2011 (1) TMI 1114 - HC - Income Tax

Deduction u/s 80HHE - deduction of the profit earned from the export of computer software - Held that - Supreme Court in K.RAVINDRANATHAN NAIR S CASE 2007 (11) TMI 10 - Supreme Court of India applies to consultancy charges received in India which is unrelated to the business of export of computer software and so much so, 90% of the income by way of consultancy charges received in India should be excluded under Explanation (d) to Section 80HHE in the computation of eligible deduction under the Act - Decided against the assessee Validity of Reopnening - Held that - While working out the eligible deduction did not exclude 90% of the income received by way of consultancy charges which is to be specifically excluded by virtue of mandatory provision contained in Explanation (d) of Section 80HHE. In fact, since there is an omission to apply the statutory provision in the working out of eligible deduction of profit on export of software, the assessment could even be rectified through rectification proceedings under Section 154. In any case when the mandatory provision is not followed leading to evasion of tax by way of excess relief granted to the assessee, the remedy open to the officer is to revise the assessment by invoking powers under Section 147 - Decided against assessee

Summary

Issues:
1. Claim of deduction under Section 80HHE for export of computer software.
2. Validity of reassessment completed under Section 147.
3. Interpretation of statutory provisions regarding exclusion of income for eligible deduction.

Analysis:
1. The appellant, a private limited company engaged in export of computer software and consultancy services in India, claimed deduction under Section 80HHE for the profit earned from software export during the assessment year 1999-2000. The issue arose when the Assessing Officer revised the assessment, excluding profit from consultancy services in India from the claimed deduction, which was initially allowed but later deemed incorrect due to violation of statutory provisions. The CIT(Appeals) allowed the claim, but the Tribunal, relying on a Supreme Court decision, reversed the order, leading to the appellant's appeal. The High Court upheld the Tribunal's decision, emphasizing the need to exclude income unrelated to export business, such as consultancy charges received in India, as mandated by Explanation (d) to Section 80HHE.

2. The validity of reassessment under Section 147 was challenged by the appellant, arguing it was a pure legal question concerning the officer's jurisdiction. The High Court allowed the appellant to raise this ground, ultimately rejecting the challenge against the reassessment. The court highlighted that the failure to exclude 90% of consultancy charges, as required by Explanation (d) of Section 80HHE, could have been rectified through Section 154 proceedings or justified the revision of assessment under Section 147 due to tax evasion resulting from excess relief granted.

3. The interpretation of statutory provisions regarding the exclusion of income for eligible deduction under Section 80HHE was crucial. The court compared Explanation (d) to Section 80HHE with Explanation (baa) to Section 80HHC, citing a Supreme Court decision to support the exclusion of income similar to brokerage, commission, interest, or rent, which is not attributable to export business. The court emphasized that the purpose was to determine the precise profit derived from export business, especially when an assessee is engaged in both local and export businesses. The exclusion of consultancy charges received in India, unrelated to software export, was deemed necessary to compute the eligible deduction accurately, aligning with the statutory provisions and previous judicial interpretations.

In conclusion, the High Court dismissed the appellant's appeal, upholding the Tribunal's decision on both the deduction claim and the validity of reassessment under Section 147, emphasizing compliance with statutory provisions and the exclusion of income unrelated to the export business for accurate deduction calculation.