DCIT, CHENNAI V. Atlas Systems Private Ltd., CHENNAI

ITA 665/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8203 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 18-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: K HEMALATHA
• Section: 143(3); 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . . . , . , % BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.665/MDS/2016 ( / ASSESSMENT YEAR: 2010-11) THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-I(1), CHENNAI-600 034. VS M/S. ATLAS SYSTEMS PVT.LTD., 102, NSIC STP, B24,EKKADUTHANGAL, GUINDY INDL.ESTATE , CHENNAI - 600 032. PAN: AAECA2777M ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. SHIVA SRINIVAS, JCIT /RESPONDENT BY : MS. K.HEMALATHA, C.A. /DATE OF HEARING : 3 RD AUGUST,2016 /DATE OF PRONOUNCEMENT : 21 ST OCTOBER, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL IS FILED BY THE REVENUE AGGRIEVED BY T HE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS)- I, CHENNAI DATED 29.12.2015 FOR THE ASSESSMENT YEAR 2011- 12 (SIC) 2010-11 IN ITA NO.134/CIT(A)-1/2014-15 PAS SED UNDER SECTION 143(3) R.W.S. 92CA & 250(6) OF THE AC T. 2. THE REVENUE HAS RAISED SEVERAL GROUNDS IN ITS AP PEAL, HOWEVER, THE CRUXES OF THE ISSUES ARE AS FOLLOWS:- (I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DELETING THE DISALLOWANCE OF DEDUCTION UNDER SECTION 10A OF THE ACT IN 2 ITA NO.665/MDS/2016 REGARD TO PROVISION MADE FOR GRATUITY AMOUNTING TO RS.22,11,368/- IN VIOLATION OF SECTION 40A(7) OF THE ACT AND PENALTY PAID FOR RS.3,303/- UNDER EXPLANATION-1 TO SECTION 37 OF THE ACT. (II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DIRECTING THE LEARNED ASSESSING OFFICER TO EXCLUDE TELECOMMUNICATION EXPENSES FROM TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE SERVICE S FILED ITS RETURN OF INCOME ON 01.10.2010 FOR THE ASSESSME NT YEAR 2010-11 ADMITTING INCOME OF RS.7,27,110/- AFTER CLA IMING DEDUCTION UNDER SECTION 10A OF THE ACT. THE CASE WA S SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143( 2) OF THE ACT WAS ISSUED TO THE ASSESSEE ON 24.08.2011. THERE AFTER THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) R .W.S. 92CA OF THE ACT ON 28.03.2014, WHEREIN HE EXCLUDED THE PROVISION MADE FOR GRATUITY OF RS.22,11,368/- AND P ENALTY PAID AMOUNTING TO RS.3,303/- AGGREGATING TO RS.22,1 4,671/- FROM GRANTING DEDUCTION UNDER SECTION 10A OF THE A CT, AND FURTHER EXCLUDED THE TELECOMMUNICATION EXPENSES ONL Y FROM THE EXPORT TURNOVER WHILE COMPUTING THE DEDUCTION U NDER SECTION 10A OF THE ACT. ON APPEAL THE LD.CIT DELET ED THE 3 ITA NO.665/MDS/2016 ADDITION ARISING OUT OF THE ORDER OF THE LD.A.O AGG RIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE