Income Tax Appellate Tribunal - Hyderabad
Ito, Ward-2(2),, Hyderabad vs M/S 3K Technologies Private Limited,, ... on 26 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SHRI G. PAVAN KUMAR, JUDICIAL MEMBER
ITA No. Asst. Year Appellant Respondent
M/s. 3K Technologies Income Tax Officer,
165/Hyd/13 Ltd., Ward-2(2),
HYDERABAD HYDERABAD
[PAN: AAACZ2607F]
2009-10
The Deputy M/s. 3K Technologies
238/Hyd/13 Commissioner of Ltd.,
Income Tax, HYDERABAD
Circle-2(2), [PAN: AAACZ2607F]
HYDERABAD
For Assessee : Shri P. Murali Mohan Rao, AR
For Revenue : Shri P. Chandra Sekhar, DR
Date of Hearing : 23-02-2017
Date of Pronouncement : 26-04-2017
ORDER
PER B. RAMAKOTAIAH, A.M. :
These two are cross-appeals by Assessee and Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)- III, Hyderabad dated 11-12-2012.
2. Briefly stated, assessee is involved in the business of software development and has a branch in USA. Assessee has filed NIL return of income for the AY. 2009-10 on 29-09-2009 and offered ITA Nos. 165/Hyd/2013 :- 2 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., income under the MAT provisions at Rs. 1,27,55,690/- and tax due on that at Rs. 16,04,910/- was paid by way of self-assessment tax. In the scrutiny assessment, the Assessing Officer (AO) has noted that company has made export software to an extent of Rs. 78,70,97,271/- and admitted profit of Rs. 1,27,96,345/-. AO also records that assessee has claimed deduction u/s. 10A of the Income Tax Act [Act] of Rs. 1,20,67,509/- after adjusting depreciations, accordingly, it filed NIL return of income. AO also notes that assessee had on-site development center at USA with turnover at Rs. 57,27,61,526/-. In the course of assessment proceedings, assessee asked for various details of software purchases and enquired about TDS provisions. He was of the opinion that assessee has not justified the claim of expenditure on purchase of soft ware of Rs. 64,09,69,696/- and accordingly, the amount was disallowed u/s Section 40(a)(ia). In addition, AO also noted that as against the turnover of Rs. 78.07 Crores, assessee has brought in only Rs. 13,41,44,047/- to India and accordingly by re-working out the deduction of export turnover/total turnover, he has allowed the deduction of Rs. 4,05,17,110/- ,as against the claim made by assessee of the entire profit declared as gross total income. AO while working out the deduction u/s. 10A considered the disallowance made u/s. 40(a)(ia) also as profit earned by assessee and accordingly, worked out the deduction at a higher amount than claimed. In addition to the above, the AO also added an amount of Rs. 1,55,25,000/- as he found that there are certain credits received from the directors and assessee has not given any confirmations for receipt of cash credits. Accordingly, he treated the above amount as 'unexplained cash credit' and brought to tax under the head 'income from other sources'. Thus, in assessment ITA Nos. 165/Hyd/2013 :- 3 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., order, AO has disallowed purchase of software to the extent of Rs. 65,57,42,034/-, restricted the claim u/s. 10A but allowed an amount of Rs. 4,05,17,110/- and brought to tax under 'other sources' an amount of Rs. 1,55,25,000/- as 'unexplained cash credit'. Accordingly, he completed the assessment assessing the income at Rs. 64,28,17,433/-.
3. Before the Ld.CIT(A), assessee contended that AO has wrongly disallowed an excess amount under the head 'purchase of software' whereas the actual amount is less than the amount. It was submitted that the disallowance of Rs. 65,57,42,034/- is wrong as assessee has purchased software amounting to Rs. 64,09,69,696/-. Apart from the factual error, assessee submitted that entire software purchase was by the branch office and accordingly, provisions of TDS do not apply, as those parties do not have any taxable income in India. It relied on various case law with reference to that issue. With reference to exemption u/s. 10A, it was submitted that the AO has taken the figures wrongly and re- worked out without considering the Board Circular No. 621 dt. 09- 12-1991 and also relied on various case law to submit that deduction u/s. 10A was wrongly computed by the AO. With reference to the cash credits, it was submitted that necessary details and confirmations have been furnished to the AO in the course of assessment proceedings. Therefore, addition is not correct and not justified. Assessee made detailed explanations in the course of appellate proceedings.
