Income Tax Appellate Tribunal - Hyderabad
Kernex Micro Systems(India)Limited, ... vs Assessee on 15 February, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
I.T.A. No. 882/Hyd/2006 - A.Y. 1999-2000
I.T.A. No. 883/Hyd/2006 - A.Y. 2000-2001
I.T.A. No. 884/Hyd/2006 - A.Y. 2001-2002
I.T.A. No. 885/Hyd/2006 - A.Y. 2002-2003
M/s. Kernex Micro Systems Vs. Dy. Commissioner of Income-
(India) Ltd., Hyderabad tax, Circle-2(1),
PAN: AAACK8312Q Hyderabad
Appellant Respondent
Appellant by: Shri K.V.S. Bhaskar Rao and
Shri K.A. Sai Prasad
Respondent by: Shri V. Srinivas and
Shri K. Vishwanatham
Date of hearing: 15.02.2012
Date of pronouncement: 30.03.2012
ORDER
PER CHANDRA POOJARI, AM:
These four appeals by the assessee are directed against the common order of the CIT(A)-III, Hyderabad dated 2nd August, 2006. Since the issues raised in these four appeals are common in nature, they are clubbed together, heard together and are being disposed of by this common order.
2. The first common ground in these appeals is with regard to initiation of re-assessment proceedings to consider the excessive claim allowed u/s. 80HHE of the Income-tax Act, 1961.
3. For the purpose of adjudicating this ground, since the facts are same in all these years, we consider the assessment year 1999-2000. In this year there was no scrutiny assessment. The return of income was processed u/s. 143(1) on 29.3.2000. Later, the Assessing Officer issued notice u/s. 147 on 31.3.2004 i.e., 2 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== within four years from the end of relevant assessment year to consider the excessive deduction granted u/s. 80HHC of the Act. The contention of the assessee's counsel is that the notice u/s. 147 was issued for all these assessment years on 31.3.2004. According to the AR, the Assessing Officer had not given any reasons for issuing the notice u/s. 147 of the Act. The Assessing Officer while passing the impugned assessment order, considered the issue relating to the allowability of deduction u/s. 80HHE for these assessment years. According to the assessee's counsel all the required information regarding the allowability of deduction u/s. 80HHE was very much with the Assessing Officer and there is no fresh material came to the knowledge of the Assessing Officer to reopen the assessment. There is no mistake on the part of the assessee in furnishing the relevant information for the purpose of assessment and there is no fresh material which has come to the notice of the Assessing Officer indicating escapement of income and all that the Assessing Officer has done was only re-calculation based on figures available on record. According to the AR unless some fresh material indicating escapement of income has come to the notice of the Assessing Officer no notice u/s. 147 of the Act can be issued. This is so, even in cases where simple intimation u/s. 143(1)(a) of the Act was sent according to the later decision of Mumbai Bench in the case of , since the facts are same in all these years, we consider the assessment year 1999-2000. In this year there was no scrutiny assessment. The return of income was processed u/s. 143(1) on 29.3.2000. Later, the Assessing Officer issued notice u/s. 147 on 31.3.2004 i.e., within four years from the end of relevant assessment year to consider the excessive deduction granted u/s. 80HHC of the Act. The contention of the assessee's counsel is that the notice u/s. 147 was issued for all these assessment years on 31.3.2004. According to the AR, the Assessing Officer had not given any reasons for issuing the notice 3 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== u/s. 147 of the Act. The Assessing Officer while passing the impugned assessment order, considered the issue relating to the allowability of deduction u/s. 80HHE for these assessment years. According to the assessee's counsel all the required information regarding the allowability of deduction u/s. 80HHE was very much with the Assessing Officer and there is no fresh material came to the knowledge of the Assessing Officer to reopen the assessment. There is no mistake on the part of the assessee in furnishing the relevant information for the purpose of assessment and there is no fresh material which has come to the notice of the Assessing Officer indicating escapement of income and all that the Assessing Officer has done was only re-calculation based on figures available on record. According to the AR unless some fresh material indicating escapement of income has come to the notice of the Assessing Officer no notice u/s. 147 of the Act can be issued. This is so even in cases where simply an intimation u/s. 143(1)(a) of the Act was sent according to the latest decision of Mumbai Bench in the case of H.V. Transmissions Ltd. vs. ACIT in ITA Nos. 2230 and 2476/Mum/2010 dated 7.10.2011. According to the assessee's counsel the judgement of Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd., 291 ITR 500 is not applicable to the facts of the case. More so, the same was considered by the Mumbai Bench while adjudicating similar issue in the case of H.V. Transmissions Ltd. (supra). He relied on the judgement of Delhi High Court in the case of P.C. Puri vs. CIT, 151 ITR 584. According to the learned AR, there is no tangible material justifying the reopening of assessment to say that there is escapement of income. He relied on the order of the Tribunal in the case of Telco Dadaji Dhakjee Ltd. vs. DCIT in I.T.A. No. 4613/Mum/05 dated 12th May, 2010. He also relied on the judgement of Delhi High Court in the case of CIT vs. Kelvinator of India & Eicher Ltd., 320 ITR 561.
