Income Tax Appellate Tribunal - Hyderabad
M/S. Seven Hills Business Solutions,, ... vs Department Of Income Tax on 2 March, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No.796/Hyd/2011 : Assessment year 2007-08
M/s. Seven Hills Business V/s. Dy. Commissioner of Income-tax,
Solutions Ltd., Hyderabad Circle 3(1), Hyderabad
( PAN - AAECS 1694 K)
(Appellant) (Respondent)
ITA No.819/Hyd/2011 : Assessment year 2007-08
Dy. Commissioner of Income- V/s. M/s. Seven Hills Business Solutions
tax, Circle 3(1), Hyderabad Ltd, Hyderabad
( PAN - AAECS 1694 K)
(Appellant) (Respondent)
Assessee by : Shri P.Murali Mohana Rao
Department by : Smt. Alka R.Jain
Date of Hearing 24.7.2012
Date of Pronouncement 14.9.2012
ORDER
Per Chandra Poojari, Accountant Member:
These are cross appeals -one by the assessee and the other by the Revenue- are directed against the order of the Commissioner of Income- tax(Appeals) Guntur, dated 2.3.2011. Since common issues are involved, these appeals are being disposed off with this common order for the sake of convenience.
2 ITA No.796 & 819/Hyd/11M/s. Seven Hills Business Solutions Ltd.
Hyderabad Assessee's Appeal : ITA 796/Hyd/2011:
2. The only issue involved in the assessee's appeal is with regard to disallowance of expenditure in terms of S.40a(ia) of the Act, in view of non-
deduction of Tax at Source under S.194J of the Act.
3. Assessing officer disallowed a sum of Rs.10,92,886, as the assessee failed to comply with the requirements of S.194J of the Act, by applying the provisions of S.40a(ia) of the Act. On appeal, the CIT(A) confirmed such disallowance made by the assessing officer. Hence, assessee is in second appeal before us.
4. We heard both the parties and have perused the record. In our opinion, the issue involved in this appeal of the assessee is covered by the decision of the Special Bench of the Tribunal(Visakhapatnam) dated 29th March, 2012 in the case of Merilyn Shipping & Transports Visakhapatnam V/s. ACIT Range-I, Hyderabad in ITA No.477/Viz./2008 for assessment year 2005-06 in favour of the assessee and against the Revenue. Relevant portion of the said decision is reproduced below-
" .... I have gone through the detailed reasons given by Shri Mahavir Singh while coming to the conclusion that the word 'payable' used in section 40(a)(ia) of the Income tax Act, 1961 has to be given its natural meaning, and, going by strict interpretation, I am of the firm view that section 40(a)(ia) of the Act is applicable only to expenditure which is payable as on 31st March of every year and cannot be invoked to disallow the amounts which have already been paid during the previous year, without deducting tax at Source. I therefore, agree with the view taken by Shri Mahavair Singh, JM and answer the question accordingly. The matter may now be placed before the Division Bench for passing appropriate orders, in the above listed cases, in the light of the majority view of the Members consisting of the Special Bench."
In view of the above order of the Tribunal, we hold that the provisions of S.40a(ia) are applicable only in respect of the expenditure which remains 3 ITA No.796 & 819/Hyd/11 M/s. Seven Hills Business Solutions Ltd.
Hyderabad payable as on 31st of the March of the relevant previous year, and such disallowance cannot be made in respect of the expenditure which has already been paid during the relevant previous year, though without deducting tax at source. We therefore, set aside the impugned order of the CIT(A) and direct the assessing officer to allow the impugned expenditure to the extent already paid during the relevant previous year and accordingly restrict the disallowance only to the amount remaining outstanding as at the end of the relevant previous year.
5. In the result, assessee's appeal is partly allowed.
Revenue's Appeal : ITA 819/Hyd/2011:
6. The first grievance of the Department in this appeal is with regard to granting of deduction under S.10A of the Income-tax Act by the CIT(A), in the absence of requisite proof and details furnished by the assessee.
7. The assessee company claimed deduction under S.10A of the Act to the tune of Rs.1,00,89,335. The same was disallowed by the assessing officer for the reasons that the assessee has not furnished the evidence to show that the assessee has received the amount in question in convertible foreign exchange, and has also not furnished the requisite details in Form 56F. Before the CIT(A), assessee furnished the relevant details to substantiate its claim of eligibility of exemption under S.10A of the Act. The assessee furnished the details of the US Branch sales and the bank account copy confirming the receipts of sales. Taking note of the same, the CIT(A) observed that it is an admitted fact that the assessee is a software developer and the assessee made exports to USA the entire volume of software developed during the year under consideration. He further observed that this is not the first year of operations 4 ITA No.796 & 819/Hyd/11 M/s. Seven Hills Business Solutions Ltd.
Hyderabad claiming exemption under S.10A of the Act. The CIT(A) accordingly granted deduction under S.10A of the Act in accordance with Form No.56F furnished by the assessee.
8. Aggrieved by the relief granted by the CIT(A), Revenue is in appeal before us on this issue.
9. We have heard both the parties and perused the material on record. The assessee is a software developer and this is not the first year of operation. In earlier years also, the assessee has claimed exemption under S.10A, and as is evident from the copies of the assessment orders for earlier years furnished before us, the same has been has been allowed by the assessing officer as well. The assessee has filed all the requisite details as required under S10A of the Act before the CIT(A). Being so, we do not see any infirmity in the action of the CIT(A) in granting deduction under S.10A Act. The assessing officer cannot disturb the exemption under S.10A in the middle of the period, having granted the same in the earlier years, unless he has material to show that the assessee has violated any of the provisions of S.10A of the Act, during the year under appeal. Therefore, in our opinion, the CIT(A) is justified in granting deduction under S.10A. Accordingly, we uphold the impugned order of the CIT(A) and reject the grounds of the Revenue on this issue.
10. The next grievance of the Revenue in this appeal is with regard to disallowance of US branch expenditure to the tune of Rs.11,96,91,582.
11. Before the assessing officer, who disallowed the expenditure in question, the assessee has not furnished the details of the expenditure incurred in respect of US Branch. However, the assessee furnished the details 5 ITA No.796 & 819/Hyd/11 M/s. Seven Hills Business Solutions Ltd.
Hyderabad of such expenditure incurred on on-sight development of software and pleaded before the CIT(A) that the same has to be considered as deemed export and should to be excluded from the export of software. The assessee has also filed before the CIT(A), the income tax return in respect of the US branch and claimed that the expenditure in question should be allowed as per Explanation 3 of S.10A of the Act. The said explanation relied upon by the assessee before the CIT(A) reads as follows-
"For the removal of doubts, it is hereby declared that the profit and gains derived from on site development of the computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of the software outside India."
The CIT(A), after considering the details furnished by the assessee, called for remand report from the assessing officer. In the absence of any remand report received from the assessing officer in spite of repeated reminders given to the assessing officer on successive occasions by his predecessor, the CIT(A) drawing his own inference that the assessing officer has no comments to offer, treated the expenditure incurred in foreign branch as incurred for business purposes. He accordingly treated the same as correctly expended for the purpose of the business. He accordingly directed the assessing officer to allow the same.
12. Against the relief granted by the assessing officer, Revenue is in appeal before us on this issue.
13. The Learned Departmental Representative strongly opposed the action of the CIT(A) and relied on the decision of the Delhi Bench of the Tribunal in the case of JCIT V/s. Swarup Vegetable Products (98 TTJ 420), wherein, vide apra-13, it is held as follows-
6 ITA No.796 & 819/Hyd/11M/s. Seven Hills Business Solutions Ltd.
Hyderabad "13. In view of the position enunciated by the judgement of the Apex Court, Hon'ble Delhi High Court and various other High Courts in India, the legal position is quite clear that while deciding a ground of appeal taken by an assessee it is incumbent upon the CIT(A) to give a positive finding of fact. He cannot decide an appeal on the basis of the negative finding that the AO has not inquired into the matter fully or that he has not properly arrived at the finding of fact. The CIT(A) has to decide the matter, on merits on the basis of material already available on record and if for that purpose it is necessary to make further inquiry, the CIT(A) has only two options i.e., either to make further inquiries himself or to have such inquiry as he thinks fit made by the AO. The expression "may" appearing in Section 250(4) is required to be interpreted as "shall". The powers conferred upon the CIT(A) Under Section 250(4) are not merely decorative or cosmetic. They cast upon the CIT(A) an obligation and duty to carry out such further inquiry as is necessary to arrive at a decision on merits on the facts of the case. In the instant case before us the CIT(A) has deleted the addition of the higher amount of Rs. 35 lakhs for the short reason that the AO had made an assessment of Rs. 11,00,562/- also. It was incumbent upon him to arrive at a positive finding as to which of these two additions to the declared income were really called for. We see no merit in the contention of the Ld. CIT(A) that as the amounts had been alleged by the assessee as the sale proceeds of fixed assets, the AO was precluded from applying the provisions of Section 68 of the Act. For arriving at that view it was first necessary to come to the conclusion that there was indeed sale of plant and machinery to M/s A.S. Engineering Works as alleged by the assessee. The Ld. CIT(A) has not addressed himself to that issue at all. We, therefore, consider it necessary to restore this issue to the file of the Ld. CIT(A) for decision afresh in the light of the observations made by us in this order. Let it be clearly understood that for this purpose the CIT(A) would consider on merits as to which one of the two additions i.e., Rs. 20 lakhs or Rs. 11,00,562A should be retained. He should arrive at specific findings of fact as to whether or not the assessee sold plant and machinery to M/s A.S. Engineering Works, Khatoli as claimed by the assessee."