3.1. Ld.CIT(A) has considered the detailed submissions and decided the issues as under:
ITA Nos. 165/Hyd/2013 :- 4 -: & 238/Hyd/2013
M/s. 3K Technologies Ltd.,
"4.2. I have seen carefully the facts and evidence and I have also gone through the relevant case law on the .issues. The first issue to be decided is whether tax had to be' withheld with respect to purchase of software from foreign sellers.
4.3. First of all it is important to quote section 9(1)(vi) wherein explanation 2 defines royalty:
"Explanation 2 to section 9(1)(vi) of the Act, defines the term "royalty"
as "consideration for" -
- transfer of all or any right (including the granting of a licence) " in respect of a patent, technology or of copyright, trade mark;
- use of technology ;
- use or right to use patent, trademark, industrial, commercial or scientific equipment;
- imparting of information concerning, for the working of or use of, technology; or 'concerning technical. industrial, commercial or scientific knowledge ;
- rendering services in connection with the activities in connection with the above. i.e. the activities of the "use" or "right to use" or "in respect of"
patent, trademark, technology or copyright."
4.4. The important feature of the provision is that the payment should be a consideration for " transfer (including the granting of a license)" in respect of" or the "use" or "right to use" a patent, trade mark, technology or copyright. The identification of the consideration of payment is, therefore, necessary to determine whether it is royalty. It should be "in respect of"
transfer of all or any right (including the granting of a license). the use or the "right to use" of copyright, patent, trademark etc. 4.4.1 Similarly, article 12(3) of the DTAA between India and US is quoted as under:
"Article 12 of US Model reads as under:
ARTICLE 12 - Royalties
1. Royalties arising in a contracting State and beneficially owned by a resident of the other contracting State may be taxed only in that other State.ITA Nos. 165/Hyd/2013
:- 5 -: & 238/Hyd/2013
M/s. 3K Technologies Ltd.,
2. The term "royalties" as used in this convention means:
(a) any consideration for the use of, or the right to use, any copyright of literary, artistic, scientific or other work (including computer software, cinematographic films, audio or video tapes or disks, and other means of image or sound reproduction), any patent, trademark, design or model.
plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial; or scientific experience; and
(b) gain derived from the alienation of any property described in sub- paragraph (a), provided that such gain is contingent on the productivity, use, or disposition of the property.
3. The provisions of paragraph 1.shall not apply if the beneficial owner of the royalties, being a resident of a contracting State, carries on business in the other contracting state through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties are attributable to such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business Profits) or Article 14 (Independent personal services), as the case may be, shall apply.
4. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right, or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last- mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each contracting State, due regard being had to the other provisions of the Convention."
The main difference is that OECD Model would recommend that royalty is not taxed in the country which uses the technology for which royalty is paid, unless the lender has permanent establishment in the borrower's country. But this has not been accepted by almost all the borrowing countries. The recommendation of UN Model enables tax on royalty in both countries, subject to agreement that the rate of tax should be fixed at agreed rate in the, borrowing country, from where royalty is payable, by bilateral negotiations."
4.5 I have considered carefully the facts of the case, the law as well as the r various judicial pronouncements made by the various courts. The facts clearly point out that there was no software purchased by the domestic company. All the transactions in question were made by the PE in USA. The sale also took place in USA. There is thus no question of any income being taxable in India with respect to the purchases in question. In this ITA Nos. 165/Hyd/2013 :- 6 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., regard the judgement of the Honb'le ITAT Hyderabad in the case of AP Power Generation Corporation Ltd vs Assistant Commissioner of Income Tax circle 14(2)(TDS), Hyderabad is applicable. The gist of that judgement 105 ITD 423 (Hyd) is as below:- .
