DCIT, Trivandrum V. M/s IBS Software Services P.Ltd, Trivandrum

ITA 856/COCH/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 4314 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2010
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 06-05-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 05-11-2007
• Court: TRIBUNAL
• Department Lawyers: A K THATAI
• Assessee Lawyers: A S NARAYANAMOORTHY
• Keywords: Gift; Search and seizure; Competent authority
• Section: 43B; 56; 10

Judgement Text

IN THE INCOME TAX APPELLATE T RIBUNAL COCHIN BENCH, COC HIN BEFORE S/SHRI N.VIJAYAKUMARAN, JM AND SANJAY ARORA, AM I.T.A. NOS. 855 TO 857/COCH/2007 AND 847/COCH/2007 /COCH/ 2007 ASSESSMENT YEARS : 2001-02 TO 2004 -05 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), TRIVANDRUM. VS. .M/S. IBS SOFTWARE SERVICES (P) LTD., 521-524, NILA, TECHNOPARK CAMPUS, TRIVANDRUM. [PAN: AAACI 6825N] (REVENUE -APPELLANT) (ASSESSEE - RESPONDENT) REVENUE BY SHRI A.K.THATAI, CIT (DR) ASSESSEE BY SHRI AS.NARAYANAMOORTHY, CA O R D E R PER SANJAY ARORA, AM: THESE ARE A SET OF FOUR APPEALS BY THE REVENUE, I. E., FOR FOUR CONSECUTIVE YEARS, BEING ASSESSMENT YEARS (AYS) 2001-02 TO 2004-05, IN THE ASSESSEES CASE, CONTESTING THE SEPARATE ORDERS BY THE COMMISSIONER OF INCOME-T AX (APPEALS)-I, TRIVANDRUM (CIT(A) FOR SHORT) OF EVEN DATE, I.E., 30.5.2007. 2. AS THE APPEALS RAISE COMMON GROUNDS, THESE WERE HEARD TOGETHER, AND ARE BEING DISPOSED OF VIDE A COMMON, CONSOLIDATED ORDER FOR S AKE OF CONVENIENCE. THE FIRST AND THE PRINCIPAL GROUND, WHICH IS COMMON TO ALL THE AP PEALS, ALBEIT WITH SOME VARIATION ON INCIDENTAL ASPECT(S), RELATES TO THE ALLOWANCE O F EXEMPTION TO THE ASSESSEE OF ITS ENTIRE INCOME FROM INCOME-TAX BY THE LD. CIT(A) VID E THE IMPUGNED ORDER(S). 3.1 THE ASSESSEES ENTIRE INCOME, AS CLAIMED BY IT, AND ON WHICH ASPECT THERE APPEARS TO BE NO DISPUTE, IS FROM A SINGLE UNIT COV ERED UNDER SOFTWARE TECHNOLOGY PARKS (STP SCHEME, NOTIFIED VIDE NOTIFICATION NO. S .O. 243(E) DATED 22 ND MARCH, 1994 ISSUED BY THE MINISTRY OF COMMERCE, GOVERNMENT OF INDIA (REFER: 209 ITR (ST.) 48). THE ASSESSEES CASE IS THAT BEING HAVING THUS REGISTERED WITH THE GOVERNMENT OF ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 2 INDIA AS A 100% EXPORT ORIENTED UNDERTAKING (EOU), IT IS ENTITLED TO SPECIAL TAX HOLIDAY, EVEN AS SPECIFIED IN THE SAID SCHEME PER 2 .8.1. THEREOF. THE REVENUES CASE, ON THE OTHER HAND, IS THAT THE SAID EXEMPTION FROM INCOME-TAX COULD ONLY BE ALLOWED UNDER AND IN TERMS OF THE PROVISIONS OF THE INCOME- TAX ACT, 1961 (`THE ACT HEREINAFTER) AND, THUS, STANDS TO BE ALLOWED U/S. 1 0A OF THE ACT. ACCORDINGLY, INTEREST ON BANK DEPOSITS, WHICH IS ASSESSABLE U/S. 56 OF TH E ACT, WOULD NOT BE SUBJECT TO EXEMPTION U/S. 10A. SIMILARLY, THE EXPORT TURNOVER OF THE BUSINESS WOULD STAND TO BE COMPUTED BY EXCLUDING THE UNREALISED EXPORT TURNOVE R, I.E., AS IS NOT RECEIVED IN (OR BROUGHT INTO) INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE WITHIN A PERIOD OF SIX MONTHS FROM THE END OF THE RELEVANT PREVIOUS YE AR OR WITHIN SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW ON THIS BEHALF, I .E., AS PER SECTION 10A(3) OF THE ACT. THE THIRD ISSUE IS, AGAIN, IN RELATION TO THE COMPUTATION OF DEDUCTION U/S. 10A; THE REVENUE, IN COMPUTING THE RELIEF U/S. 10A, WORK ED OUT THE SAME, IN VIEW OF EXPLANATION 2(IV) TO THE SECTION, WHICH DEFINES THE TERM `EXPORT TUR NOVER, EXPENDITURE ON DATA COMMUNICATION LINK CHARGES, TRAVEL EXPENDIT URE OUTSIDE INDIA AND PROFESSIONAL CONSULTANCY CHARGES, WHILE NOT ALLOWING ANY CORRESP ONDING REDUCTION FROM THE AMOUNT OF TOTAL TURNOVER, ON THE GROUND THAT THE SA ME STANDS NOT DEFINED UNDER THE PROVISION, SO THAT IT WOULD HAVE TO BE ACCORDED ITS NATURAL ORDINARY MEANING; THUS, ADVERSELY IMPACTING THE AMOUNT OF BENEFIT EXIGIBLE FOR DEDUCTION U/S. 10A. THE ASSESSEE, ON THE OTHER HAND, PLEADS FOR A LIKE REDU CTION FROM THE AMOUNT OF TOTAL TURNOVER, PLACING RELIANCE ON THE DECISIONS IN THE CASE OF ITO VS. SAK SOFT LTD ., 313 ITR (AT) 353 (CHENNAI) (SB) AND GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. VS. ACIT , 32 SOT 428 (MUM.). 