2020 (11) TMI 938 - AT - Income Tax

Exemption u/s 10A - denial of exemption as no evidence for software export made through STPI and clearance received from STPI given - HELD THAT - Assessee has discharged the burden with regard to software development and export of software services by furnishing necessary information to the STPI and also before the AO. Merely because of some defects, the same cannot be brushed aside and deny the exemption claimed by the assessee u/s 10A - It is for the department to establish that the assessee has not made software exports or prove that the information furnished by the assessee is false or incorrect. No such exercise was done by the department. No adverse observations were made by the STPI with regard to exports. Though PF, ESI payment does not establish the salary payments, they definitely show that the assessee has engaged the personnel for carrying the work - AO has not conducted any enquiries either with the clients of the assessee or with the STPI to show that the assessee has neither developed the software nor exported the same to the foreign company. STPI is a Government Agency which monitors the activities of the assessee company and collecting timely reports for export of software. The very fact that the STPI has permitted expansion of operations shows that the assessee company was engaged in software development which is proposed for expansion of the existing activity at a broader level. All these facts show that the assessee is carrying on software activity in the STPI and made the exports. Once there is evidence for software export made through STPI and clearance received from STPI by softex forms and the receipt of foreign exchange remittances, it is for the department to bring evidence to deny the exemption u/s 10A of the Act. In the instant case, no such evidence was brought on record by the AO. - Decided in favour of assessee. Disallowance made u/s 14A - scope of assessment u/s 143(3) r.w.s. 153A - HELD THAT - As discussed while discussing the issue of deduction u/s 10A, we have observed that no incriminating material was found in respect of the claim made u/s 10A - Similarly, during the course of search, no evidence was found relating to income derived by the assessee u/s 14A - For the A.Y. 2009-10, the time limit for issue of notice u/s 143(2) got expired and the assessment became completed. Therefore, we hold that the disallowance made by the AO u/s 14A is outside the scope of assessment u/s 153A r.w.s. 143(3). Accordingly, we set aside the orders of the lower authorities and delete the addition made by the AO. Appeal of the assessee for the A.Y. 2009-10 in respect of addition made u/s 14A stands allowed. Disallowance @0.5% of the average investment u/s 14A - HELD THAT - In the instant case, there was no dispute that the assessee has earned dividend income and provisions of Rule 8D attracts. Accordingly, the AO made the disallowance applying Rule 8D, hence, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. The appeals of the assessee on this ground is dismissed. Addition being opening balance of the advances received by the assessee - HELD THAT - The assessee had admitted the income, stating that the advances were no more payable to the customers. The assessee had admitted the income u/s 132(4) and subsequently filed the return of income and paid the taxes. No addition was made by the AO to the returned income. Therefore, there is no grievance to the assessee. Having paid the taxes and filed the return of income, if there is mistake in the return of income , the assessee ought to have filed the revised return of income within the time allowed under the Act. Alternatively, the assessee ought to have taken remedial measures by filing the petition u/s 264 before the Ld.CIT(A). In the instant case, the assessee has neither agitated the addition before the AO nor filed the revision petition u/s 264 of the Act or the revised return. It is also observed from the order of the Ld.CIT(A) that the assessee has not retracted the statement given u/s 132(4) before the AO. All the above facts show that the assessee has admitted the income voluntarily having belief that the advances constitute income. Therefore, we are of the view that filing additional ground before the CIT(A) seeking relief was nothing but an afterthought. The assessee has not established the fact that the admission was made erroneously with supporting evidences regarding the existence of the liability. During the appeal hearing, the Ld.AR pressed for relief of ₹ 4.23 crores. No evidence was placed by the Ld.AR to support the claim of outstanding advance. For a query from the bench, the Ld.AR admitted that there is no evidence of payment of ₹ 4,23,00,000/- to the foreign company subsequently. No reason to interfere with the order of the Ld.CIT(A). Accordingly, we hold that the Ld.CIT(A) rightly confirmed the addition and the same is upheld. The appeal of the assessee on this ground is dismissed. Addition of balance amount of the opening balance - HELD THAT - In the instant case, the AO neither brought any evidence to disprove the genuineness of outstanding liability nor found any material evidencing that the liability was written off by the assessee or the company has waived the advance. No material was brought on record by the AO to show that the liability was not in existence. The AO also failed to establish that the liability outstanding was related to the deduction or loss claimed by the assessee with regard to trading liability in respect of the earlier years. Therefore, the addition made by the AO is unsustainable. Difference of turnover in STPI and the turnover declared in the P L account - HELD THAT - AO did not bring any evidence to show that the assessee has suppressed the turnover by reconciling the turnover of the assessee with the invoices raised and the turnover declared to the STPI. In the instant case the books of accounts were audited and the entire sales were export sales and no domestic sales / cash sales by the company. No evidence was brought on record to show that the assessee has received the sums over and above the sales admitted in the return of Income. The turnover is supported by invoices, therefore, there is no reason to suspect the turnover admitted by the assessee in the books of accounts. Addition made of notional interest on advances made - HELD THAT - The assessee submitted that the amounts were given as advances for purchase of property and subsequently, the lands were also purchased and registered in respect of some properties. It was also explained that in the case of M.Durga Reddy, due to some problem, the sale deed was cancelled and the amount was received back. In the case of Veenus Developers, due to defective construction, the sale agreement was cancelled. The above explanation of the assessee shows that the amounts were advanced for acquiring the properties and the AO misdirected himself because of the promissory note of M.Venkata Narayana found bearing interest. No material was found by the department evidencing the charging of interest on amounts advanced by the assessee or indicating the finance business. The AO did not make any cross verifications with the borrowers of money to support the case of department. No evidence was brought on record to show that the assessee was receiving interest. In the absence of any material to show that the assessee was receiving interest, we have no reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the revenue is dismissed. Charging of notional interest on outstanding advances - HELD THAT - Assessee has to pay back the deposits or the amounts collected from unsuccessful candidates to the respective candidates. Merely because of operations, the company is ceased, the company cannot escape the liability and the AO is also not permitted to treat the same as income. Once receipt is accepted and shown as liability, unless, it is established that the amounts need not be refunded to the unsuccessful candidates or the liability is proved to be bogus, the AO is not permitted to tax the same amount. Since the names of the candidates are available, the AO ought to have made enquiries with the candidates and made the addition in respect of the candidates who surrendered the amounts. Since no such evidence was brought on record, the addition made by the AO is unsustainable, hence, we do not find any reason to interfere with the order of the CIT(A) and the same is upheld.