"Section 195, read with section 194C, of the Income-tax Act, 1961 Deduction of tax at source - Payment to on-resident - Assessment years 1999-2000 to 2002-03 - Assessee was a State Government undertaking engaged - generating power - Japan Bank for International Corporation (JBIC) had lent certain amount for a project uant to loan agreements with President of India - Assessee was· identified as agency by Government to implement that project - Assessee entered into an agreement/contract with a company of Japan 'S' for supply of p turbines, inlet valves, motor generator sets, associated auxiliary control and ancillary equipment - Said contract envisaged that out of total consideration payable to 'S' some charges related to supervisory engineers fur assembly erection, testing and commissioning and Held-testing of generators and controls - Assessee also entered into an independent contract with one PES Engineers for purposes of erecting and commissioning era tors, turbines and other equipment - Assessee further entered into two agreements with said 'S' for supply of gas insulated switchgear and 400 KV XLPE insulated power cables - Assessee did not get gas. ated switchgear installed by'S' and had given a separate contract for installation of gas insulated _ . chgear to an Indian company 'BHEL' - Assessee also entered into a contract with another company of Japan 'E' by which 'E' was awarded retainership to advise assessee on a continuous basis in project - Assessing Officer held that assessee had committed default by not deducting tax in respect of sums paid to '5', 'E' and BHEL' in relevant financial years - Whether from agreements it was evident that property in goods passed to see only in India that more than 80 per cent of contract value pertained to activities that had been undertaken in Japan clearly pointed out that element of contract was most densely grouped in Japan and not india and, thus, that was a pure sale contract and not a works contract - Held, yes - Whether since contract between assessee and '5' was a contract of sale, no portion of income of 'S' was chargeable to tax in India under Income-tax Act Held, yes _ Whether when no portion of gross remittances to 'S' was liable to charge under Act . India, there was no liability on part of assessee to deduct tax at source under section 195 in respect of remittances to 'S' - Held, yes _ Whether provisions of section 194C would be applicable to payment made to 'BHEL'-Held,yes"
Similarly, the decision of the Hon'ble ITAT, Delhi bench in the case of Royal Airways Ltd vs Additional director of Income Tax(lnternational Taxation), 98 ITO 259 (Delhi) also applies in the current case. The gist of that decision is as below"· "Section 249 of the Income-tax Act, 1961- Commissioner (Appeals) - Form of appeal and limitation - Assessment years 1994-95to 1996-97- Whether provision limiting time for bringing an appeal must be liberally interpreted so that party pursuing remedy allowed to him, is not deprived of same on mere technicalities - Held, yes - Whether where major part of delay in filing appeal related to period when assessee's business operation came to a grinding halt and assessee had acted bona fide which was not in doubt, reasons for delay, in absence of any material to contrary, should be construed to be reasonable and delay in filing appeal should be condoned - Held, yes ITA Nos. 165/Hyd/2013 :- 7 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., Section 195 of the Income-tax Act, 1961, read with article VIII of DTAA betwen India and Federal Republic of Germany - Deduction of tax at source - Payment to non-resident
- Assessment years 1994-95 to 1996-97 - Assessee entered into three separate agreements with a foreign company LAG, for taking aircrafts on lease, for servicing of aircrafts and for providing crew to fly aircrafts - CBDT granted exemption under section 10(15A)in relation to assessee's agreement with LAG - According to assessee, since lease was a composite lease of aircrafts, services and operation, said exemption fully covered aforesaid three agreements and applied to all payment for crew, lease, flat-rate charges, training fee and ground handling charges -Assessing Officer, however, held that payment for other services rendered by LAG was not exempt and assessee was liable to deduct tax at source from such payment -Whether in view of Tribunal's ord.er in assessee's own case holding that payments made by assessee to LAG were governed by article VIII of DTAA and could not be charged to tax in India because LAG did not have any permanent establishment in India, Assessing Officer was not justified in insisting upon payment of TDS by assessee - Held, yes"
5.0 Given the above legal matrix and facts I hold that since none of the transactions were taxable in India and the events happened totally outside India, there was no requirement of any tax to be withheld in India. Accordingly there is no default of TDS and section 40(a)(ia) does not apply. The addition on this account Is ordered to be deleted.
