2014 (11) TMI 1226 - AT - Income Tax

Reopening of assessment - Disallowance u/s 10A - business of development of computer software and export - assessee was running the activities since 1993 under SSI unit and hence the undertaking is not newly established undertaking as registered by Section 10A - Claim accepted earlier but withdrawn in subsequent assessment years - HELD THAT - We find the claim of deduction u/s.10A was also allowed by the Revenue in summary assessment for the A.Y. 2004-05 and there was no scrutiny assessment u/s.143(3). There is also no dispute to the fact that after completion of the assessment for the impugned assessment year on 21-02-2013 the AO had reopened the assessments for A.Yrs. 2006-07, 2007-08 2008-09 by issuing notice u/s.148 on 25-032013 for all the three years. From the reasons recorded for issue of notice u/s.148 we find the reasons for such re-opening was on the basis of the finding of the AO for A.Y. 2010-11. However, we find the AO vide order dated 28-03-2014 has dropped such 147 proceedings for the above 3 years. Identical orders have been passed for A.Yrs. 2007-08 2008-09. From the above chronology of events, it is crystal clear that the claim of deduction u/s.10A of the assessee from A.Yrs. 2004-05 to 2009-10 have been allowed. Whether after allowing the deduction for 6 years can the AO deny the benefit of deduction u/s.10A in the 7th year, i.e. for the impugned assessment year? - We find an identical issue had come up before the Hon ble Bombay High Court in the case of Western Outdoor Interactive Pvt. Ltd 2012 (8) TMI 709 - BOMBAY HIGH COURT held that unless deduction allowed u/s.10A for the first assessment year is withdrawn, denial of exemption u/s.10A for subsequent years is impermissible. Thus claim of deduction u/s.10A cannot be denied to the assessee for the A.Y. 2010-11 since such deduction has been allowed to the assessee from A.Yrs. 2004-05 to 2009-10 - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance under Section 10A of the Income Tax Act, 1961.
2. Fulfillment of conditions under Section 10A(2) of the Act.
3. Utilization of old plant and machinery.
4. Requirement of a master service agreement or statement of works with foreign clients.
5. Location of the software technology park.
6. Consistency in allowing deductions in subsequent years.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 10A of the Income Tax Act, 1961:
The Revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 69,41,350/- under Section 10A, arguing that the business of software development and export was not a newly established undertaking. The CIT(A) countered this by noting that the assessee's business prior to 2003-04 involved low-skilled job work, whereas post-2003-04, it involved sophisticated software development with skilled employees, thus constituting a new and distinct business line.

2. Fulfillment of Conditions under Section 10A(2) of the Act:
The Revenue contended that the assessee's undertaking did not meet the conditions of Section 10A(2), specifically that it was not formed by splitting up or reconstructing an existing business. The CIT(A) found that the new business involved different human resources and new equipment, distinguishing it from the old business. The CIT(A) also noted that the assessee had been allowed the deduction in previous years after scrutiny, and there was no change in the factual matrix to warrant a different view.

3. Utilization of Old Plant and Machinery:
The AO argued that old machinery and plant were being used, and no new machinery was purchased for the new undertaking. The CIT(A) observed that substantial new computer equipment was purchased, and the significant input for software development was human resources, which were newly employed. The CIT(A) relied on judicial precedents to support the view that the new undertaking was not formed by the transfer of old machinery.

4. Requirement of a Master Service Agreement or Statement of Works with Foreign Clients:
The AO's contention that there was no master service agreement or statement of works with foreign clients was rejected by the CIT(A), who pointed out that there is no such requirement under Section 10A. The assessee had provided work orders from foreign entities and earned foreign exchange, fulfilling the necessary conditions.

5. Location of the Software Technology Park:
The AO claimed that there was no zone notified at Jalgaon for a software technology park. The CIT(A) clarified that the geographical location of the software technology park is immaterial, as long as the park is set up in accordance with the notified scheme. The CIT(A) referred to the explanation in Section 10A and judicial precedents to support this view.

6. Consistency in Allowing Deductions in Subsequent Years:
The AO argued that the deduction allowed in previous years could not be the basis for allowing it in the current year. The CIT(A) and the Tribunal noted that the deduction had been allowed in scrutiny assessments for several years without any change in the factual matrix. The CIT(A) cited judicial precedents, including the Bombay High Court's decision in Western Outdoor Interactive, which held that unless the deduction for the first year is withdrawn, it cannot be denied in subsequent years.

Conclusion:
The Tribunal upheld the CIT(A)'s order, emphasizing that the claim of deduction under Section 10A could not be denied for the assessment year 2010-11, as it had been allowed consistently from 2004-05 to 2009-10. The Tribunal relied on the Bombay High Court's ruling that unless the deduction for the first year is withdrawn, it cannot be denied in subsequent years. Consequently, the appeal filed by the Revenue was dismissed.