US. GROUND NO.1:- DISALLOWANCE OF DEDUCTION UNDER SECTI ON 10A OF THE ACT WITH RESPECT TO PROVISION MADE FOR GRATU ITY IN VIOLATION OF SECTION 40A(7) OF THE ACT AND PENALTY PAID UNDER EXPLANATION-1 TO SECTION 37 OF THE ACT AGGREGATING TO RS.22,14,671/- 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LEARNED ASSESSING OFFICER THAT THE ASSESSEE HAD CLAIMED AN AMOUNT OF RS.2,39,20,217/- AS DEDUCT ION UNDER SECTION 10A OF THE ACT BEING THE PROFITS & GA INS DERIVED BY THE UNDERTAKING FROM EXPORT OF COMPUTER SOFTWARE WHICH ALSO INCLUDED THE INFLATED PROFIT ARRIVED AT BY DI SALLOWING THE PROVISION MADE FOR GRATUITY FOR RS.22,11,368/- IN V IOLATION OF SECTION 40A(7) OF THE ACT AND PENALTY PAID UNDER EX PLANATION- 1 TO SECTION 37 OF THE ACT. THE LEARNED ASSESSING OFFICER WAS OF THE VIEW THAT SINCE THESE EXPENDITURES ARE EXPRE SSLY DISALLOWED BECAUSE OF THE DEEMING FICTIONS CREATED BY THE PENAL PROVISIONS OF THE INCOME TAX ACT DUE TO INFRI NGEMENT OF LAW, EXEMPTION UNDER SECTION 10A OF THE ACT CANNOT BE AVAILED BY THE ASSESSEE ON THE INFLATED PORTION OF PROFIT 4 ITA NO.665/MDS/2016 ARISING OUT OF THE SAME. THE LEARNED ASSESSING OFF ICER FURTHER POINTED OUT THE WELL SETTLED PRINCIPLE THAT THE DEEMING FICTION CREATED UNDER THE INCOME TAX ACT [ IN THE P RESENT CASE DISALLOWANCE U/S 40A(7) AND EXPLANATION-1TO SECTION 37 OF THE ACT] CANNOT BE IMPORTED INTO ANOTHER PROVISION OF THE ACT WHICH HAS A FICTION [IN THE PRESENT CASE, FOR THE P URPOSE OF COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT WH ICH IS A BENEFICIAL PROVISION WITH FICTION] BY RELYING ON TH E DECISION OF THE AHMEDABAD BENCHES OF THE TRIBUNAL IN THE CASE OF DCIT, CIRCLE -2(2) VS. RAMESH BHAI C.PRAJAPATHI REPORTED IN 140 ITD 488. ACCORDINGLY, HE HELD THAT THE ABOVE DISALL OWANCES OF RS.22,14,671/- ARE TO BE EXCLUDED WHILE COMPUTI NG THE ELIGIBLE PROFIT/DEDUCTION UNDER SECTION 10A OF THE ACT. THUS, THE CLAIM OF DEDUCTION OF RS.2,39,20,217/- WAS REST RICTED TO RS.2,17,05,546/- (RS.2,39,20,217 RS.22,14,671). 5. AGGRIEVED BY THE ORDER OF THE LEARNED ASSESSING OFFICER, THE ASSESSEE WENT ON APPEAL BEFORE THE LEA RNED COMMISSIONER OF INCOME TAX (APPEALS). THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AFTER EXAMININ G THE ISSUE HELD IN FAVOUR OF THE ASSESSEE BY OBSERVING A S UNDER:- 5 ITA NO.665/MDS/2016 9. I HAVE CAREFULLY CONSIDERED THE FACTS IN ISSUE, THE VIEW TAKEN BY THE AO, THE ARGUMENTS ADVANCED BY THE APPELLANT AND MATERIAL ON RECORD AND FIND THAT THE PLEA MADE BY THE APPELLANT HAS TO BE UPHELD. THE PROVISI ONS U/S.10A PROVIDES FOR A DEDUCTION OF SUCH PROFITS A ND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM EXPORT OF ART ICLES OR THINGS