6.0. The next issue relates to the recomputation of exemption under section10A of the income tax act. First of all, I find that both the assessing officer as well as the appellant had been unable to go into details of the issues. Firstly the assessing officer has erroneously concluded that the entire turnover amounting to Rs. 78,07,97,271/- pertains to revenue derived from export of software from India. In the same paragraph the assessing officer has held that the appellant has a permanent establishment in USA and on-site software development work has also been undertaken in that country. Further, the only reason why the ass4ssing officer has held the entire turnover to be from software exported from India is that there is an invoice is raised amounting to $87,86,181/- by the appellant company. I do not find that there is any reason to support the conclusion that the permanent establishment in USA is a sham and that the entire work has been done in India. Neither the facts nor any evidence support such a conclusion. Therefore, I disagree with the assessing officer on this conclusion and hold it to be incorrect. Further, the assessing officer has disallowed all on-site expenses without verifying any details.
6.1. On the other hand the appellant has not even been able to provide the bills and vouchers relating to purchase of software. It has not been able to correlate the purchases with the sales and has not been able to provide any details at all regarding the various expenses. Its claim of exemption under section 10A is also unsubstantiated. Finally, as already quoted above, the appellant has admitted that its books of account are not ITA Nos. 165/Hyd/2013 :- 8 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., properly maintained and that they should be rejected; and income estimated at 6% of the turnover. The appellant has also agreed that its claim of exemption under section 10A be denied as it is unable to substantiate the same.
7.0. I have seen carefully the facts and evidence and I find that the books of accounts of the appellant do not provide any worthwhile details of its financial dealings. Neither the turnover nor the expenses are verifiable or properly vouched. It is a settled law that wherever the books of accounts do not provide accurate details of the financial affairs, they can be rejected and income can be estimated. Accordingly. I reject the books of accounts. The appellant has stated that its net profit be estimated at 6% of turnover. However, I find that in the case of software development companies the net profits are generally higher. I also find that in the current case there are unsubstantiated cash credits and a whole lot of unsubstantiated purchases. The on-site expenses are also unsubstantiated. In order to account for all the discrepancies and to account for the correct net profit it would be in the fitness of things to estimate the net profit at 10% of the turnover. No exemption under section 10A or any other deduction would be available to the appellant beyond this amount. All discrepancies including unaccounted cash credits would also be included in this estimation. The assessing officer is directed accordingly.
8.0. The other issues like unaccounted cash credits etc are not being adjudicated separately as the estimation above has already taken into account all discrepancies".
4. Aggrieved on the above order, assessee has raised grounds on the 'estimation of income which is to be considered at 3 to 6% instead of 10%' and further allowance of exemption u/s. 10A on the export income. Revenue is aggrieved on the deletion of the addition made by the AO under the head 'software purchases' and further, resorting to estimation by the CIT(A) when books are not rejected by the AO. It is also a ground that the Ld.CIT(A) ignored addition made on account of unexplained cash credits by stating that the same is covered in the estimation of profit. Thus, both the parties are in appeal before us.