3.2 THE ASSESSEE, IN APPEAL, FOUND FAVOUR WITH THE LD. CIT(A). IN THE PRESENT CASE THE BENEFIT STANDS EXTENDED BY A DIFFERENT LEGISLAT ION, I.E., FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 1992, U/S. 3(1) O F WHICH THE PRESENT NOTIFICATION STANDS ISSUED. IN HIS VIEW, IT IS PERMISSIBLE, AND THE AO OUGHT TO HAVE KNOWN, THAT THE `TAX SYSTEM OF THE COUNTRY, ALLOWS PROVISION OF IN CENTIVE OR EVEN INFLICTION OF DIS- INCENTIVE, I.E., WITH RESPECT TO INCOME ASSESSABLE UNDER THE ACT, THROUGH LEGISLATION ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 3 OTHER THAN THE ACT. AS FOR EXAMPLE, U/S. 52(1) (AA) OF THE UNIT TRUST OF INDIA ACT, 1963, INCOME FROM UNITS ACQUIRED BY A NON-RESIDENT INDIAN OUT OF THE NRI ACCOUNT OR FOREIGN EXCHANGE REMITTANCES MADE FROM OUTSIDE INDI A, IS EXEMPT FROM INCOME-TAX AND DOES NOT FORM PART OF THE TOTAL INCOME OF THE N ON-RESIDENT. SIMILARLY, SECTION 9 OF THE INTEREST ON DELAYED PAYMENTS TO SMALL SCALE AND ANCILLARY INDUSTRIAL UNDERTAKINGS ACT, 1993, INTEREST PAID OR PAYABLE BY ANY BUYER, UNDER OR IN ACCORDANCE WITH THE PROVISIONS OF THE SAID ACT, DOES NOT QUALI FY AS A PERMISSIBLE DEDUCTION IN THE COMPUTATION OF INCOME UNDER THE ACT. FURTHERMORE, T HE EXEMPTION PROVISION AS PER SECTION 10A OF THE ACT IS TO BE VIEWED LIBERALLY SO AS TO SUB-SERVE ITS INTENDED PURPOSE. THE SCHEME NOWHERE STATES THAT THE INTERES T ON DEPOSITS, OR ANY INTEREST FOR THAT MATTER, WOULD STAND TO BE EXCLUDED FROM THE BL ANKET TAX HOLIDAY THAT STANDS EXTENDED TO THE STP UNITS. AS SUCH, IRRESPECTIVE O F THE SOURCE OR THE HEAD OF THE INCOME, THE ENTIRE INCOME OF THE ELIGIBLE UNIT WOUL D STAND TO BE COVERED BY THE SAID NOTIFICATION FOR A BLOCK OF FIVE YEARS IN THE FIRST EIGHT YEARS OF ITS OPERATION. 4. BEFORE US, LIKE SUBMISSIONS STOOD RAISED BY BOTH THE PARTIES; EACH RELYING ON THE ORDER OF THE AUTHORITIES BELOW AS FAVOURABLE TO IT. APART FROM THE TWO EXAMPLES OF THE PROVISIONS UNDER A DIFFERENT LEGISLATIONS IMPACTING THE TAX LIABILITY UNDER THE ACT, AS CITED BEFORE AND BY THE LD. CIT(A), THE LD. AR ALSO RELIED ON THE SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006, WHICH BEARS A PR OVISION SIMILAR TO SECTION 9 OF THE INTEREST ON DELAYED PAYMENTS TO SMALL SCALE AND ANCILLARY INDUSTRIAL UNDERTAKINGS ACT, 1993. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 5.1 THE ASSESSEE CLAIMS THAT ITS ENTIRE INCOME, BEING FROM A STP UNIT AND, THUS, COVERED UNDER A SPECIFIC SCHEME PROMULGATED BY THE GOVERNMENT OF INDIA UNDER THE POWERS CONFERRED THEREON BY SUB-SECTION (1) OF SECT ION 3 OF THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 1992, SHALL, IRRE SPECTIVE OF ITS NATURE AND IMMEDIATE SOURCE, BE ELIGIBLE FOR A COMPLETE TAX HO LIDAY, I.E., IN TERMS OF ITS ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 4 PROVISIONS, AND IS THUS EXEMPT FROM INCOME-TAX FOR A BLOCK OF FIVE YEARS FALLING WITHIN FIRST EIGHT YEARS OF ITS OPERATION. 