OR COMPUTER SOFTWARE ETC. THE INCOMES WHIC H CANNOT BE SAID TO BE DERIVED FROM I.E WHICH DO NOT HAVE A DIRECT NEXUS WITH THE ACTIVITY OF THE INDUSTRIAL TH IS CASE THE APPELLANT HAS CORRECTLY POINTED THAT THE DISALLOWAN CES PREFERRED BY THE AO CANNOT BE KEPT AWAY FROM THE PR OFITS AND GAINS OF BUSINESS AS THE DISALLOWANCES ARE UNDE R DEEMING FICTIONS OF THE I.T.ACT. AS PER SECTION 29 INCOME AND PROFITS AND GAINS OF BUSINESS OR PROFESSION SHA LL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINE D IN SECTION 30 TO 43D. THIS VIEW IS ALSO SUPPORTED BY T HE DECISION IN RAJKUMAR EXPORTS LTD. VS. ACIT (2009-TI OL- 88 ITAT-MAD HELD THAT DISALLOWANCE U/S.40A(3) WAS T O BE CONSIDERED FOR ARRIVING AT THE PROFIT OF SPECIFIED UNDERTAKING FOR COMPUTATION OF DEDUCTION U/S.80IA. THE ITAT HELD THAT THE DISALLOWANCES MADE BY THE AO UND ER DIFFERENT SECTIONS FROM 30 TO 43D OF THE ACT DO NOT CHANGE THE NATURE OF THE INCOME THAT IS ARRIVED AT. THE AO IS THEREFORE DIRECTED TO TAKE INTO CONSIDERATION THE DISALLOWANCES AGGREGATING RS.22,14,671/- UNDER SECT ION 40A(7) AND 37 AS BEING PART OF THE PROFITS AND GAI NS OF BUSINESS WHILE COMPUTING THE DEDUCTIONS U/S.10A. TH IS GROUND IS ALLOWED. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE ARGUED BEFORE US RELYING ON THE ORDER OF THE LEARNED ASSES SING OFFICER AND THE ORDER OF THE AHMEDBAD BENCH OF THE TRIBUNAL WHILE AS THE LEARNED AUTHORIZED REPRESENTATIVE ARGU ED IN SUPPORT OF THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS). 6 ITA NO.665/MDS/2016 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS ON RECORD. IT IS A WELL SETTL ED AND GUIDING PRINCIPLE THAT THE DEEMING FICTION CREATED UNDER ANY PROVISION OF THE ACT CANNOT BE IMPORTED INTO ANOTHE R PROVISION WITH FICTION. IF IT IS DONE SO, IT WILL FRUSTRATE T HE PURPOSE OF THE PENAL PROVISIONS OF THE ACT. IN THE PRESENT CASE, T HE ASSESSEE HAS VIOLATED THE PROVISION OF SECTION 40A(7) OF THE ACT AND ALSO PAID PENALTY IN VIOLATION OF SECTION 37 OF THE ACT DUE TO WHICH THESE EXPENDITURE ARE DISALLOWED AS DEDUCTION WHILE COMPUTING THE PROFIT AND GAINS OF THE ASSESSEE. THU S, TO THAT EXTENT THE PROFITS GET INFLATED AGAINST WHICH THE A SSESSEE HAS TO PAY TAX. HOWEVER, IN THE PRESENT CASE THE ASSES SEE IS ENTITLED TO CLAIM DEDUCTION UNDER SECTION 10A OF TH E ACT. SECTION 10A OF THE ACT IS A BENEFICIAL PROVISION WI TH FICTION. FOR COMPUTING THE ELIGIBLE PROFIT FOR GRANTING DEDU CTION UNDER SECTION 10A OF THE ACT, IF ANOTHER PROVISIONS WITH FICTION SUCH AS SECTION 40A(7) AND EXPLANATION-1TO SECTION 37 A RE IMPORTED, THEN THE PENAL EFFECT FOR VIOLATING THE P ROVISIONS OF SECTION 40A(7) OF THE ACT AND EXPLANATION-1 TO SECT ION 37 OF THE ACT WILL BE