14. On the other hand, the learned authorised representative for the assessee submitted that the assessing officer has not submitted any remand report even after long wait of the CIT(A) for over an year duly sending 7 ITA No.796 & 819/Hyd/11 M/s. Seven Hills Business Solutions Ltd.
Hyderabad reminders to the assessing officer for the same. It was in the absence of any response to the assessing officer in spite of repeated reminders, that the CIT(A) drew his own inference, and allowed the claim of the assessee. He prayed that the order of the CIT(A) is perfectly in order and should be upheld.
15. We heard both the parties and perused the material on record. Admittedly, the CIT(A) in the present case called for remand report of the assessing officer on the issue involved, and waited for over a year. In spite of reminders sent to the assessing officer from time to time, there was no response from the assessing officer. The appeal of the assessee was filed before the CIT(A) on 18.12.2009 and the same was disposed off by the order of the CIT(A) on 12.3.2011. The CIT(A) has written a letter dated 1st March, 2010 informing the DCIT that assessee furnished the additional evidence as per Rule 46A(1) of the Income-tax Rules, and called for his report thereon. Further on 9th August, 2010, he sent a reminder, as there was no reply from the assessing officer. Even thereafter, there was no response from the assessing officer. In the circumstances, the CIT(A) drawing his own inference that the assessing officer has no comments to offer, by furnishing the remand report as called for, proceeded to dispose off the appeal before him on merits. In the circumstances, we find effective opportunity of hearing has been granted by the CIT(A) to the assessing officer, since effective opportunity does not mean giving indefinite period of time. Before us, the Revenue has not placed any material to suggest that the CIT(A) has not given reasonable opportunity of hearing to the assessing officer. In the circumstances, we are inclined to uphold the order of the CIT(A). In view of this, the inference drawn by the CIT(A) that the expenses incurred by the assessee in foreign branch is for the purposes of business only and has to be treated as expended for the purposes of business. Further, as held by the coordinated Bench of the Tribunal in the case of DCIT V/s. Planet Online Private Limited in its order dated 29-8-2008 passed in ITA 8 ITA No.796 & 819/Hyd/11 M/s. Seven Hills Business Solutions Ltd.
Hyderabad No.1016/Hyd/2007 for the assessment year 2004-05, that enhanced income, if any, on account of any disallowance, is construed as income from exports only, consequently boosting the income eligible for exemption under S.10A of the Act. Even on that count also, the claim of be assessee has to be allowed.
16. The next ground is with regard to allowance of expenditure claimed by the assessee towards product development expenditure as expenditure is not allowable for amortization.
17, The assessee has debited an amount of Rs.63,91,878, being expenditure towards product development and the same was written off. As the details of the expenditure were not a furnished by the assessee, the assessing officer disallowed the same. On appeal, the CIT(A) allowed the same observing that the assessee has developed supply chain management software and the expenditure incurred on such product development is written off at the rate of 10% every year, as it is a continuing process. The assessee has been following this system year after year and the same was allowed by the CIT(A). Against the relief granted by the CIT(A), Revenue is in appeal before us.
18. We heard both the parties and perused the materials on record. As seen from the order of the CIT(A), this expenditure has been incurred by the assessee year after year and 10% of the product development expenditure is written off in the year under consideration. This being expenditure of regular nature, and has been incurred by the assessee for the purpose of business, we find no infirmity in the order of the CIT(A) on this issue. The same is accordingly confirmed, and the grounds of the Revenue on this issue are rejected.
19. In the result, Revenue's appeal is dismissed.
9 ITA No.796 & 819/Hyd/11M/s. Seven Hills Business Solutions Ltd.
Hyderabad
20. To sum up, while the appeal of the assessee, being ITA No. 796/Hyd./2011 is partly allowed, appeal for the Revenue being ITA No. 819/Hyd/2011 is dismissed.
Order pronounced in the court on 14.09.2012
Sd/- Sd/-
(Asha Vijayaraghavan) (Chandra Poojari)
Judicial Member Accountant Member
Dt/- 14th September, 2012
Copy forwarded to:
1. M/s. Seven Hills Business Solutions Ltd., C/o. M/s.P.Murali & Co., Chartered Accountants, 6-3-6755/2/3, 1st Floor, Somajiguda, Hyderabad-82
2. Dy. Commissioner of Income-tax Circle 3(1), Hyderabad.
3. Commissioner of Income-tax(Appeals), Guntur.
4. Commissioner of Income-tax III Hyderabad
5. Departmental Representative, ITAT, Hyderabad.
B.V.S.