5.2 WE FIND, EVEN AS OBSERVED BY THE BENCH DUR ING THE HEARING, THE ASSESSEES STAND, THOUGH FOUND FAVOUR WITH THE LD. CIT(A), AS COMPLETELY UNTENABLE. THIS IS FOR THE SIMPLE REASON THAT THE FOREIGN TRADE (DEVELOPME NT AND REGULATION) ACT, 1992, DOES NOT CONTAIN ANY PROVISION OVERRIDING OR IN SUP ERSESSION OF THE PROVISIONS OF THE INCOME-TAX ACT, 1961, I.E., AN ACT ENACTED BY THE P ARLIAMENT, AS ITS PREAMBLE STATES, TO CONSOLIDATE AND AMEND THE LAW RELATING TO INCOME-TA X AND SUPER-TAX, I.E., THE INCOME- TAX ACT, 1922, TO LEVY AND COLLECT TAXES ON INCOME BY THE STATE (UNION OF INDIA). IT IS ONLY IN CASE OF SUCH A PROVISION, EXPLICITLY MANDAT ING ITS OVERRIDING STATUS, I.E., QUA THE PROVISIONS OF THE ACT, EITHER GENERALLY OR WITH REFERENCE TO CERTAIN SPECIFIC PROVISIONS THEREOF, THAT THE SAME WOULD PREVAIL IN SUPERSESSION OF THE ACT TO THE STATED EXTENT. THE LD. CIT(A) HAS FAILED, WE ARE AFRAID T O SAY, TO NOTE THIS IMPORTANT LEGAL ASPECT OF THE MATTER. SECTION 32(1) OF THE UNIT TRU ST OF INDIA ACT, 1963 CLEARLY PROVIDES THAT THE SAME WOULD HOLD, NOTWITHSTANDING ANYTHING IN THE INCOME-TAX ACT, 1961; THE WEALTH TAX ACT, 1957; THE SUPER PROFITS T AX ACT, 1963; THE COMPANIES (PROFITS) SURTAX ACT, 1964. SIMILARLY, SECTION 10 O F THE INTEREST ON DELAYED PAYMENTS TO SMALL SCALE AND ANCILLARY INDUSTRIAL UNDERTAKING S ACT, 1993, SPECIFICALLY PROVIDES FOR THE PROVISIONS OF THE SAID ACT TO HAVE EFFECT, NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CONTAINED IN ANY OTHER LAW FOR THE TIME B EING IN FORCE. AND LIKEWISE, PER SECTION 24 OF MICRO SMALL AND MEDIUM ENTERPRISES DE VELOPMENT ACT, 2006. VIDE THE SAID PROVISIONS OF LAW, THE PARLIAMENT, WHICH ONLY IS EMPOWERED TO LEGISLATE, THUS, ITSELF CARVES OUT A WINDOW OF EXCEPTION TO THE PROV ISIONS OF THE ACT, GENERALLY OR SPECIFICALLY, IN RELATION TO SOME DEFINED INCOMES. THE SAID RELIANCE, THUS, RATHER THAN THAT OF THE ASSESSEE, FAVOURS THE STAND OF THE REVE NUE INASMUCH AS BUT FOR THESE EXCEPTING PROVISIONS, THE PROVISIONS OF THE ACT WOU LD PREVAIL. THERE IS, AS SUCH, NO AMBIGUITY IN THE POSITION OF LAW, OR CONFLICT OR IN CONSISTENCY BETWEEN THE SAID PROVISIONS AND OF THE ACT, AND THE EXCLUSION OF THE STATED/EXCEPTED INCOMES FROM THE ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 5 PURVIEW OF THE PROVISIONS OF THE ACT, LEGALLY FIRM. THE RELIANCE BY THE ASSESSEE ON THE SAID ACTS IN CANVASSING ITS CASE IS, THUS, GROSSLY MISPLACED, AND OF NO ASSISTANCE. 5.3 COMING TO THE MERITS OF THE CASE, THERE IS NO CORRESPONDING PROVISION IN THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 199 2. VIDE SECTION 3 OF THE SAID ACT, THE GOVERNMENT OF INDIA IS EMPOWERED TO FORMUL ATE A SCHEME IN CONSISTENCE WITH THE OBJECTIVES OF THE SAID ACT, WHICH, AS APPARENT, IS FOR THE DEVELOPMENT AND REGULATION OF FOREIGN TRADE. THE SOFTWARE TECHNOLOG Y PARKS (STP) SCHEME IS A 100 PER CENT. EXPORT ORIENTED SCHEME FOR UNDERTAKING OF SOFTWARE DEVELOPMENT FOR EXPORT USING DATA COMMUNICATION LINK OR IN THE FORM OF PHY SICAL EXPORTS INCLUDING EXPORT OF PROFESSIONAL SERVICES. THE SCHEME IS TO BE ADMINIST ERED BY IT THROUGH THE DEPARTMENT OF ELECTRONICS, ACTING THROUGH THE DIRECTORS OF THE RESPECTIVE SOFTWARE TECHNOLOGY PARKS, WHICH ARE TO BE SET UP BY THE GOVERNMENT OF INDIA. THE UNITS COVERED UNDER THE SAID SCHEME WOULD BE, SUBJECT TO CONDITIONS SPE CIFIED FOR THE PURPOSE, PER PARA 2.8., WHICH READS AS UNDER, ENTITLED TO CERTAIN BEN EFITS:- 2.8 THE STP UNIT SHALL BE ELIGIBLE FOR THE FOLL OWING BENEFITS: 2.8.1 TAX HOLIDAY. THE STP WILL BE EXEMPTED FOR PAYMENT OF CORPORATE INCOME-TAX FOR A BLOCK OF FIVE YEARS IN THE FIRST EIGHT YEARS OF IT S OPERATION. 