Summary

Issues Involved:
1. Denial of exemption claimed under Section 10A of the Income Tax Act.
2. Validity of assessment under Section 153A in the absence of incriminating material.
3. Disallowance under Section 14A.
4. Addition of advances as income.
5. Addition of notional interest on advances.
6. Addition of H1B Visa fees as income.

Detailed Analysis:

1. Denial of Exemption Claimed Under Section 10A:
The primary issue across the assessment years (A.Ys) 2007-08 to 2011-12 was the denial of exemption claimed by the assessee under Section 10A of the Income Tax Act. The Assessing Officer (AO) disallowed the exemption on the grounds that the assessee did not engage in software development and export, but rather in staff augmentation services. The AO's conclusion was based on discrepancies found during a search, such as the sale of company assets and the absence of employees at the premises. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee failed to provide sufficient evidence of software development and export.

Upon appeal, the Tribunal found that the assessee had provided substantial evidence, including registration with STPI, Softex forms, foreign inward remittances, and payment of salaries and PF/ESI contributions. The Tribunal held that the AO did not provide conclusive evidence to disprove the assessee's claim of software export. Consequently, the Tribunal directed the AO to allow the exemption under Section 10A.

2. Validity of Assessment Under Section 153A:
The assessee challenged the validity of assessments under Section 153A for A.Ys 2007-08 to 2009-10, arguing that no incriminating material was found during the search to justify the additions. The Tribunal observed that the AO did not find any material during the search to establish that the exports were bogus. The Tribunal referred to prior decisions, emphasizing that without incriminating material, additions in completed assessments are not permissible. Therefore, the Tribunal held that the additions made by the AO under Section 153A were invalid.

3. Disallowance Under Section 14A:
For A.Ys 2009-10 and 2010-11, the AO made disallowances under Section 14A related to exempt income. The Tribunal found that no incriminating material was found during the search to support these disallowances. For A.Y. 2009-10, the Tribunal set aside the disallowance as it was outside the scope of Section 153A. However, for A.Y. 2010-11, the Tribunal upheld the disallowance as it was made in accordance with Rule 8D and the assessee had earned dividend income.

4. Addition of Advances as Income:
For A.Y. 2011-12, the AO added the opening balance of advances received by the assessee as income, suspecting that the advances were not genuine. The CIT(A) deleted the addition, noting that there was no evidence of cessation or waiver of liability. The Tribunal upheld the CIT(A)’s decision, stating that the AO failed to provide evidence that the liability ceased to exist or was bogus.

5. Addition of Notional Interest on Advances:
For A.Ys 2009-10 and 2011-12, the AO added notional interest on advances given by the assessee, based on a promissory note found during the search. The CIT(A) deleted the addition except for the interest on the advance to M. Venkata Narayana. The Tribunal upheld the CIT(A)’s decision, stating that there was no evidence of interest being charged on other advances and the advances were for property purchases.

6. Addition of H1B Visa Fees as Income:
For A.Y. 2011-12, the AO added the outstanding balance of H1B Visa fees collected from candidates as income, assuming the liability ceased due to the company’s closure. The CIT(A) deleted the addition, and the Tribunal upheld this decision, noting that the liability to refund the fees to unsuccessful candidates still existed and the AO did not provide evidence to prove otherwise.

Conclusion:
The Tribunal allowed the appeals of the assessee for A.Ys 2007-08 to 2009-10 on the issue of exemption under Section 10A and disallowance under Section 14A for A.Y. 2009-10. The appeals for A.Ys 2010-11 and 2011-12 were partly allowed, with specific reliefs granted on the addition of advances and notional interest. The appeals of the revenue for A.Ys 2009-10 and 2011-12 were dismissed.