOR PROPOSED NEW VENTURE, ACCORDINGLY THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF FOREIGN TRAVEL EXPENSES ARE NOT RELATING INCOME EARNED FROM THE BU SINESS CARRIED ON DURING THE RELEVANT PREVIOUS YEAR. ACCORDINGLY, WE ARE IN FUL L AGREEMENT WITH THE FINDINGS OF THE LOWER AUTHORITIES AND WE CONFIRM THE SAME. THIS IS SUE OF THE ASSESSEES APPEAL IS DISMISSED. 6. THE SECOND ISSUE IN THIS APPEAL OF THE ASSESSEE IS AS REGARDS TO THE ORDER OF CIT(A) IN CONFIRMING THE DISALLOWANCE OF INTEREST P AYMENT U/S. 40A(2)(B) OF THE ACT, ITA NO.551 & 886/AHD/2005 A.Y. 2001-02 MASIBUS PROCESS INST.P. LTD. V. ACIT GNR CIR. PAGE 5 BY HOLDING THE SAME AS EXCESSIVE PAYMENT. FOR THIS , THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE GROUND:- 3.1 THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS I N CONFIRMING THE DISALLOWANCE OF INTEREST PAYMENT OF RS.67,367/- U/S .40A(2)(B) AS EXCESSIVE PAYMENT. 3.2 THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) OUGHT NOT TO HAVE UPHELD THE DISALLOWANCE OF INTEREST PAYMENT OF RS.67,376/-. 7. THE BRIEF FACTS ARE THAT THE ASSESSING OFFICER M ADE THE DISALLOWANCE IN ACCORDANCE WITH THE OBSERVATIONS IN PARA 6 AND 7 OF THE ASSESSMENT ORDER. THE AO OBSERVED THAT THE ASSESSEE HAD PAID INTEREST OF RS. 6,73,779/- @ 20% TO THE PERSONS SPECIFIED U/S.40A(2)(B) OF THE ACT AND DID NOT FIND ANY MERIT IN THE CLAIM OF THE ASSESSEE THAT INTEREST WAS PAID AT A HIGHER RATE FO R THE REASON THAT THEY WERE PIONEER DEPOSITORS OF THE COMPANY AND THAT THERE WAS ORAL A SSURANCE FROM THESE PERSONS TO RETAIN THE FUNDS WITH THE COMPANY FOR CERTAIN PERIO D. THE AO TREATED THIS EXPLANATION AS GENERAL, VAGUE AND UNSATISFACTORY AN D ACCORDINGLY DISALLOWED THE EXCESS INTEREST PAYMENT OF RS.67,376/-. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A) AND CIT(A) ALSO CONFIRMED THE ACTION OF THE ASSESSING OFFICER VIDE PARA-5.4 OF HIS APPELLATE ORDER AS UNDER:- 5.4 I HAVE CAREFULLY CONSIDERED THE RELEVANT FACTS AND PROVISIONS OF LAW WITH REGARD TO THE ISSUE INVOLVED. IT AS AN ADMITTED POS ITION THAT THE APPELLANT HAD PAID INTEREST TO THE PERSONS SPECIFIED U/S.40A(2)(B ) AT A RATE HIGHER THAN THE PREVALENT MARKET RATE OF INTEREST. THE CLAIM OF THE APPELLANT THAT THE HIGHER EXPENDITURE WAS OUT OF COMMERCIAL EXPEDIENCY AND ON ACCOUNT OF LONG PERIOD OF DEPOSITS, IS NOT SUBSTANTIATED BY ANY DOCUMENT. THE CONTINUATION OF DEPOSITS FROM YEAR TO YEAR IS OBVIOUS FROM THE FACT THAT THEY WERE BEING PAID INTEREST AT A HIGHER RATE THAN WHAT WOULD BE AVAILA BLE TO THEM FROM A DEPOSIT IN A BANK AND ALSO FROM THE FACT THAT THERE WAS ENO UGH SECURITY TO THESE DEPOSITORS AS THE MONEY WAS LYING WITH THE APPELLAN T-COMPANY WHEREIN THEIR RELATIVES WERE AT THE HELM OF AFFAIRS. THERE IS NO DOCUMENTS THAT