2.8.2 100% FOREIGN EQUITY. FOREIGN EQUITY UP TO 100% IS PERMISSIBLE IN THE CASE OF STP UNITS, SUBJECT TO APPROVAL OF THE FIPB . WITHOUT DOUBT, THE BENEFIT OF THE TAX HOLIDAY EXTEN DED PER THE SAID SCHEME TO THE STP UNITS HAS ONLY TO BE AS PER THE RELEVANT LA W, .I.E., THAT ENACTED FOR THE PURPOSE OF LEVY AND COLLECTION OF TAX(ES) ON INCOME, OR `TH E ACT. IT NEEDS TO BE UNDERSTOOD AND APPRECIATED THAT IT IS ONLY THE LEGISLATURE WHI CH HAS THE POWER TO LEVY TAX(ES) ON INCOME AND, THUS, IN CERTAIN CIRCUMSTANCES, AS DEEM ED FIT BY IT, TO CARVE OUT A SEPARATE PROVISION(S) IN THE ACT IN RESPECT OF SOME TAXABLE UNITS (AS STP UNITS), BY EXTENDING A BLANKET OR PARTIAL TAX HOLIDAY TO THE SAME. IT WOUL D BE EQUALLY OPEN TO THE PARLIAMENT ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 6 TO, AS WE SEE IN THE CASE OF `INTEREST ON DELAYED P AYMENTS TO SMALL SCALE AND ANCILLARY INDUSTRIAL UNDERTAKINGS ACT, 1993, TO MA KE A PROVISION UNDER THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 1992, CLEAR LY PROVIDING FOR PROVISION OF A DEFINED RELIEF UNDER THE ACT TO THE UNITS COVERED B Y AND/OR A SCHEME NOTIFIED THERE- UNDER. THERE IS NO REFERENCE, HOWEVER, IN THE PRESE NT CASE TO ANY PROVISION IN ANY CENTRAL LEGISLATION HAVING A BEARING IN THE MATTER. THE SCHEME UNDER REFERENCE IS ONLY A DELEGATED LEGISLATION UNDER THE SAID LAW, SO THAT ITS SCOPE WOULD STAND CIRCUMSCRIBED BY THE PURVIEW OF THE SAID ENACTMENT, I.E., PROMOTI ON AND REGULATION OF FOREIGN TRADE. ALL THAT ONE CAN UNDERSTAND, ON A HOLISTIC READING OF THE SCHEME, IS THAT IT CONTEMPLATES, INTER ALIA , EXTENSION OF THE EXEMPTION FROM INCOME-TAX, AS AV AILABLE TO 100% EOU UNITS UNDER THE ACT, TO THE STP UNITS COVE RED THERE-UNDER, BEING 100% EOU UNITS. A CLAIM FOR EXEMPTION THERETO, DE HORS THE ACT, AS CLAIMED BY THE ASSESSEE, TO CONCURRENCE BY THE LD. CIT(A), IS WITH OUT ANY LEGAL OR FACTUAL BASIS. IN FACT, EVEN FOR THIS LIMITED READING TO TAKE EFFECT, THERE WOULD NEED TO BE A SPECIFIC PROVISION (AS S. 10A) IN THE ACT FOR SUCH UNITS, SO THAT NO BENEFIT COULD BE EXTENDED THERETO IN ITS ABSENCE (OR A LIKE PROVISION IN THE ACT), I.E., IF SUCH A PROVISION WERE NOT ON THE STATUTE, OR IF THE UNIT DID NOT SATISFY THE CONDITIONS LISTED IN THE SAID SECTION. THE ASSESSEE, AS NOTED EARLIER, DOES NOT MAKE REFERENCE TO ANY PROVISION OF THE SAID ACT (FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 19 92) IN PRESSING ITS CLAIM. IN FACT, EVEN A PROVISION IN THAT LAW INCONSISTENT WIT H THE PROVISIONS OF THE ACT, WOULD, IN THE ABSENCE OF A VALIDATING PROVISION PROVIDING FOR THE OVERRIDING EFFECT OF THE RELEVANT PROVISION, (AND AS FOUND IN EACH OF THE CI TED ENACTMENTS), WOULD AT BEST GIVE RISE TO A LEGAL DEBATE, I.E., AS TO WHICH OF THE TW O CONFLICTING ENACTMENTS WOULD PREVAIL. THE TRIBUNAL IS NOT EMPOWERED TO READ DOWN A PROVIS ION OF LAW, AND THUS, ITS COMPETENCE TO ADDRESS SUCH A LEGAL DEBATE, WHICH TH OUGH DOES NOT OBTAIN IN THE PRESENT CASE, IS ITSELF DOUBTFUL. 5.4 CONTINUING FURTHER, IN FACT, THE ASSESSEE, CLAIMING AN EXEMPT STATUS QUA ITS STP UNIT, INDEPENDENT OF THE ACT, AND HAVING, THUS, NOT MADE ANY CLAIM FOR EXEMPTION OR DEDUCTION U/S. 10A PER ITS RETURN OF INCOME, COULD NOT HAVE BEEN ALLOWED RELIEF UNDER ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 7 THE SAID SECTION, IN VIEW OF THE DECISION IN THE CA SE OF GOETZE INDIA LTD . V. CIT , 284 ITR 323 (SC). BESIDES, THE RELIEF, IF AT ALL, COULD BE ALLOWED ONLY IN TERMS OF THE PROVISION, WHICH REQUIRES, AMONG OTHERS, FURNISHING OF THE RETURN OF INCOME WITHIN TIME; MAINTENANCE OF A RESERVE ACCOUNT, WHICH IS TO BE UTILIZED FOR SPECIFIED PURPOSES WITHIN THE PRESCRIBED PERIOD; A CERTIFICATE FROM AN ACCOUNTANT CERTIFYING THE COMPUTATION OF DEDUCTION THERE-UNDER, WHICH REQUIRE MENTS, AGAIN, REMAIN EVIDENTLY UNSATISFIED IN THE PRESENT CASE. FURTHER, GOING BY THE ASSESSEES