ITA Nos. 165/Hyd/2013 :- 9 -: & 238/Hyd/2013
M/s. 3K Technologies Ltd.,
5. It was the contention of Ld. Counsel that Indian office has suffered losses whereas there are profits in the overseas branch and the entire profits is exempt from tax. Since assessee has offered income u/s. 115JB, the same should have been accepted by the Ld.CIT(A). It was further contended that even if estimation was resorted to, the same can only be done on the Indian export turnover, but not the entire turnover of the company as that includes the overseas turnover which cannot be brought to tax in India. Accordingly, he requests for restricting the estimation to the exports made from India only. Further, it was the contention that assessee has suffered losses and estimation of income at 10% is on higher side. It is also submitted that Ld.CIT(A) wrongly denied the benefit u/s. 10A when assessee has not made any such ground nor it is warranted on the facts of the case. He referred to the order of the AO wherein even the disallowance made by him was considered as 'profit' of assessee and proportionate amount was allowed u/s. 10A to an extent of almost Rs. 4 Crores when assessee has claimed only Rs. 1.27 Crores in the computation of income. It was the submission that order of the CIT(A) cannot be considered as correct since assessee has neither admitted for withdrawal of deduction u/s. 10A nor agreed for estimation at 10%. It is also submission that assessee has furnished necessary confirmation letters before the AO with reference to cash credits which should have been enquired by the AO and accepted.
6. In reply, Ld.CIT-DR submitted that the order of CIT(A) is not fully correct. While accepting that income from the overseas business cannot be brought to tax in India, it was submitted that assessee has not furnished necessary details correctly before the ITA Nos. 165/Hyd/2013 :- 10 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., AO. Therefore, AO has to resort to disallowance of the amounts. It was further submitted that Ld.CIT(A) erred in rejecting the books of account, when that is not a ground before the CIT(A) in the appeal. Whether any additional ground was raised or not it is not known from the order. Further, it was submitted that the AO treated the unexplained cash credits as 'income from other sources' and the same cannot be stated as covered by the estimation of profit. Ld. DR relied on the following case law to support that income from other sources is to be taxed separately, even if income from business was estimated.
i. Kale Khan Mohammad Hanif Vs. CIT [50 ITR 1] (SC); ii. CIT Vs. G.S. Tiwari & Co. [357 ITR 651] (Allahabad); iii. CIT Vs. Devi Prasad Vishwanath Prasad [72 ITR 194] (SC); iv. CIT Vs. Maduri Rajaiahgari Kistaiah [120 ITR 294] (AP) It was submitted that the order of the CIT(A) require modification to that extent.
7. Ld. Counsel in reply submitted that the evidence with reference to cash credits have already been furnished before the AO, therefore, the same can be accepted. With reference to income from the overseas operations, it was submitted that the same was exempt from income as rightly considered by the Ld.CIT(A) and further relied on the following case law:
i. CIT Vs. P.V.A.L. Kulandagan Chettiar [267 ITR 654] (SC); ii. Order of ITAT, Mumbai in the case of Bank of India in ITA Nos. 2781 & 3534/Mum/2011 dt. 15-06-2012;ITA Nos. 165/Hyd/2013
:- 11 -: & 238/Hyd/2013
M/s. 3K Technologies Ltd.,
7.1. In the course of present proceedings, Ld. Counsel raised additional grounds of appeal on the issue that the order of the AO (ITO) is void as the monetary limit for assigning cases to ITO is only upto Rs. 30 Lakhs as per the Board instructions No.1/2011 dt. 31-01-2011 which was applicable from 01-04-2011. In the course of present proceedings, when it was pointed out that the Board instruction was issued w.e.f. 01-04-2011 and the impugned assessment year being AY 2009-10, for which the said instruction was not applicable, having been selected for scrutiny much earlier than the issuance of circular, Ld. Counsel withdrew the grounds pertaining to this issue. Accordingly, grounds on issue of jurisdiction raised by assessee are treated as withdrawn.
8. We have considered the rival submissions and perused the evidence placed on record. As seen from the P&L A/c placed on record, assessee has shown the total turnover at Rs.