SUCH INTEREST RATE WAS AGREED UPON AND THE DEPOSITS WERE MADE FOR AN ASSURED LONG PERIOD, SAY 5 TO 10 YEAS. THERE WAS FALL IN THE MAR KET RATE OF INTEREST IN THE PREVIOUS YEAR IN COMPARISON TO EARLIER YEARS AND TH EREFORE THE APPELLANT ALSO OUGHT TO HAVE REDUCED THE RATE OF INTEREST. AS RATE OF INTEREST PAID TO THESE SPECIFIC PERSONS WAS HIGHER THAN THE MARKET RATE, T HE ASSESSING OFFICER HAS RIGHTLY INVOKED PROVISIONS OF SECTION 40A(2)(B) TO DISALLOW PAYMENT IN EXCESS OF FAIR MARKET VALUE. I, THEREFORE, FIND THAT THE C ONSEQUENTIAL DISALLOWANCE OF RS.67,376/- MADE BY THE ASSESSING OFFICER WAS IN AC CORDANCE WITH THE PROVISIONS OF LAW AND WAS FAIR AND JUST CONSIDERING THE RELEVANT FACTS. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS ACCOR DINGLY CONFIRMED. THIS GROUND OF APPEAL IS, THEREFORE TREATED AS REJECTED. ITA NO.551 & 886/AHD/2005 A.Y. 2001-02 MASIBUS PROCESS INST.P. LTD. V. ACIT GNR CIR. PAGE 6 AGGRIEVED, ASSESSEE CAME IN APPEAL BEFORE US. 8. WE FIND THAT ALL SIX PARTIES WERE PAID INTEREST @ 20% AS PER THE LIST ENCLOSED AND THE REASONS FOR PAYING INTEREST @ 20% WAS THE COMMERCIAL EXPEDIENCE IN AS MUCH AS THE SAID DEPOSITORS HAD ASSURED TO RETAIN F UNDS FOR A LONGER PERIOD AND STAND BY EVEN DURING INITIAL OR DIFFICULT PERIOD. W E ARE OF THE VIEW THAT THE RATE OF INTEREST WOULD COMMENSURATE WITH THE PERIOD OF LOAN OR DEPOSIT I.E. LONGER THE PERIOD HIGHER THE INTEREST AND VICE VERSA. NOW IN THE PRE SENT CASE 4 OUT OF 6 DEPOSITORS HAVE ADVANCED MONEY WAY BACK IN FINANCIAL YEAR 1993 -94 AND REMAINING TWO FROM FINANCIAL YEAR 1996-97. THEREFORE, CONSIDERING THE DURATION OF THE ADVANCE, THE RATE OF INTEREST AT 20% CANNOT SAID TO BE EXCESSIVE. MOR EOVER, THE AO HAS FAILED TO APPRECIATE THAT WHEN THE RATE OF INTEREST OF 20% WA S MUTUALLY AGREED UPON AT THE TIME OF ADVANCE IN FINANCIAL YEAR 1993-94 OR 1996-9 7, IT WAS A REASONABLE RATE IN THE MONEY MARKET AND THE SAME CANNOT BE CHANGED UNLESS FRESH BORROWINGS ARE MADE OR A NEW AGREEMENT IS MADE. WE ARE OF THE FURTHER V IEW, THAT THE INTEREST RATE OF 20% CANNOT BE SAID TO BE EXCESSIVE CONSIDERATION THE FA CT THAT NO SECURITY OR OTHER PAPER WORK LIKE BORROWING FROM FINANCIAL INSTITUTIONS IS INVOLVED. ACCORDINGLY, THIS ISSUE OF THE ASSESSEES APPEAL IS ALLOWED. NOW COMING TO REVENUES APPEAL IN ITA NO.886/AHD/20 05. 9. THE ONLY ISSUE IN THIS APPEAL OF THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITION OF RS.5,52,532/- MADE BY THE ASSESSING OFFICER ON ACCOUNT THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT. FOR THIS, THE REVENUE HAS RAISED THE FOLLOWING EFFECTIVE GROUND:- . THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE ADDITION OF RS.5,52,532/- MADE BY THE ASSESSING OFFICER AS THE AMOUNT NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE ACT. 10. THE BRIEF FACTS LEADING TO THIS ISSUE ARE THAT THE ASSESSING OFFICER MADE THE DISALLOWANCE IN ACCORDANCE WITH THE OBSERVATIONS IN PARA-5 OF THE ASSESSMENT ORDER. THE AO OBSERVED THAT THE ASSESSEE WAS CLAIMING DEDU CTION U/S.10A OF THE ACT ON EXPORTS TO ITS SEPARATE SOFTWARE UNIT AND THAT MOST OF THE EXPORTS WERE MADE BY THE ASSESSEE TO MASIBUS, USA WHICH WAS A PROPRIETARY CO NCERN OF A COUSIN OF MANAGING DIRECTOR OF THE ASSESSEE-COMPANY AND ACCORDINGLY EX AMINED FAIR MARKET VALUE OF THE EXPORTS IN ACCORDANCE WITH THE PROVISIONS OF SECTIO N 10A OF THE ACT AND OBSERVED THAT THE NET PROFIT DECLARED BY THE ASSESSEE FROM E XPORT ACTIVITIES DURING THE RELEVANT ITA NO.551 & 886/AHD/2005 A.Y. 2001-02 MASIBUS PROCESS INST.P. LTD. V. ACIT GNR CIR. PAGE 7 PREVIOUS YEAR WAS SHOWN AT RS.7,63,623/- ON A TURNO VER OF RS.22,10,129/- GIVING A NET PROFIT RATE OF 34.55% AND THIS PROFIT RATE WAS TREATED BY THE AO AS ABNORMALLY HIGH IN COMPARISON TO PRECEDING YEARS NET PROFIT R ATE OF 2.5%. THE AO THUS OBSERVED THAT IN A NORMAL BUSINESS, AN ABNORMAL JUMP FROM 2. 5% TO 35.54% WAS NOT POSSIBLE AND THAT ASSESSEE COULD NOT EXPLAIN THIS ASPECT SAT ISFACTORILY. HE ACCORDINGLY HELD THAT THE ASSESSEE HAD INFLATED THE PROFIT IN THIS S OFTWARE UNIT AS THE PROFITS WERE EXEMPT U/S.10A. THE AO ACCORDINGLY ESTIMATE NET PRO FIT @ 9.5% WHICH WORKS OUT TO RS.2,11,067/- AND ALLOWED DEDUCTION U/S.10A OF THE ACT ONLY TO THAT EXTENT AND THE BALANCE AMOUNT OF RS.5,52,532/- WAS ACCORDINGLY NOT TREATED AS ELIGIBLE FOR EXEMPTION U/S.10A OF THE ACT AND WAS ACCORDINGLY BR OUGHT TO TAX BY THE AO. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE CIT (A). THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY GIVING FOLLOWING FINDING I N PARA-4.4 OF HIS APPELLATE ORDER:- 4.4 I HAVE CAREFULLY CONSIDERED THE RELEVANT FAC TS AND PROVISIONS OF LAW WITH REGARD TO THE ISSUE INVOLVED. I FIND THAT DURING TH E ASSESSMENT PROCEEDINGS THE APPELLANT DID FURNISH AN EXPLANATION IN THIS RE GARD BUT THE ASSESSING OFFICER HAS NOT DISCUSSED THE SAME IN THE ASSESSMEN T ORDER. IN THE BUSINESS OF INFORMATION TECHNOLOGY THERE CANNOT BE ANY UNIFO RM PROFIT RATE AND THE RATE OF PROFIT MAY SUBSTANTIALLY VARY AS HAS BEEN RIGHTL Y POINTED OUT BY THE LD. COUNSEL FOR THE APPELLANT. ALL SALES MADE BY THE AP PELLANT HAVE BEEN ROUTED THROUGH STPI AND NO CASE HAS BEEN MADE BY THE ASSES SING OFFICER THAT THERE WAS ANY SPECIFIC OVER-INVOICING OR BOGUS INVOICE RA ISED BY THE APPELLANT OR THERE WAS ANY CASE OF THE APPELLANT TO BUY A FOREIG N EXCHANGE OUT OF UNACCOUNTED CASH. THE ESTIMATION OF NET PROFIT RATE OF 9.55% ADOPTED BY THE ASSESSING OFFICER HAS NO BASIS. THE APPELLANT HAS C LEARLY BROUGHT ON RECORD THAT THE BASIS REASON FOR