STAND, THE AO COULD NOT FRAME AN ASSESSMENT THEREON UNDER THE ACT AS TH E SAME COULD ONLY BE ON A PERSON GOVERNED BY AND UNDER THE ACT AND NOT ONE FALLING O UTSIDE ITS PURVIEW, SO THAT ITS STATUS WOULD ONLY BE OF A NON EST ASSESSMENT. AS, FOR EXAMPLE, AN ASSESSMENT MADE ON A PERSON LIVING AND WORKING OUTSIDE INDIA, WITH NO BUSINESS OR OTHER CONNECTION WHATSOEVER WITH INDIA, OR ANY INCOME ARISING IN IND IA, IN RESPECT OF HIS INCOME EARNED ABROAD. THE SAME COULD BE CHALLENGED BY THE ASSESSE E, THEREFORE, ONLY UNDER THE WRIT JURISDICTION OF THE HIGH COURT UNDER ART. 226/227 O F THE CONSTITUTION OF INDIA; THE AO HAVING NO JURISDICTION OVER IT TO FRAME THE ASSESSM ENT IN RESPECT OF ANY INCOME DERIVED FROM SUCH A UNIT. AS SUCH, TAKING THE ASSES SEES ARGUMENT TO ITS LOGICAL END, THE FIRST APPELLATE AUTHORITY, AS WELL AS ANY SUPER IOR APPELLATE AUTHORITY WOULD BE INCOMPETENT TO ADJUDICATE IN THE MATTER, AND WHOSE ACTION WOULD NEED TO BE SIMILARLY CHALLENGED BY IT. THE ABOVE DISCUSSION IS ONLY TO H IGHLIGHT THE UN- MAINTAINABILITY IN LAW OF THE ASSESSEES ARGUMENT WITH REFERENCE TO TH E SEVERAL ISSUES THAT EMANATE THEREFROM. WE, HOWEVER, WOULD RESTRICT OURSELVES ON LY TO THE ISSUES RAISED FOR OUR ADJUDICATION BY THE RESPECTIVE PARTIES. 5.5 IN VIEW OF THE FOREGOING, WE FIND NO LEGAL BASIS IN THE ASSESSEES CLAIM, AND THUS, REJECT THE SAME, SETTING ASIDE THE IMPUGNED O RDER TO THAT EXTENT. 6. WITH REGARD TO THE OTHER ISSUES ARISING OUT OF T HE ALLOWANCE OF DEDUCTION U/S. 10A; THE ASSESSEE-COMPANY BEING NOT IN APPEAL OR BY WAY OF CROSS-OBJECTION, ONLY THOSE ISSUES ARISING OUT OF THE ORDER BY THE FIRST APPELLATE AUTHORITY AS AGITATED BY THE ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 8 REVENUE BEFORE US, WOULD STAND FOR ADJUDICATION. IN THIS REGARD, WE SHALL TAKE EACH OF THE ISSUES SEPARATELY ALONG WITH THE YEARS IN WHICH THEY ARISE. 7.1 THE FIRST ISSUE IS THE EXCLUSION OF THE UNREA LIZED EXPORT PROCEEDS FROM THE `EXPORT TURNOVER BUT NOT THE `TOTAL TURNOVER BY THE AO, I N CALCULATING THE RELIEF EXIGIBLE U/S. 10A IN THE ASSESSMENT FOR AY 2002-03. THE LD. CIT(A ) ALLOWED THE SAME, FOLLOWING THE DECISIONS IN THE CASE OF CIT VS. ABAD FISHERIES , 258 ITR 641 (KER.) AND SEEMA SILKS AND SAREES VS. ACIT , 103 TTJ (MUMBAI) 704. 7.2 WE HAVE HEARD THE PARTIES, AND PERUSED THE MATE RIAL ON RECORD. FOR THE REASONS THAT FOLLOW, WE ARE UNABLE TO BE IN AGREEMENT WITH THE LD. CIT(A). THE DEDUCTION UNDER U/S. 10A(1) IS ONLY IN RESPECT OF PROFITS AND GAINS DERIVED BY THE UNDERTAKING (FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE), SUBJECT TO THE PROVISIONS OF THE SECTION, INCLUDING THOSE RELATING TO THE CO NDITIONS THAT ARE REQUIRED TO BE SATISFIED. SUB-SECTION (3) STATES THAT THE SECTION (S. 10A) APPLIES TO THE UNDERTAKING IF THE SALE PROCEEDS OF ARTICLE OR THINGS OR COMPUTER SOFTWARE EXPORTED OUT OF INDIA AND RECEIVED IN, OR BROUGHT INTO, INDIA IN CONVERTIBLE FOREIGN EXCHANGE WITHIN A PERIOD OF SIX MONTH FROM THE END OF THE PREVIOUS YEAR OR WITH IN SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. CLEAR LY, THEREFORE, WHERE THE SALE PROCEEDS ARE NOT BROUGHT INTO INDIA BY THE ASSESSEE EITHER IN CONVERTIBLE FOREIGN EXCHANGE OR THOUGH IN SUCH FORM BUT NOT WITHIN THE SAID PERIOD OF SIX MONTHS OR THE EXTENDED TIME PERIOD AS ALLOWED BY THE COMPETENT AU THORITY FOR THE PURPOSE, THE SECTION ITSELF WOULD BE INAPPLICABLE TO ITS UNDERTA KING. IN OTHER WORDS, THE SAME REPRESENTS A BASIC CONDITION FOR THE ALLOWANCE U/S. 10A. THE SAME CONDITION FINDS SPECIFICATION IN THE DEFINITION OF THE `EXPORT TURN OVER UNDER EXPLANATION 2(IV) TO THE SECTION. AS SUCH, TO THE EXTENT THE EXPORT