2006 (4) TMI 217 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of deduction under Section 80-IA of the IT Act.
2. Disallowance of Rs. 53,21,968 as inflation of expenses on purchase of software.
3. Application of provisions of Section 40A(2)(a) regarding payments to specified persons.
4. Disallowance of Rs. 2,10,00,000 on account of excessive price paid for purchase of hardware.
5. Disallowance of Rs. 41,64,000 on account of sales commission paid to independent parties.

Detailed Analysis:

1. Allowability of Deduction under Section 80-IA of the IT Act:
The Tribunal held that the deduction under Section 80-IA is only available to the profits and gains derived from the industrial undertaking. The income from AMC charges, installation and technical charges, consultation charges, and software license fees were not derived from the industrial undertaking situated at Pondicherry. Consequently, these incomes were not eligible for deduction under Section 80-IA of the Act. This ground was rejected.

2. Disallowance of Rs. 53,21,968 as Inflation of Expenses on Purchase of Software:
The assessee had passed a journal entry on 31st March 2001, debiting the purchase of software, and reversed it the next day. The AO concluded that this resulted in a reduction of profit by Rs. 53,21,968. The AO added this amount to the income, believing the assessee had inflated expenses to conceal income. The CIT(A) confirmed this action but directed to ensure no double addition in the subsequent year. The Tribunal upheld the AO's decision, stating that the assessee had agreed to offer this amount as income and could not later claim it was erroneously made.

3. Application of Provisions of Section 40A(2)(a) Regarding Payments to Specified Persons:
The AO disallowed Rs. 3,36,46,054 as excessive payment for software purchased from Chip Trans, USA, compared to Diebold Inc., USA. The AO applied Section 40A(2)(a), concluding that the payment to Chip Trans was excessive. The CIT(A) confirmed this disallowance. The Tribunal upheld the lower authorities' decision, noting that the assessee failed to substantiate the higher cost of software from Chip Trans and that the payment was excessive and unreasonable.

4. Disallowance of Rs. 2,10,00,000 on Account of Excessive Price Paid for Purchase of Hardware:
The AO found that the price paid to Chip Trans for ATMs was higher than that paid to Diebold Inc., and disallowed Rs. 21,00,000 as excessive. The CIT(A) found discrepancies in the average cost calculations and sustained the addition. The Tribunal set aside this issue to the AO for re-examination, directing to compare the correct prices and consider the difference due to C&F and FOB pricing.

5. Disallowance of Rs. 41,64,000 on Account of Sales Commission Paid to Independent Parties:
The AO disallowed the commission paid to four entities, noting no evidence of services rendered and that the Bank of Punjab was unaware of these agents. The CIT(A) confirmed this disallowance. The Tribunal agreed with the lower authorities, stating that the assessee failed to prove the necessity and genuineness of the commission payments and that the arrangement appeared to be a device to minimize tax liability.

Conclusion:
The Tribunal allowed the appeal in part for statistical purposes, confirming most of the AO's and CIT(A)'s findings but remanding the issue of hardware purchase prices for re-examination.