78,07,97,271/- and total software purchases debited at Rs. 64,09,69,596/-. However, the bifurcation of the turnovers furnished indicate that the exports from India are to the extent of Rs. 20,80,35,745/- whereas the overseas turnover was to the extent of Rs. 57,27,61,526/-. Assessee has debited Rs. 14,26,60,894/- towards exports from India and Rs. 49,83,08,802/- towards overseas turnover. The overseas branch has earned a profit of Rs. 4,18,05,148/- in its operations, the Indian unit has suffered a loss to an extent of 2,90,08,703/-. One of the major expenditures in Indian operations was of on-site expenses of Rs. 7,38,91,898/- claimed against Indian exports. As seen from the orders of the AO, he has confused himself with various figures and in fact has disallowed more than what assessee has claimed in the ITA Nos. 165/Hyd/2013 :- 12 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., P&L A/c. That apart AO has not noted the different turnovers, the turnover of exports undertaking from India and turnover from the overseas branch. In our opinion, the AO has totally misled himself in making the disallowance in the order, including the computations u/s. 10A. Ld.CIT(A) had correctly came to the conclusion that income from overseas operations cannot be brought to tax in India and to that extent, supported by various case law, he has rightly concluded that profits earned by the USA branch cannot be brought to tax in India. We affirm the order to that extent. Consequently, the claim of purchases to an extent of Rs. 49,83,08,802/- made in the branch accounts are not covered by the provisions of TDS as the transactions occurred overseas. Even with reference to the software purchases, claims made with reference to exports from India, it was submitted by Ld. Counsel that they are not covered by the provisions of TDS. Even though various case law relied that the software purchases that it does not amount to royalty, we are not adjudicating that issue on the simple reason that there are no outstanding payments ( payble) at the end of the year to be disallowed u/s. 40(a)(ia). If the issue is considered u/s. 201, then a finding is required whether the amounts paid are covered by TDS provisions or not? Since the disallowance made was under the provisions of Section 40(a)(ia), following the Special Bench decision in the case of Merilyn Shipping and Transport Ltd., Vs. ACIT reported as 136 ITD 23 (SB) [16 ITR 1] (SB)(Visakha.)(Trib.), we are of the opinion that since there is no outstanding payable at the end of the year, provisions of Section 40(a)(ia) are not attracted. To that extent, order of the CIT(A) gets affirmed and Revenue grounds on this issue are to be dismissed.
ITA Nos. 165/Hyd/2013 :- 13 -: & 238/Hyd/2013
M/s. 3K Technologies Ltd.,
9. The other issue is with reference to estimation of income and allowance of deduction u/s. 10A on the same. As can be seen from the order of the AO, there is no dispute with reference to claim of 10A. In fact, AO has re-worked out the profit and allowed the deduction more than what assessee has claimed by way of his own working by taking a less export turnover and more profit. There is no dispute with reference to the fact that assessee is eligible for a deduction u/s. 10A. Therefore, order of the CIT(A) that deduction u/s 10A is not to be allowed has no basis. As seen from the record also, there is no such admission by assessee that he will not claim 10A deduction. Therefore, assessee's grounds to that extent are allowed. To that extent, order of the CIT(A) gets modified.
10. Coming to the issue of estimation of income u/s. 10A, assessee himself has accepted the estimation of income by rejecting the books of account. Assessee admitted for estimation up to 6%, whereas Ld.CIT(A) without any basis, has estimated the income at 10%. Whether it is 3% or 6% or 10%, the same does not matter as the entire income get exempted u/s. 10A. In view of that, we do not intend to estimate the profit at any particular rate. Since Ld. CIT(A) has already, rather arbitrarily, fixed the rate at 10%, we are of the opinion that the estimation of income at 10% can be resorted to only on the software exports from India of Rs. 20,80,35,745/-.
11. One issue which AO has considered and CIT(A) has not adjudicated is the amounts brought in to India. With reference to overseas turnover, Ld.CIT-DR was of the opinion that Explanation- 2 to Section 10A that sale proceeds referred to in sub-section shall ITA Nos. 165/Hyd/2013 :- 14 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., be deemed to have been received in India where such sale proceeds are credited to a separate bank account maintained for the purpose by assessee with any bank outside India with the approval of RBI is applicable. Ld. Counsel submitted that assessee has approved bank accounts and was in business in earlier years also and also in later years. Therefore, the Explanation-2 gets satisfied. It was submitted that assessee has received entire amount into India and accordingly, referring to Form 56F filed during the course of assessment proceedings, it was submitted that restriction made by the AO is not warranted. We are not in a position to give any finding on this issue as those requires factual verification by the AO. Therefore, subject to satisfying the AO with reference to the export proceeds received into India, the AO is directed to estimate the income only on the export turnover from India at 10% and allow the deduction u/s. 10A as applicable as per the provisions of the Act. In case the total income determined becomes less than the income offered the income under the MAT provisions, AO is directed to accept the income offered under MAT provisions by assessee at Rs. 1,27,55,690/-. Subject to the above observations, assessee's grounds are considered allowed partially.