FRUSTRATED, I.E., WHEN THE ASSESSEE DOES NOT ENJOY THE BENEFIT OF SECTION 10A OF THE ACT IT HAS TO SUFFER THE 7 ITA NO.665/MDS/2016 PENAL CONSEQUENCE OF THE PROVISIONS OF SECTION 40A( 7) AND EXPLANATION-1TO SECTION 37 OF THE ACT WHILE AS WHEN THE ASSESSEE ENJOYS THE BENEFIT OF SECTION 10A OF THE A CT IT WILL NOT SUFFER THE PENAL CONSEQUENCE OF SECTION 40A(7) AND EXPLANATION-1TO SECTION 37 OF THE ACT. THAT IS NOT THE INTENTION OF THE FISCAL STATUTE AND SUCH DISCRIMINATION CANNO T BE MADE UNDER DIFFERENT CIRCUMSTANCE WHEN THE ASSESSEE VIOL ATES THE PENAL PROVISIONS OF THE ACT. PRECISELY ANY BENEFICI AL PROVISIONS OF THE ACT WHICH HAS A FICTION CANNOT BE USED AS A COVER TO ESCAPE THE WRATH OF ANY PENAL PROVISIONS O F THE ACT WHICH ALSO HAS A FICTION. KEEPING IN VIEW OF THESE ASPECTS AS WELL AS THE SETTLED PRINCIPLES OF INTERPRETATION OF FISCAL STATUTES RELATING TO PROVISIONS WITH DEEMING FICTIONS, ON TH E EARLIER OCCASION THE AHMEDABAD BENCHES OF THE TRIBUNAL IN T HE CASE OF DCIT, CIRCLE -2(2) VS. RAMESH BHAI C.PRAJAPATHI REPORTED IN 140 ITD 48 HAS HELD AS FOLLOWS:- 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS ON RECORD. IT IS SETTLED PRIN CIPLE THAT THE DEEMING FICTION CREATED UNDER ANY PROVISIONS OF THE ACT CANNOT BE IMPORTED INTO A BENEFICIAL PROVISIONS OF THE ACT. IN THIS CASE, THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF EXPENDITURE IS DUE TO THE DEEMING F ICTION CREATED BY THE PENAL SECTION 40(A)(IA) OF THE ACT. THUS, THE EFFECT OF THE SAME CANNOT BE IMPORTED INTO A BENEFI CIAL PROVISION VIS-A-VIS SECTION 80-IB(10) OF THE ACT. W HILE COMPUTING DEDUCTION U/S 80-IB (10) OF THE ACT, THE PLAIN 8 ITA NO.665/MDS/2016 MEANING OF THE LANGUAGE OF THE ACT HAS TO BE GIVEN EFFECT. THE LEGAL FICTION CREATED BY VIRTUE OF SECTION 40(A )(IA) CANNOT BE EXTENDED TO DETERMINE THE PROFIT OF THE B USINESS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80-IB(10 ) OF THE ACT. SECTION 80-IB(10) OF THE ACT HAS TO BE APP LIED ONLY FOR THE DEFINITE AND LIMITED PURPOSE FOR WHICH IT I S CREATED. IN THE CASE OF EXECUTORS & TRUSTEES OF SIR CAWASJIJEHANGIR V. CIT [1959] 35 ITR 537 ( BOM), IT HAS BEEN EXPLAINED THAT UNLESS IT IS CLEARLY AND EXPRES SLY PROVIDED, IT IS NOT PERMISSIBLE TO IMPOSE A SUPPOSI TION ON A SUPPOSITION OF LAW. IT IS NOT PERMISSIBLE TO SUB-JO IN OR TRACK A FICTION UPON FICTION. IN THE LIGHT OF THE ABOVE, IT IS APPARENT THAT AS FAR AS ARRIVING AT THE DEDUCTION U /S 80 IB OF THE ACT IS CONCERN ONE HAS TO STRICTLY FOLLOW TH E PROVISIONS OF THAT SECTION AND COMPUTE THE DEDUCTIO N ACCORDINGLY WITHOUT INFUSING ANY OTHER PROVISION OF THE ACT WHICH CREATES A LEGAL FICTION. IN THE PRESENT CASE, WHILE COMPUTING THE PROFIT FOR