PROCEEDS DO NOT SATISFY THE MANDATE OF S. 10A(3), THE SECTION WOULD BE INAPPLICABLE TO THE UN DERTAKING; WITHOUT DOUBT, A PART OF THE EXPORTS SATISFYING THE SAID CONDITION. THIS IS AS TO SUGGEST, AS A LITERAL INTERPRETATION OF S. 10A(3) DOES, THAT THE UNDERTAK ING WOULD ON THAT ACCOUNT NOT BE AN ELIGIBLE UNDERTAKING ITS ENTIRE EXPORT NOT QUALIF YING U/S. 10A(3) AND, THUS, NOT ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 9 ENTITLED TO ANY BENEFIT WHATSOEVER THERE-UNDER, WOU LD BE TAKING TOO STRICT A VIEW OF THE MATTER. IN FACT, THAT IS ALSO NOT THE REVENUES CAS E IN THE INSTANT CASE. BESIDES, THE SECTION, BY DEFINING THE `EXPORT TURNOVER SO AS TO EXCLUDE THE TURNOVER NOT SATISFYING THE CONDITION OF S. 10A(3), ENSURES THAT NO DEDUCTI ON QUA PROFITS TO THE PROPORTIONATE EXTENT IS ALLOWED TO THE ASSESSEE (S. 10A(4)). THE ONLY HARMONIOUS AND PURPOSIVE READING WOULD BE THAT THE UNDERTAKING WOULD BE ELIG IBLE FOR THE BENEFIT U/S. 10A TO THE PROPORTIONATE EXTENT. COMING TO THE ISSUE OF QUANTIFYING THE DEDUCTION, THE SECTION, PER SUB-SECTION (4) THEREOF, ITSELF DELINEATES THE MECHANISM FOR CO MPUTING THE SAME, I.E., IN RESPECT OF THE PROFITS DERIVED FROM THE QUALIFYING EXPORTS (OF ARTICLES OR THINGS OR COMPUTER SOFTWARE, SALE PROCEEDS OF WHICH ARE RECEIVED OR BR OUGHT AS REQUIRED BY THE ACT), AND WHICH IS TO BE DETERMINED BY APPLYING THE SAME RATI O AS THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER; IN SHORT, BY APPORTIONMENT. IN THE PRESENT CASE, THE PROFITS FROM THE EXPORT OF RS. 90,76,376/- (WHILE THE AO MENTIONS IT TO BE RS. 90,79,376/-) IS INCLUDED IN THE ASESSEES TOTAL PROFITS DERIVED FROM EXPORTS . THAT BEING THE CASE, THE SAME (TOTAL PROFIT) WOULD BE ENTITLED TO ALLOCATION, AND ONLY O N THE BASIS OF THE RATIO OF THE EXPORT TURNOVER (AS DEFINED) TO THE TOTAL TURNOVER WITHOUT ANY EXCLUSION OF SUCH EXPORT. THE SAME FOLLOWS THE SIMPLE PRINCIPLE OF APPORTIONMENT; THE NUMERATOR (I.E., THE PROFITS WHICH STANDS TO BE ALLOCATED) BEING INCLUSIVE OF TH AT ON THE EXPORT OF RS. 90.79 LAKHS, THE BASE OR THE DENOMINATOR WOULD NECESSARILY HAVE TO BE THE TOTAL TURNOVER, I.E., INCLUSIVE OF THE SAID SUM OF RS. 90.79 LAKHS. IN T HE CASE OF ABAD FISHERIES (SUPRA), THE HONBLE COURT AGREED WITH THE TRIBUNAL AS THE A MOUNT IN REFERENCE DID NOT FORM PART OF THE PROFIT, SO THAT IT WOULD NOT FORM PART OF THE TOTAL TURNOVER; ITS RELEVANT OBSERVATIONS BEING AS: (REFER PAGE 645) REGARDING THIS CONDITION, THE TRIBUNAL HELD THAT S INCE THIS DOES NOT FORM PART OF THE PROFIT, IT CANNOT FORM PART OF THE TU RNOVER ALSO. SINCE THE AMOUNT TO BE PROPORTIONED DID NOT INCLUDE THE PROFIT ON THE EXCLUDED TURNOVER, THE SAME WOULD ALSO BE INCLUDED IN THE TO TAL TURNOVER. THERE COULD HARDLY BE ANY DISPUTE WITH THE SAME. THE SAID DECISION, THUS, IS NOT APPLICABLE IN THIS CASE. WITH ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 10 REGARD TO THE DECISION IN THE CASE OF SEEMA SILKS AND SAREES (SUPRA), WE ARE UNABLE TO SEE AS TO HOW THE SAME IS OF ASSISTANCE TO THE ASSE SSEE. IN THAT CASE, THE ASSESSEE WAS ENGAGED IN THE EXPORT OF SILK SAREES, WHILE ITS LOC AL SALES ALSO INCLUDED SALES OF RAW SILK YARN. IT WAS IN THAT CONTEXT THAT IT WAS HELD BY THE TRIBUNAL THAT THE ITEMS FOR WHICH EXPORT TURNOVER AND TOTAL TURNOVER IS TO BE C ONSIDERED SHOULD BE IN PARITY, SO THAT THE LOCAL SALES OF THE RAW SILK YARN WOULD STA ND TO BE EXCLUDED FROM THE TOTAL TURNOVER. IN THE PRESENT CASE, THE TURNOVER OF RS. 90.79 LAKHS IS ONLY FROM EXPORT OF THE SAME GOODS, AND BUT FOR IT BEING NOT BROUGHT IN TO INDIA IN SATISFACTION OF THE CONDITION OF S. 10A(3), WOULD HAVE FORMED PART OF T HE EXPORT TURNOVER AS WELL. THE SAID DECISION IS DISTINGUISHABLE ON FACTS, AND THE SAID FIGURE WOULD THUS STAND TO BE INCLUDED IN THE TOTAL TURNOVER. 8. THE NEXT ISSUE, IN THE CONTEXT OF SECTION 10A DE DUCTION, IS WITH REGARD TO THE EXCLUSION OF RS. 434.21 LAKHS, BEING TRAVEL EXPENSE S, TELECOMMUNICATION CHARGES AND PROFESSIONAL CONSULTANCY CHARGES, IN THE COMPUTATIO N OF `EXPORT TURNOVER, WITHOUT A CORRESPONDING REDUCTION OF THE SAID FIGURE FROM THE FIGURE OF `TOTAL TURNOVER, BY THE AO WHILE FRAMING THE ASSESSMENT FOR A.Y. 2004-05. T HE SAID REDUCTION IS INCONSISTENT WITH THE DEFINITION OF `EXPORT TURNOVER UNDER EXPLANATION 2(IV) . THE ASSESSEE, NOT DISPUTING THE SAME, HOWEVER, PLEADS FOR A LIKE REDU CTION IN RECKONING THE AMOUNT OF `TOTAL TURNOVER AS WELL. THOUGH THE LD. CIT(A) HA S ALLOWED THE ASSESSEES CLAIM IN THE SAME WAY AS FOR A.Y. 2002-03, WE FIND THE ASSES SEES CLAIM AS VALID. THIS IS FOR THE SIMPLE REASON THAT THE SAID CHARGES BEAR NO ELE MENT OF PROFIT, WHICH WOULD REQUIRE ALLOCATION. AS SUCH, ONCE THE LAW PROVIDES FOR ALL OCATION (OF PROFITS) BY APPORTIONMENT, ONLY COMPARABLES WOULD BE SUBJECT TH ERETO. AS SUCH, THE PRINCIPLE OF APPORTIONMENT OR RATIO WOULD ITSELF DECIDE THE CASE IN ASSESSEES FAVOUR, AND THE SAID CHARGES WOULD STAND TO BE EXCLUDED FROM THE COMPUTA TION OF `TOTAL TURNOVER AS WELL. WE DECIDE ACCORDINGLY. 9.1 THE SECOND ISSUE IN THE PRESENT APPEALS, ARISIN G QUA ITS ASSESSMENT FOR AY 2003-04, IS IN RELATION TO THE LOYALTY BONUS RECOVE RED FROM THE EMPLOYEES. THE ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 11 ASSESSEE WAS FOUND TO HAVE CLAIMED A DEDUCTION, THR OUGH DEBIT TO ITS PROFIT AND LOSS ACCOUNT, IN THE SUM OF RS. 75.24 LAKHS, IN RESPECT OF THE EMPLOYERS SHARE TO A WELFARE FUND MAINTAINED FOR ITS EMPLOYEES UNDER A LOYALTY B ONUS SCHEME. THE EMPLOYEES SHARE, AMOUNTING TO RS. 58.94 LAKHS, STOOD REFLECTE D AS CURRENT LIABILITY IN ITS BALANCE- SHEET AS AT THE YEAR-END, UNDER THE ACCOUNT HEAD `L OYALTY BONUS PAYABLE. THE SAME WAS EXPLAINED AS BEING THE EMPLOYEES CONTRIBUTION, DEDUCTED FROM THE SALARY DUE AND PAYABLE TO THEM, CALCULATED AT THE RATE OF 20% OF T HE SALARY OF EACH EMPLOYEE COVERED UNDER THE SCHEME, IN TERMS OF ITS PROVISIONS. THE SAME, HOWEVER, WAS NOT BONUS. THE AO, HOWEVER, ADDED THE SAME IN VIEW OF SECTION 43B OF THE ACT. HE WAS OF THE VIEW THAT THE SAID AMOUNT BEARS THE CHARACTER OF A RECE IPT/INCOME IN THE HANDS OF THE ASSESSEE, AS HELD BY THE HONBLE APEX COURT IN THE CASE OF CHOWRINGHEE SALES BUREAU , 87 ITR 542 (SC) IN THE CONTEXT OF SALES-TAX. IN FI RST APPEAL, THE LD. CIT(A) ALLOWED THE ASSESSEES CLAIM, BY ALLOWING ITS OTHER ISSUE, HOLDING ITS ENTIRE INCOME AS EXEMPT FROM INCOME-TAX FOR A PERIOD OF FIVE CONSECUTIVE YE ARS IN THE EIGHT YEARS COMMENCING THE FIRST YEAR OF ITS OPERATIONS. IN VIEW THEREOF, THE ADDITION OF THE IMPUGNED AMOUNT WOULD BE OF NO CONSEQUENCE. 9.2 WE HAVE, VIDE OUR DECISION IN RESPECT OF THE PR INCIPAL ISSUE, WHICH IS COMMON FOR ALL THE YEARS, WHILE ADJUDICATING THE SAME, NEG ATIVED THE ASSESSEES CLAIM, SO THAT IT WOULD BE ONLY ENTITLED TO DEDUCTION U/S. 10A IN ACC ORDANCE WITH THE PROVISIONS OF THE SAID SECTION. AS SUCH, THE BASIS ON WHICH THE ASSES SEE STOOD ALLOWED RELIEF ON THIS ASPECT OF ITS ASSESSMENT DOES NOT SURVIVE. EVEN AS THE ASSESSEE HAS NOT PREFERRED ANY APPEAL OR CROSS OBJECTION BEFORE US AGAINST THE IMP UGNED ORDER; IT HAVING RAISED THIS ISSUE SEPARATELY BEFORE THE LD. CIT(A), IT WAS ENTI TLED TO AN INDEPENDENT ADJUDICATION THEREOF. EVEN OTHERWISE, WHEN A MATTER IS DISPUTED ON BOTH LEGAL AS WELL AS ON MERITS, AN APPELLATE AUTHORITY SHOULD DECIDE THE SAME ON BO TH OF THEM. UNDER THE CIRCUMSTANCES, WE, THEREFORE, HAVING ALREADY SET AS IDE HIS ORDER, RESTORE THIS GROUND BACK TO HIS FILE FOR PROPER ADJUDICATION ON MERITS IN ACCORDANCE WITH LAW, ALLOWING BOTH THE SIDES AN OPPORTUNITY OF HEARING BEFORE HIM . WE DECIDE ACCORDINGLY. ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 12 10. THE ONLY SURVIVING ISSUE IN THE PRESENT APPEAL IS THE DISALLOWANCE FOR AN AGGREGATE OF RS. 1,12,275/- BY THE AO ON ACCOUNT OF EMPLOYEES CLUB MEMBERSHIP FEES, I.E., RS.8500/-; GIFTS AND CONTRIBUTION FOR E MPLOYEE MARRIAGES AT RS. 96,825/-, AND PAYMENTS TO MAHINDRA HOLIDAY RESORTS, AT RS. 69 50/-, FOR AY 2004-05. THE LD. CIT(A), IN APPEAL, ALLOWED RELIEF TO THE ASSESSEE IN RESPECT OF FIRST TWO EXPENSES, STATING THAT THE AO HAD NOT CITED ANY REASON FOR TH E DISALLOWANCE, WHILE CONFIRMING HIS ORDER QUA THE THIRD EXPENSE; THE ASSESSEE HAVING NOT SUPPOR TED ITS CLAIM IN ITS RESPECT WITH ANY DETAIL OF THE PAYMENTS. AGGRIEVED , THE REVENUE IS IN APPEAL (VIDE GROUND NOS. 6 & 7). 11. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATERIAL ON RECORD. THE AO HAS, EVEN AS STATED BY THE LD. CIT(A) VIDE HIS ORDER, PR OCEEDED TO MAKE THE IMPUGNED DISALLOWANCES WHILE COMPLETING THE ASSESSMENT, WITH OUT CITING ANY REASON FOR THE SAME. THERE IS NO MENTION OR ANY DISCUSSION IN ITS RESPECT IN HIS ORDER. THE AO HAS NOT CITED ANY REASON FOR DISALLOWANCE IN RESPECT OF ALL THE THREE EXPENSES, AND WHICH, WITHOUT DOUBT, IS REASON ENOUGH FOR VACATING HIS AC TION AND DELETING THE DISALLOWANCES. THIS IS AS THE ASSESSEES OBLIGATION WOULD COMMENCE ONLY IF AND WHEN IT IS CALLED UPON TO FURNISH THE INFORMATION IN SUB STANTIATION OF ITS CLAIMS. THE LD. CIT(A), WE OBSERVE, ALSO FINDS IT SO IN RESPECT OF THE FIRST TWO EXPENSES, DELETING THE CORRESPONDING DISALLOWANCES, SO THAT HIS ACTION QUA THE SAME IS JUSTIFIED. HOWEVER, WITH REGARD TO THE THIRD EXPENSE HE CONFIRMS THE DI SALLOWANCE, STATING OF THE ASSESSEE HAVING NOT SUBMITTED ANY DETAILS AS THE REASON. WE, AS SUCH, FIND HIS ORDER AS CONTRADICTORY. IF THE NON-CITATION OF ANY REASON IS A JUSTIFIABLE BASIS FOR DELETION, AS INDEED IT IS, IT WOULD BE SO FOR THE THIRD EXPENSE AS WELL. AT THE SAME TIME, IF HE FOUND THE ASSESSEE TO HAVE NOT SUBMITTED ANY DETAILS QUA THE THIRD EXPENSE/CLAIM, IT ONLY MEANS THAT THE SAID DETAILS STOOD ACTUALLY CALLED F OR BY THE AO, AND CONSIDERED BY HIM, THOUGH HAS OMITTED TO RECORD THE SAME IN HIS ORDER, AND WHICH CANNOT BE FATAL TO THE REVENUES CASE, PARTICULARLY CONSIDERING THAT THE L D. CIT(A) ENJOYS CO-TERMINUS POWERS, AND HAS AS IT APPEARS ALSO EXAMINED THE ASS ESSMENT RECORD. AND IN WHICH CASE, HE OUGHT TO, OR SHOULD HAVE, DECIDED THE ISSU E ON MERITS BY RENDERING DEFINITE ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 13 FINDINGS OF FACT. WE, THEREFORE, ONLY CONSIDER IT F IT AND PROPER UNDER THE CIRCUMSTANCES TO REMIT THIS MATTER BACK TO THE FILE OF THE LD. CI T(A) FOR A DECISION ON MERITS ON THE CASE, INCLUDING THE NON-REQUISITION BY THE AO OF AN Y DETAILS FROM THE ASSESSEE IN VERIFICATION OF ITS CLAIMS, IF SO, IN ACCORDANCE WI TH LAW, ALLOWING PROPER OF HEARING TO BOTH THE SIDES. WE DECIDE ACCORDINGLY. 12. IN THE RESULT, ALL THE REVENUE APPEALS ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 13TH JULY 2010 GJ COPY TO: 1. M/S. IBS SOFTWARE SERVICES PVT. LTD., 521-524, N ILA, TECHNOPARK CAMPUS, TRIVANDRUM. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1( 1), TRIVANDRUM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIV ANDRUM. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R./I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) ITA. NO. 855 TO 858/ COCH./2007 & 847/COCH/ 2007 14