11.1. In the result, appeal of assessee is partly allowed.
12. Coming to Revenue appeal, as already stated above, we do not find any reason to interfere with the order of the CIT(A) with reference to issue of software purchases. Just because TDS was not made, the same cannot be considered as bogus software purchases as raised in the grounds. In fact AO has not disallowed the software purchases u/s. 37(1), therefore, the grounds raised by ITA Nos. 165/Hyd/2013 :- 15 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., the Revenue per se is not correct, as the issue of bogus nature does not arise at all either before the AO or before the CIT(A). The issue before the authorities was only with reference to disallowance u/s. 40(a)(ia) for not deducting tax on the said amounts. The Revenue Ground No. 2 raised on the issue is accordingly misleading and does not warrant any interference/adjudication.
13. Coming to the estimation of income after rejecting the books of account, this issue was already discussed in assessee's appeal. We do not find any reason to interfere, since the AO has not understood the facts of the case properly while making the assessment. Ld.CIT(A) therefore had to resort to estimation of income which assessee has not objected. Accordingly, Ground Nos. 3 & 4 on the issue are rejected.
14. Ground Nos. 5 & 6 pertains to the issue of unexplained cash credits. It is the contention of assessee that it has furnished necessary evidence/confirmations before the AO. Ld.CIT(A) order that these are covered by the estimation of income cannot be accepted, in view of the judgment of the Hon'ble Supreme Court in the case of Kale Khan Mohammad Hanif Vs. CIT [50 ITR 1] (SC) (supra).
14.1. In all the cases relied on by the Ld.DR in the course of arguments, the principle is established that AO has power to bring to tax unexplained cash credits as income from other sources provided they are not connected to business activity/business income. In view of that, the order of the CIT(A) to that extent is not justifiable. However, it is the contention of assessee that necessary ITA Nos. 165/Hyd/2013 :- 16 -: & 238/Hyd/2013 M/s. 3K Technologies Ltd., evidence for proving the genuineness of the credits were already furnished before the AO which are not verified/accepted. In view of that we are of the opinion that in principle while accepting that income from other sources can be brought to tax by way of unexplained cash credits, the issue is restored to the file of the AO to examine the cash credits separately and give due findings whether they are explained cash credits or unexplained cash credits. Assessee is directed to furnish necessary evidence and co- operate with the AO in making necessary enquiries if required in support of the claim. Therefore Ground Nos. 5 & 6 raised by Revenue are allowed for statistical purposes.
14.2. In the result, Revenue appeal is considered partly allowed for statistical purposes.
15. To sum-up, appeal of assessee is partly allowed and appeal of Revenue is considered partly allowed for statistical purposes.
Order pronounced in the open court on 26th April, 2017 Sd/- Sd/-
(G. PAVAN KUMAR) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 26th April, 2017
TNMM
ITA Nos. 165/Hyd/2013
:- 17 -: & 238/Hyd/2013
M/s. 3K Technologies Ltd.,
Copy to :
1. M/s. 3K Technologies Ltd., Hyderabad. C/o. P. Murali & Co., Chartered Accountants, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad.
2. The Deputy Commissioner of Income Tax, Circle-2(2), Hyderabad.
3. The Income Tax Officer, Ward-2(2), Hyderabad.
4. CIT (Appeals)-III, Hyderabad.
5. CIT-II, Hyderabad.
6. D.R. ITAT, Hyderabad.
7. Guard File.