THE PURPOSE OF GRANTING DEDUCTION UNDER SECTION 10A OF THE ACT THE PENAL PROVISIONS OF SECTION40A(7) AND EXPLANATI ON-1TO SECTION 37 OF THE ACT SHOULD NOT BE GIVEN EFFECT BE CAUSE ALL THESE PROVISIONS VIZ., SECTION 10A, 40A(7), & EXPLA NATION-1 TO SECTION 37 ARE PROVISIONS WITH FICTION. ACCORDINGL Y THE INFLATED PORTION OF PROFIT ARISING OUT THE PENAL PROVISION O F SECTION 40A(7) AND EXPLANATION-1 TO SECTION 37 OF THE ACT W ILL BE TAXED AS HELD BY THE LD.A.O., AND THUS TO THAT EXTE ND CANNOT ENJOY THE BENEFIT OF SECTION 10A OF THE ACT. 9 ITA NO.665/MDS/2016 8. FOR THE ABOVE STATED REASONS, WE ARE OF THE CONS IDERED VIEW THAT THE DECISION OF THE LEARNED ASSESSING OFF ICER DOES NOT REQUIRE ANY INTERFERENCE, THEREFORE WE HEREBY S ET ASIDE THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WHEREIN THE SETTLED PRINCIPLES WITH RESPE CT TO INTERPRETATION OF FISCAL STATUES ON DEEMING FICTION HAS NOT BEEN CONSIDERED. ACCORDINGLY THIS ISSUE IS DECIDED IN FAVOUR OF THE REVENUE. GROUND NO.2:- EXCLUDING TELECOMMUNICATION EXPENSES FROM EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER WHIL E COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT: 9. THE ASSESSEE HAD INCURRED EXPENSES TOWARDS TELECOMMUNICATION CHARGES AND CFS CHARGES AGGREGATI NG TO RS. 15,25,760/-. IN COMPLIANCE WITH THE PROVISIONS OF THE ACT AND IN ACCORDANCE WITH THE DECISION IN THE CASE ITO VS. SAK SOFT LTD., REPORTED IN 313 ITR (AT) 53, THE ASSESSE E HAD DEDUCTED THOSE EXPENSES BOTH FROM TOTAL TURNOVER AS WELL AS FROM THE EXPORT TURNOVER. HOWEVER, THE LEARNED ASSE SSING OFFICER WAS OF THE VIEW THAT THE EXPENSES SHOULD BE EXCLUDED ONLY FROM EXPORT TURNOVER BUT NOT FROM THE TOTAL TU RNOVER. 10 ITA NO.665/MDS/2016 10. ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) FOLLOWING VARIOUS DECISIONS OF HIGHER JUD ICIARY IN THE CASE CIT VS. FLOWSERVE MICRO FINISH VALVES P.LTD., 204 TAXMAN 133 (KAR) , GEM PLUS JEWELLERY INDIA LTD. RE PORTED IN 330 ITR 175(BOM) AND IN THE CASE ITO VS.SAK SOFT LT D.,313 ITR (AT) 353 HELD THE ISSUE IN FAVOUR OF THE ASSESS EE AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE US. 11. SINCE THE ISSUE IS ALREADY DECIDED BY THE HIGHE R JUDICIARY (SUPRA) IN FAVOUR OF THE ASSESSEE WHICH T HE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS FOLLOWED, WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE ORDER O F THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 21 ST OCTOBER, 2016 SD/- SD/- ( . . . ) ( . ) (N.R.S.GANESAN) ( A.M OHAN ALANKAMONY ) # % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER # /CHENNAI, ( /DATED 21 ST OCTOBER, 2016 SOMU 11 ITA NO.665/MDS/2016 *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF