2016 (8) TMI 506 - AT - Income Tax

Denial of deduction u/s 80IA - adoption of arbitrary figure of 5% of the income as business income - Held that - The assessee has failed miserably to substantiate its claim that it manufacture software, profit from which is eligible for deduction u/s 80IA of the Act. Therefore we confirm the finding of the ld CIT(A) in confirming the disallowance of deduction of ₹ 14.46 lakhs as well as confirming the rejection of the book results applying the provisions of section 145 rws 144 of the Act and considering only 5% of the income of the Assessee as business income and balance 95% as income from other sources. In the result all the grounds of the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Denial of deduction under Section 80IA of the Income Tax Act, 1961.
2. Adoption of an arbitrary figure of 5% of the income as business income.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 80IA of the Income Tax Act, 1961:

The assessee filed an appeal against the order of the CIT (A), Shimla, which denied the deduction under Section 80IA. The assessee claimed to be engaged in the business of software development and filed a return declaring nil income after claiming a deduction of ?14,46,797 under Section 80IA. Initially, the AO allowed this claim, but the CIT, Shimla, later invoked Section 263, deeming the order erroneous and prejudicial to the revenue's interest. The CIT held that the income assessed in excess of 5% should be treated as undisclosed income and that the assessee did not meet the conditions for deduction under Section 80IA.

The coordinate bench modified the CIT's order and directed the AO to scrutinize the claim's genuineness and fulfillment of conditions without reviewing the decision on whether the activity fell within the ambit of industrial undertaking eligible for deduction under Section 80IB. The AO, upon re-assessment, rejected the books of account citing discrepancies and the incompetence of the assessee's staff to develop software, leading to the disallowance of the deduction under Section 80IA. The CIT (A) upheld this finding, and the assessee appealed.

The tribunal noted that for deduction under Section 80IA, the assessee must be engaged in manufacturing or production employing more than 10 workers and should furnish a certificate by a chartered accountant. The assessee, a partnership firm formed by individuals with no expertise in software development, claimed to have employed 14 staff members, yet failed to substantiate their qualifications and roles effectively. The financial details showed a high profit margin, raising suspicion about the genuineness of the claim.

The CIT (A) and AO found that the assessee did not have sufficient machinery, skilled manpower, or infrastructure to develop software. The tribunal upheld these findings, concluding that the assessee failed to meet the basic conditions for deduction under Section 80IA, including employing 10 or more workers in the manufacturing process and proving the development of software. The tribunal also noted that the assessee's activities did not qualify as manufacturing under the amended provisions of Section 80IA.

2. Adoption of an Arbitrary Figure of 5% of the Income as Business Income:

The AO, during reassessment, rejected the books of account and considered only 5% of the declared turnover as business income, treating the remaining 95% as income from undisclosed sources. The CIT (A) upheld this approach, noting the absence of sufficient evidence to support the assessee's claims. The tribunal confirmed the CIT (A)'s finding, stating that the assessee failed to substantiate its claim of manufacturing software, and thus, the rejection of the book results and the application of Section 145 read with Section 144 of the Act were justified.

In conclusion, the tribunal dismissed the appeal, confirming the denial of deduction under Section 80IA and the adoption of 5% of the income as business income. The order was pronounced in the open court on 09/08/2016.