2018 (4) TMI 324 - AT - Income Tax

Deduction u/s 10A - CIT(A) rejecting the assessee s claim as the assessee failed to demonstrate any evidence of manufacturing of any computer software / program / customized electronic data / project or services of similar nature and further, the services rendered as aforesaid do not reveal production of any computer software or related services of similar nature - Held that - Manufacture of computer software or program was not an essential condition rather the CBDT notification covered wide spectrum of notified services which were eligible for deduction u/s 10A. We find that Ld. CIT(A) has not appreciated the claim of the assessee vis- -vis aforesaid CBDT instructions. It is also noted that other years have been reopened by the revenue to deny the said deduction to the assessee. Therefore, keeping in view these multiple factors, we deem it fit to restore the matter back to the file of Ld. CIT(A) for re-appreciation of assessee s claim and readjudicate the same as per law with a direction to assessee to substantiate his claim.

Issues Involved:

1. Authority to decide on manufacturing and export of software.
2. Enhancement of income by CIT(A) without following procedures.
3. Determination of manufacturing and export of software.
4. Evidence of manufacturing of computer software and eligibility for deduction u/s 10A.
5. Change in facts and circumstances affecting deduction u/s 10A.
6. Incorrect enhancement of income by CIT(A).
7. Reduction of deduction u/s 10A by attributing interest expenses.
8. Reduction of deduction u/s 10A by attributing excess provision of earlier years.
9. Deduction u/s 10A on exchange gain.
10. Set off of unabsorbed depreciation against the income.
11. Addition of dividend income not claimed as exempt.

Detailed Analysis:

1. Authority to Decide on Manufacturing and Export of Software:
The assessee questioned whether the Assessing/Appellate authorities have the power to decide on the manufacturing and export of software when certified by the Software Technology Park Authorities. This issue was not contested before the Tribunal.

2. Enhancement of Income by CIT(A) Without Following Procedures:
The assessee contended that the CIT(A) erred in enhancing the income by ?3,39,75,960 without following the procedures laid down u/s 251. The Tribunal found that the CIT(A) enhanced the assessment based on the opinion that the assessee was not eligible for deduction u/s 10A, which was contested by the assessee.

3. Determination of Manufacturing and Export of Software:
The CIT(A) held that the assessee did not undertake any manufacturing and export of software, which was disputed by the assessee. The Tribunal noted that the assessee claimed to be engaged in the production of computer software and rendering notified IT-enabled services.

4. Evidence of Manufacturing of Computer Software and Eligibility for Deduction u/s 10A:
The CIT(A) concluded that the assessee failed to demonstrate evidence of manufacturing computer software or related services and was not entitled to deduction u/s 10A. The Tribunal referred to the CBDT notification and the interpretation by the Delhi High Court in CIT Vs. ML Outsourcing Services Private Limited, which expanded the scope of "computer software" to include various IT-enabled services. The Tribunal found that the CIT(A) did not consider the CBDT notification properly and restored the matter for re-appreciation.

5. Change in Facts and Circumstances Affecting Deduction u/s 10A:
The CIT(A) stated that new facts emerged in the year under consideration, affecting the deduction u/s 10A, while the assessee argued no change in facts or business activities. The Tribunal directed the CIT(A) to re-evaluate the claim considering the consistent nature of business activities.

6. Incorrect Enhancement of Income by CIT(A):
The assessee argued that the CIT(A) incorrectly enhanced the income by ?3,39,75,960 instead of ?1,26,17,478. The Tribunal noted the need for re-evaluation of the income enhancement by the CIT(A).

7. Reduction of Deduction u/s 10A by Attributing Interest Expenses:
The CIT(A) confirmed the AO's action of reducing the deduction u/s 10A by attributing interest expenses of ?3,80,575 towards the STPI unit. The Tribunal found that the allocation of expenses needed re-examination.

8. Reduction of Deduction u/s 10A by Attributing Excess Provision of Earlier Years:
The CIT(A) did not adjudicate the ground relating to the AO's action of reducing the deduction u/s 10A by attributing excess provision of earlier years of ?83,62,000 towards the non-STPI unit. The Tribunal directed the CIT(A) to adjudicate this issue.

9. Deduction u/s 10A on Exchange Gain:
The CIT(A) did not adjudicate the additional ground regarding the deduction u/s 10A on the exchange gain of ?9,96,985 arising from the restatement of foreign debtors. The Tribunal directed the CIT(A) to consider this ground.

10. Set Off of Unabsorbed Depreciation Against the Income:
The CIT(A) did not adjudicate the ground relating to the disallowance of the set-off of unabsorbed depreciation of ?2,55,37,440 pertaining to AY 1996-97 to 2000-01. The Tribunal directed the CIT(A) to adjudicate this ground.

11. Addition of Dividend Income Not Claimed as Exempt:
The CIT(A) did not adjudicate the ground relating to the addition made by the AO on account of dividend income of ?15,000, which the appellant had not claimed as exempt. The Tribunal directed the CIT(A) to adjudicate this ground.

Conclusion:
The Tribunal restored the matter back to the file of the CIT(A) for re-appreciation of the assessee's claims and re-adjudication as per law, considering the statutory provisions and CBDT notifications. The appeal was partly allowed for statistical purposes.

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