4 I.T.A. Nos. 882 to 885/Hyd/2006M/s. Kernex Micro Systems (India) Ltd.
==============================
4. The learned DR strongly opposed the argument of the learned counsel for the assessee and submitted that there was no assessment in this case u/s. 143(3) of the Act. Being so, there is non consideration of issue relating to deduction u/s. 80HHE of the Act. He relied on the judgement of Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra). Further he relied on the judgement of Madras High Court in the case of Areva T. and D India Ltd. vs. ACIT (294 ITR 233) for the proposition that if there is any procedural irregularities in completing the re-assessment it does not invalidate the assessment order. He also relied on the judgement P & H High Court in the case of Sunil Bhaseen vs. CIT (179 Taxman 148) for the proposition that the Department was under no obligation to dispose of objection of the assessee to the initiation of proceedings, by way of separate and independent order unless the findings of the Assessing Officer are not pervert in any manner.
5. We have heard both the parties and considered the material available on record. In this case there is no assessment u/s. 143(3) of the Act and only the return was processed u/s. 143(1) of the Act. The reopening of the assessment is within four years from the end of the relevant assessment year. As per clause (b) of Explanation 2 to proviso to section 147 where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, the Assessing Officer is entitled to reopen the assessment. Further in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), it was held that the Assessing Officer is having jurisdiction to issue notice u/s. 148 for bringing to tax income escaping assessment on the ground that the assessee claimed excessive relief or deduction. In the present 5 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== case considering the excessive claim of the assessee u/s. 80HHE, we are of the opinion that reopening of assessment is valid.
6. We have also carefully gone through the order of the Mumbai Bench of the Tribunal in the case of H.V. Transmissions Ltd. (supra). In this case the assessee incurred expenses towards Enterprise Resource Planning software amounting to Rs. 95.14 lakhs. In the accounts the assessee has debited 25% of this amount i.e., Rs. 23,78,500 whereas in the computation of income, the assessee has claimed the entire amount of Rs. 95.14 lakhs as deduction. The expenses incurred by the assessee is payment for acquisition of software which is capital in nature. Hence the assessment is reopened to disallow the same. On appeal to the Tribunal, it was held that there was no material coming to the possession of the Assessing Officer on the basis of which the assessment completed u/s. 143(1) was reopened and this position has not been disputed even by the DR. Being so, in the present case we are not in a position to apply the ratio laid down by that decision because clause (b) to Explanation 2 to proviso 2 of section 147 clearly authorises the Assessing Officer to reopen the assessment. This provision is to be considered for the purpose of adjudicating this issue. This ground relating to reopening of assessment is decided against the assessee.
7. The next common ground in this appeal is with regard to reducing deduction claimed by the assessee u/s. 80HHE on the reasons that (a) setting off of losses of system/training divisions against profit of the software division, (b) wrongly including turnover of system/training division in the total turnover, (c) inclusion of employees compensation in the total turnover instead of netting from expenses and (d) consideration of profit on sale of fixed assets in the total turnover.
6 I.T.A. Nos. 882 to 885/Hyd/2006M/s. Kernex Micro Systems (India) Ltd.
==============================
8. The learned AR submitted that these grounds are raised against aggregation of the profits of the 100% EOU (computer software) with the losses of the training division for purposes of calculating the deduction u/s 80HHE. He submitted that the Commissioner of Income Tax has not given the correct facts. The facts are that the turnovers and profits of the computer software division constituted as a 100% EOU unit are earned independent of the turnover and the financial results of the other division namely, training division for the first two years and railway systems division for the later two years and separate books of account are maintained for each division. The Operations of the computer software division are statutorily required to be kept isolated and independent of the other operations of the company. The activities of the division do not dovetail, interlace or combine with the operations of the other divisions. It is brought to our notice that the income tax department has accepted the independence of the 100% EOU software division in all the years up to A.Y. 1998-99 by accepting a separate computation under the head "Profits and gains from business or profession" in respect of computer software division as distinct and separate from other businesses of the assessee.
9. The assessee's counsel submitted that the computer software division is continued to be recognized and approved by the STPI authorities to date, as a 100% EOU unit for the purposes of Foreign Trade Policy as it fulfils all the conditions there under, though the benefits under sec 10B of the Income Tax Act. 1961 have expired by A.Y. 1998-99. Mere claim or otherwise under sec 10A/10B or sec 80IA/80IB do not determine whether a particular unit is independent or not. The independence has to be judged on the basis of the rules governing the said unit and whether in actual practice and as a matter of fact, it is independent or not. Therefore, the computer software division is independent and distinct from the other businesses of the assessee.
10. The assessee's counsel further submitted that the Assessing Officer in his lengthy order did not dispute any of the above facts 7 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== brought before him. It is not the case of the Assessing Officer that no separate books are maintained. There is no dispute on facts before the Assessing Officer. His only objection stems from the legal angle and confined to interpretation of the decision of Supreme Court in the case of IPCA Laboratories Ltd, Vs DCIT (266 ITR 521) rendered in the context of sec. 80HHC and in the case of H.H. Sir Rama Varma Vs CIT (205 ITR 433) in connection with deduction under sec. 80T. He relied on these decisions to hold that the profits of the computer software division should be reduced by the losses of the training division and the CIT(A) upheld the same.
11. The learned counsel for the assessee further submitted that the Commissioner of Income Tax (A) treated the issue as though there are no separate books of account. He cited all cases relating to 80HHC which are not applicable to the deductions under other sections like 80HHE, 80HHF. For example in sec 80HHC the mechanism for working out the profits derived from export has been given in three different situations depending on the fulfilment of the relevant requirements. But, as per 80HHE(3) and 80HHF(3) it is clear that only one method has been provided for to compute the profits derived from exports. There is no provision similar to clause (b) of sec 80HHC(3) prescribing method of determining the export profits by reducing direct and indirect costs from the export turnover. It is to be noted that sub-section (1) of sec 80HHE simply refers to deduction to the extent of profits derived by the assessee 'from such business'. Hence the lower authorities are not justified in relying on decisions rendered in the context of 80HHC as the deduction claimed in this case is under sec 80HHE. He relied on the order of the Tribunal Bombay Bench, in the case of Sri Adhikari Bros. Television Net works Ltd. Vs. ACIT, 130 ITD 439 which is given in the context of an identical provision in sec. 80HHF While holding that the rules applicable to computation of profit under sec. 80HHC would not apply for arriving at eligible profit under sec. 80HHF. It approved its coordinate bench decision in Datamatics Ltd v ACIT (110 ITD 24) as well as the decision of Bangalore bench in the case of Wipro GE Medical Systems v DCIT 8 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== (81 TTJ 455) rendered in connection with the computation of relief under sec. 80HHE -'computer software'. The learned counsel for the assessee relied on the order of the Tribunal in the case of Datamatics, 110 ITD 24 (Mumbai) Ltd which dealt with the computation of deduction u/s. 80HHE and is directly applicable to the facts of the present case. In that case the assessee-company was exporting computer software manufactured in SEEPZ unit and keeping separate account books. The Assessing Officer held that total turnover of entire business was to be considered instead of turnover of only the unit located at SEEPZ. Before the Tribunal it was pleaded on behalf of the assessee that: "Where the two separate businesses of an assessee are properly demarcated in terms of location, operations and also where separate books of account are maintained for different units, it should be considered as separate entity and only turnover of SEEPZ unit should have been considered while calculating deduction under section 80HHE". It was in this backdrop of facts that the Tribunal held that only turnover of SEEPZ unit was to be considered while calculating deduction under section 80HHE.
12. It was submitted that in two cases considered by Bangalore bench in the case of Wipro GE Medical Systems Ltd v DCIT (2003) 81 TTJ 455 and Wipro Ltd vs. DCIT (2006) (96 TTJ 211 /5 SOT
805) also relate to sec 80HHE. In these case, it is held that the inclusion of turnover of the assessee not connected with computer software business was not justified. At paragraph 33 & 34 of the order in the case of Wipro Ltd, the bench held that the total turnover for the purposes of sec. 80HHE can only mean the total turnover of the computer software both in India and abroad. By adverting to the legislative intent, the bench said that it is not correct to include any other turnover not connected with the computer software business and therefore turnovers on account of manufacturing, trading etc., should be excluded from the computation of eligible profit for sec. 80HHE.
13. In the light of the above discussion, the learned counsel for the assessee prayed that the Tribunal be pleased to allow 9 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== relief u/s 80HHE on the profits of the 100% EOU computer software to the exclusion of the profits or losses of other divisions. These grounds are perfectly justified as amount received towards employee's compensation and profit on sale of fixed assets do not form part of the turnover and they may be directed to be deleted from turnovers.
14. The learned DR supported the order of the lower authorities and he also relied on the order of the Tribunal in the case of DCIT vs. EDS Electronics Data Systems (India) (P) Ld., 20 SOT 403 (Del).
15. We have carefully considered the provisions of section 80HHE and the rival arguments. In sub-section (1), it is provided that the assessee shall be allowed a deduction of the profits from the eligible business. Such deduction is to be allowed in computing the total income of the assessee. Sub-section (3) has been enacted only for the purposes of sub-section (1). Sub-section (1) requires that the profits which are eligible for the deduction should be derived by the assessee from the eligible business. What are the profits derived from the eligible business is explained in subsection (3). It says that the profits derived from the eligible business "shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee". Explanation (d) below the section defines the expression "profits of the business" as meaning the profits of the business as computed under the head "Profits and gains of business" as reduced by, inter alia, 90% of the receipts by way of brokerage, commission, etc. which are included in such profits. The working of the Assessing Officer, is premised on the assumption that the expression "profits of the business" appearing in sub-section (3) read with Explanation (d) means profits of all the businesses carried on by the assessee. The Assessing Officer has taken the business income as a whole. This figure of profit represents profits of the various businesses carried on by the assessee including the profits on export of computer software (eligible business).
10 I.T.A. Nos. 882 to 885/Hyd/2006M/s. Kernex Micro Systems (India) Ltd.
==============================
16. From the business profits figure the Assessing Officer has reduced 90% of the commission, brokerage, etc. as also interest receipt which he has considered tobe income from other sources and has arrived at a figure and thereafter applied the formula to determine the 80HHE deduction. He did not consider it necessary to examine the assessee's contention that the total turnover of only the eligible business should be taken note of for the purpose of applying the formula laid down in sub-section (3).
17. The controversy before us therefore is limited to the question as to whether, while applying sub-section (3) and the formula prescribed therein, the expression "profits of the business" should mean only the profits of the eligible business or the profits of all the businesses carried on by the assessee. Whereas the figure adopted by the Assessing Officer represents the aggregate profits of all the businesses carried on by the assessee, the figure of which forms the basis of the assessee's computation represents only the profits of the eligible business. The task before us is to examine which of the two views is correct.
18. According to us, the view canvassed on behalf of the assessee is to be preferred over the view put forth on behalf of the income tax department. As already noted, sub-section (3) exists only for the purposes of sub-section (1) and it says that profits derived from the business referred to in sub-section (1), which is the eligible business, shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. If regard is had to be use of the definite article "the", it seems to us that the expression "profits of the business" appearing in subsection (3) refers only to the profits of the eligible business which is referred to in sub-section (1). In other words, it is only the profits of the eligible business which have to be split in the same proportion as the export turnover in the said business bears to the total turnover in the said business. Explanation (d), which defines the expression "profits of the business" refers to the profits of the 11 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== business as computed under the head "Profits and gains of business". Under the Income Tax Act, having regard to the provisions of Chapter IV read with section 70 and section 71, it seems to us that in the case of an assessee carrying on more than one business, each business is considered as a separate source falling under the head "Profits and gains of business". The net result of the computation in respect of any source of business, if it is a loss, can be adjusted against the income from any other business as provided in section 70(1). Therefore, when Explanation (d) provides that the expression "profits of the business" means the profits of the business as computed under the head "Profits and gains of business", it means the profits of the eligible business as computed under the aforesaid head. In other words, Explanation (d) does not expand the meaning of the expression "profits of the business" to include profits of all the businesses carried on by the assessee. Having said in sub-section (3) that the profits of the business means the profits of the eligible business referred to in sub-section (1), it is inconceivable that by Explanation (d) the expression "profits of the business" would have been defined to include the profits of all the businesses carried on by the assessee. The Explanation can only explain the expression "profits of the business" appearing in sub-section (3), but it cannot expand the meaning of the expression. Explanation (d) is controlled by subsection (3) and what it says is only descriptive of what the profits of the business are. It only says that the profits of the business, which means the eligible business, are the profits as computed in the assessment order under the head "Profits and gains of business". It has possibly been enacted to clarify or explain that the profits of the eligible business is not what the books of account of the assessee show and it can only be what the assessment order shows. It is also significant that sub-section (3) as well as Explanation (d) refer only to "profits of the business"
and not the profits of all the businesses carried on by the assessee. This reasoning also takes care of the argument of the learned DR based on Tribunal decision. In this view of the 12 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== matter we are unable to accept the contention advanced on behalf of the department.
19. Our view is in conformity with the view taken by a Coordinate Bench in Mumbai in the case of Datamatics Ltd. vs. ACIT (2007) 111 TTJ (Mum) 55. Paragraphs 35 and 36 of this order deal with the question. These paragraphs are as under: -
"35. It is the case of the assessee that assessee company is exporting the computer software manufactured in SEEPZ unit. Assessee is keeping separate account. The entire activity of the assessee in this zone is independent from assessee's other business. There is no overlapping and mingling of the services or any link between the manufacturing activities of both. Both are exclusive of each other.
36. As rightly contended by the learned counsel, section 80HHC speaks of deduction in respect of profits derived by the assessee from export of such goods or merchandise; whereas section 80HHE speaks of such business. 'Such business' only could mean the business of export of computer software. The scope of consideration has been narrowed down. In other words, whether the assessee derives income from any other business or not, is not a criteria and it is wholly extraneous while granting deduction under section 80HHE, which is exclusively for computing deduction in respect of profit from export of computer software etc. For the reasons stated hereinabove, we allow the claim of the assessee on this ground."
In coming to the above conclusion the Tribunal has referred to two judgments of the Madras High Court, in the case of CIT vs. Rathore Brothers (2002) 254 ITR 656 (Mad) and in the case of CIT vs. Madras Motors / M M Forgings Ltd. (2002) 257 ITR 60 (Mad). These two judgments were concerned with section 80HHC of the Act. However, there was similarity between section 80HHC and section 80HHE in the sense that while working out the eligible profits on the basis of the ratio between the export turnover and the total turnover, it was held by the Madras High Court that it is only the profits of the export business that have to be so apportioned and the profits of businesses which did not qualify for the deduction, which were also carried on by 13 I.T.A. Nos. 882 to 885/Hyd/2006 M/s. Kernex Micro Systems (India) Ltd.
============================== the assessee, cannot be held eligible for the deduction. The ratio laid down in these judgments was considered applicable to the provisions of section 80HHE also."
20. The result of the above discussion is that the departmental authorities were not correct in taking the profits of the eligible business as relating to whole business of the assessee. They ought to have taken the figure as contended for by the assessee, which figure represents the profits of the software division which in other words are the profits of the eligible business.
21. In view of the above discussion, we are of the opinion that for the purpose of computing deduction u/s. 80HHE the profit of 100% EOU computer software has to be considered.
22. Regarding the total turnover for the purpose of section 80HHE only the turnover of the computer software both in Indian and abroad has to be considered and turnover of business not connected with software business cannot be considered to include in the total turnover. Similarly amount received towards employee's compensation cannot form part of the total turnover. Same thing is applicable with regard to profit on sale of fixed assets which is the issue for A.Ys. 2001-02 and 2002-03. For this purpose we place reliance on the order of the Pune Bench of this Tribunal in the case of Patni Computer Systems Ltd. vs. DCIT, 60 DTR 113 and Infosys Technologies Ltd. vs. DCIT, 45 SOT 157 (Bang).
23. In the result, all the assessee's appeals are partly allowed.
Order pronounced in the open court on 30th March, 2012.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated the 30th March, 2012
14 I.T.A. Nos. 882 to 885/Hyd/2006
M/s. Kernex Micro Systems (India) Ltd.
==============================
Copy forwarded to:
1. M/s. Kernex Micro Systems (India) Ltd., "Thrushna", Plot No. 7, Software Units Layout, Infocity, Madhapur, Hyderabad-500 081.
2. The Deputy Commissioner of Income-tax, Circle-2(1), Aayakar Bhavan, Hyderabad.
3. The CIT(A)-III, Hyderabad
4. The CIT-II, Hyderabad.
5. The DR - A Bench, ITAT, Hyderabad.
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