2006 (8) TMI 333 - AT - Income Tax

Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings

Issues Involved:
1. Deduction under section 80-IB.
2. Deduction under section 80HHC.

Issue-Wise Detailed Analysis:

1. Deduction under Section 80-IB:

The primary issue was whether the assessee was entitled to a deduction under section 80-IB amounting to Rs. 1,47,95,357. The assessee claimed this deduction for its business of manufacturing communication equipment parts, components, and software. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied the deduction on several grounds, including the nature of the business, the number of employees, and the adequacy of electricity consumption.

The tribunal analyzed the following key points:

- Formation of Business: The CIT(A) confirmed that the assessee was not formed by splitting up or reconstruction of an existing business, as no machinery was transferred from the sister concern, M/s. Secure Telecom Ltd., and both companies were operating independently.

- Manufacturing Activities: The tribunal noted that the software developed by the assessee was considered as "goods" based on the Supreme Court's decision in Tata Consultancy Services Ltd. The tribunal also referred to various cases where software development was treated as manufacturing for tax purposes.

- Verification by Authorities: The tribunal observed that the General Manager, District Industries Centre (DIC), had verified the plant and machinery installed at the assessee's premises, supporting the claim of manufacturing activities.

- Books of Account: The tribunal held that non-maintenance of separate books for trading and manufacturing activities did not justify the rejection of the claim under section 80-IB, as long as the overall books were maintained and accepted by the department.

- Electricity Consumption: The tribunal found the AO's argument about low electricity consumption unconvincing, noting that the power required for software development was minimal.

- Number of Employees: The tribunal found that the assessee employed more than the requisite number of employees during the relevant period, fulfilling the conditions of section 80-IB(2)(iv).

- Statements During Survey: The tribunal dismissed the evidentiary value of statements recorded during the survey under section 133A, as they were not recorded under oath and lacked proper authentication.

Based on these findings, the tribunal concluded that the assessee fulfilled all the conditions laid down in section 80-IB(2) and directed the AO to accept the claim of deduction under section 80-IB.

2. Deduction under Section 80HHC:

The assessee claimed a deduction under section 80HHC amounting to Rs. 11,42,990, which was disallowed by the AO on the grounds that the assessee did not provide complete details and supporting evidence. The AO also noted that the assessee was dealing in computer software, suggesting that the deduction should have been claimed under section 80HHE instead.

The CIT(A) upheld the AO's decision, noting that there was no evidence that sale proceeds in convertible foreign exchange were received within six months. Additionally, some bills were signed by an employee of the sister concern, M/s. Secure Telecom Ltd., raising doubts about the authenticity of the transactions.

The tribunal observed that the CIT(A)'s decision was based on the fact that the bills were signed by an employee of the sister concern, but it was not clear whether this employee was not employed by the assessee during the relevant period. The tribunal also noted the lack of clarity on whether the AO had given the assessee an opportunity to provide evidence of receipt of sale proceeds in convertible foreign exchange.

The tribunal set aside this issue and remanded it back to the AO for fresh adjudication, directing the AO to provide the assessee with an opportunity to furnish the necessary evidence and to re-examine the claim in accordance with the law.

Conclusion:

The tribunal allowed the appeal of the assessee in part. It directed the AO to accept the claim of deduction under section 80-IB and remanded the issue of deduction under section 80HHC back to the AO for fresh adjudication.

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