DIFFERENCE IN NET PROFIT WAS ON ACCOUNT OF A SINGLE ITEM OF EXPENDITURE OF RS.6,10,895/- UNDER THE HEAD CONSULTANCY EXPENSES, WHICH WERE INCURRED IN THE PRECEDING YEAR IN COMPAR ISON TO ONLY AN EXPENDITURE OF RS.27,500/- CLAIMED UNDER THIS HEAD IN THE PREVIOUS YEAR. THE ASSESSING OFFICER HAS, IN FACT, NOT INVESTIGATED TH IS ISSUE AND AS SUCH THERE IS NO MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFFI CER TO DOUBT THE GENUINENESS AND NATURE OF THE INCOME EARNED BY THE APPELLANT. THE ADDITION MADE BY THE ASSESSING OFFICER IS PURELY A GUESS WOR K AND IS BASED ON IMAGINATIVE PRESUMPTIONS AND WAS THUS NOT SUSTAINAB LE IN LAW. THE CONSEQUENTIAL ADDITION OF RS.5,52,532/- MADE BY THE ASSESSING OFFICER IS THUS NOT JUSTIFIED AND THEREFORE IS DELETED. THE ASSESSI NG OFFICER SHALL ACCORDINGLY GRANT CONSEQUENTIAL RELIEF TO THE APPELLANT. THIS GROUND OF APPEAL IS, THEREFORE, TREATED AS ALLOWED. 11. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, W E FIND THAT THE EXPORT PROFIT CLAIMED U/S.10A OF THE ACT PERTAIN TO THE SOFTWARE UNDERTAKING WHICH WAS ESTABLISHED IN THE SOFTWARE TECHNOLOGY PARK AT GANDHINAGAR AND THE SOFTWARE DEVELOPMENT AREA IS A CUSTOM BOUNDED AREA, WHERE NO OTHER ACTIVITY C AN BE CARRIED OUT. MOREOVER, ITA NO.551 & 886/AHD/2005 A.Y. 2001-02 MASIBUS PROCESS INST.P. LTD. V. ACIT GNR CIR. PAGE 8 WHEN THE PRODUCT DEALT BY THE ASSESSEE IS DIFFERENT FROM YEAR-TO-YEAR, WHICH IS MORE LIKELY IN THE I.T. INDUSTRY, THERE CANNOT BE ANY CO MPARISON OF PROFIT RATE. WE FIND THAT ALL THE SALES MADE BY THE ASSESSEE WAS ROUTED THROU GH STPI AND EVEN IN NECESSARY CERTIFICATE WAS OBTAINED FROM STPI BY FILING NECESS ARY FORM AND PROVIDING DETAILS OF EXPORT CONTRACT INVOICES ETC., THE ASSESSEE NOW BE FORE US ALSO FILED SPECIMEN COPIES OF SUCH LETTERS, CERTIFICATES, FORMS, INVOIC ES, AS FILED IN ASSESSEES PAPER BOOK AT PAGES-67 TO 113 . ACCORDINGLY, WE ARE OF THE VIEW THAT THE SALES E FFECTED BY THE ASSESSEE FROM STPI ARE UNDER THE DIRECT CONTROL OF GOVERNMENT AGENCY, I.E. MINISTRY OF INFORMATION TECHNOLOGY, GOVT. OF INDIA. IN VIEW OF THE ABOVE FACTS AND PARTICULARLY THE FACT THAT THE REVENUE HAS NOT BROUGHT ANYTHING ON RECORD THAT THE BOOKS OF ACCOUNT ARE NOT TRUE AND THE BOOK RESULTS CANNOT BE ACCEPTED, WE ARE OF THE VIEW THAT THE ASSESSEE CANNOT INFLATE THE PROFIT. ACCOR DINGLY, WE UPHELD THE FINDINGS OF CIT(A) AND THIS ISSUE OF REVENUES APPEAL IS DISMIS SED. 11. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED AND THAT OF REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 11/09/2009 SD/- SD/- (P.K.BANSAL) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED :11/09/2009 *DKP COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- GNR 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD