2011 (7) TMI 531 - HC - Income Tax

Deduction under Section 10A disallowed - assessee was engaged in development of computer software a- Held that - As it was found that the assessee had its business in another STPI area before shifting to the new STPI premise, where the production was carried out after 12.01.2001 and thus, the assessee fulfilled the criteria of having made production before 12th January, 2001 from another premise which was also a STPI area, and after 12th January period, it shifted to new STPI premise. Therefore, pre-condition set by Software Technology Park, Gandhinagar was fulfilled - The assessee also was found having sufficient number of computers and again, software was produced by own employees whose salaries and allowances to the tune of Rs.31,71,464/- was established and there was no material to show that the assessee has purchased any readymade developed computer software for exporting it - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of deduction under Section 10A of the Income Tax Act for the assessment year 2001-2002.
2. Validity of the Tribunal's order deleting the disallowance of deduction under Section 10A.
3. Compliance with the conditions of Section 10A for newly established undertakings in free trade zones.

Analysis:
Issue 1:
The Assessing Officer disallowed the deduction claimed under Section 10A amounting to Rs.2,39,15,437 by the assessee-respondent for the assessment year 2001-2002. The disallowance was based on the grounds that manufacturing operations were not conducted in the area registered under Software Technology Parks of India (STPI) as required by the Act. The Assessing Officer found discrepancies related to manufacturing, possession of assets and manpower, development charges paid to outside agencies, nature of sales receipts, and lack of necessary approvals. Consequently, the claim was disallowed as it was deemed to violate Section 10A(6)(i) of the Act.

Issue 2:
The CIT (Appeals) and the Income Tax Appellate Tribunal ruled in favor of the assessee, setting aside the Assessing Officer's order. The CIT (Appeals) allowed the claim under Section 10A, stating that the assessee had met the conditions specified for newly established undertakings in free trade zones. The Tribunal further supported the assessee's position by confirming that manufacturing activities were conducted, requisite permissions were obtained, and the shift to a new STPI premise complied with the necessary criteria. The Tribunal also noted that the assessee had the required infrastructure and evidence of in-house software development without reliance on externally purchased software.

Issue 3:
Upon careful consideration of the evidence and reasoning presented, the Court found that the assessee had fulfilled the conditions of Section 10A for newly established undertakings in free trade zones. The Court acknowledged the findings of the Tribunal regarding the production activities, compliance with STPI requirements, possession of necessary resources, and in-house software development by the assessee's employees. Consequently, the Court concluded that the authorities had appropriately assessed the situation, and the assessee was entitled to the deduction under Section 10A of the Income Tax Act. As there were no legal issues to be determined, the Tax Appeal was dismissed based on the comprehensive analysis provided by the Adjudicating Authorities.