2006 (1) TMI 539 - AT - Income Tax

Issues Involved:
1. Disallowance of deduction under section 80HHC instead of section 80HHE.
2. Bona fide belief based on a prior ITAT decision.
3. Procedural defect in filing the audit report.
4. Jurisdiction of CIT(A) in disallowing the entire deduction.
5. Erroneous computation of deduction.
6. Treatment of shares received as foreign exchange.
7. RBI's permission for extension to repatriate export proceeds.
8. Charging of interest under section 234B.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80HHC Instead of Section 80HHE
The CIT(A) disallowed the deduction of Rs. 1,67,38,513 under section 80HHC, asserting that the claim should have been made under section 80HHE. The audit report was filed in Form No. 10CCAC instead of Form No. 10CCAF. The Tribunal noted that the assessee's business involved exporting digitalized synopses, which were sent via the internet, thus not qualifying as "goods and merchandise" under section 80HHC. The Tribunal held that the assessee should have claimed the deduction under section 80HHE, which specifically covers software exports.

2. Bona Fide Belief Based on Prior ITAT Decision
The assessee argued that the claim was made under section 80HHC based on the Bombay ITAT decision in Tangerine Export (49 ITD 386). The Tribunal found that this decision did not support the case, as it held that non-physical software exported through digital means does not qualify as "goods and merchandise" under section 80HHC.

3. Procedural Defect in Filing the Audit Report
The assessee contended that the procedural defect of filing Form No. 10CCAC instead of Form No. 10CCAF should not lead to the denial of the deduction, citing CBDT Circular No. 1/2001. The Tribunal agreed, noting that the audit report contained all essential information. The Tribunal emphasized that the Assessing Officer should have requested the correct form, as the mistake was bona fide.

4. Jurisdiction of CIT(A) in Disallowing the Entire Deduction
The CIT(A) was criticized for disallowing the entire deduction without considering that the Assessing Officer had allowed a partial deduction of Rs. 47,16,987. The Tribunal found this action unjustified, especially since the department allowed similar deductions in other assessment years under section 143(1).

5. Erroneous Computation of Deduction
The assessee argued that the deduction was erroneously computed due to incorrect apportioning of direct costs. The Tribunal found that the assessee was entitled to a deduction of Rs. 62,54,283, not Rs. 47,16,987, as the Assessing Officer had computed.

6. Treatment of Shares Received as Foreign Exchange
The assessee received shares in lieu of foreign exchange, arguing that these should be treated as foreign exchange. The Tribunal rejected this, noting that the RBI did not recognize shares as convertible foreign exchange. The Tribunal cited RBI's directive to disinvest the shares and repatriate the proceeds, emphasizing that shares are not equivalent to foreign exchange under section 80HHC.

7. RBI's Permission for Extension to Repatriate Export Proceeds
The assessee received RBI's permission for an extension to repatriate export proceeds represented by shares. The Tribunal noted that this did not change the fact that shares are not convertible foreign exchange. The Tribunal upheld the disallowance of the deduction for the amount received in shares.

8. Charging of Interest under Section 234B
The assessee contested the interest charged under section 234B, arguing that the advance tax liability did not exceed Rs. 50,000. The Tribunal directed the Assessing Officer to provide consequential relief, noting that the issue was consequential in nature.

Conclusion
The Tribunal allowed the appeal in part, granting the deduction under section 80HHC for Rs. 62,54,283 while disallowing the deduction for the amount received in shares. The Tribunal emphasized the need for procedural fairness and consistency in applying tax laws.

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