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TMI Blog2016 (8) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the denial of deduction u/s 80IA of the Income Tax Act 1961 of the Act and adopting an arbitrary figure of 5% of the income as business income. 2. The brief facts of the case are that the assessee firm filed its return of income on 31.12.2000 declaring nil income after claiming deduction of ₹ 1446797/- u/s 80IA of the Act as assessee is supposedly engaged in the business of development of software. Subsequently, the assessment u/s 143(3) of the Act was completed vide order dated 25.03.2003, wherein the claim of the Assessee was allowed. Assuming power u/s 263 of the Act the ld CIT, Shimla passed an order dated 12.10.2004 wherein he held that that the order of the AO allowing the claim of the deduction u/s 80IA is erroneous and prejudicial to the interest of revenue and therefore he held that the income assessed in excess of 5% is to be treated as undisclosed income of the Assessee and the Assessee does not fulfill many of the conditions for deduction u/s 80 IA of the act. Against this order u/s 263 the Assessee preferred an appeal before the coordinate bench who vide order dated 03.06.2008 modified the order of the ld CIT (A) and directed the AO for making proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is eligible for deduction u/s 80IA, and therefore the ld AO as well as the ld CIT (A) has erred in not allowing deduction to the Assessee. 4. The ld DR relied on the orders of the lower authorities and submitted that the ld AO has given detailed reasoning and further the ld CIT (A) has given sufficient reason for disallowing all the claim of the assessee. Therefore, he submitted that assessee is found to be not eligible for deduction. In view of this, he submitted that the order of AO may be upheld. 5. We have carefully considered the rival contentions. For the purpose of deduction u/s 80IA of the Act, the assessee should be engaged in the business of manufacturing or production of things employing more than 10 workers and it should furnish a certificate by a chartered accountant quantifying the claim of the Assessee. The assessee is a partnership firm formed by husband and wife. The husband derived income from salary and running business concern in the form of Chopra Gas Agency and the wife of the Assessee is deriving salary from some filling station. Both of them are not qualified as software professionals or having past experience in that business of software dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h raised a strong suspicion about conditions for grant of deduction u/s 80IB being satisfied in this case. It is true that the suspicion howsoever strong it may be, does not take place of proof. So however, if is equally very well accepted principle that the suspicion is the mother of investigation. When facts on record raised strong suspicion about the non-existence of the conditions required to be satisfied for grant of deduction u/s 80IB, the Assessing Officer ought to have probed in the matter and made deep scrutiny. For example, the Commissioner of Income Tax has mentioned about the machinery in the form of computer software owned by the assessee. Whether two computers owned by the assessee were sufficient for the manufacturing of computer software was a matter warranting scrutiny. The Assessing Officer has failed totally to enquire about this aspect of the matter. The Commissioner of Income Tax has also pointed out that the assessee had not even purchased UPS which are necessary for running of computers. The Assessing Officer has failed to make any enquiry about the same. The Commissioner of Income-tax has also pointed out about the non-existence of any furniture for the empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quiries made regarding the (a) above, the A.O. has discussed them at length in the assessment order. It is noted that a detailed questionnaire was issued to the appellant by the A.O. on 21.07.2009 seeking information on various issues which inter-alia included the issues pertaining to conditions required to be fulfilled by the appellant to claim deduction u/s 801A. These included the details regarding the workers employed, the details regarding the consumption of electricity etc. On the basis of the perusal of the assessment order, the relevant assessment records and the appellant's submissions, the following important facts emerge:- (a) The appellant had shown the purchase of one computer on 16.02.1999. The second computer was shown purchased on 28.07.1999 and the third computer on 20.02.2000. it is noted of first two computers was shown as ₹ 29000/-each, while the third computer was purchased for a cost of ₹ 17300/- only. The A.O. has not conducted any enquiries in respect of the said purchases, but, prima-facie, even the purchase price claimed for the given computers is grossly understated, given the fact that in the year 1999-2000 the computers were quite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od 01.04.1999 to 31.12.1999. My salary was ₹ 3,000/- per month. As against the said statement of Sh. Sunny, the appellant has claimed the following salary payments to him: March, 1999 687.75 April, 1999 491.25 May June 884.25 July 262.55 Aug 951 .05 Aug 951 .05 Sept. 1965 Oct. 1711.50 Nov. 2161.50 Dec. 2282.35 Thus-the appellant has shown him employed from 01.03.1999 as against 01.04.1999 claimed by Sh.Sunny, and has booked his salary at a much lesser amount than ₹ 3000/- per month as claimed by Sh.Sunny. (h) A letter was also received on 24.03.2003 from Ms Jyoti which stated as follows ....... in reference to your letter No. ITO/PWN/MISC/2002-03/3649 received on dated 17/03/03. I was working in Indicam Software Parwanoo during the 01.04.1999 to 31.08.199. I was receptionist with amount of salary 2500/-/per months....... . As against this statement of Ms. Jyoti, the appellant has shown her employed w.e.f. March, 1999 at a salary less than ₹ 2,500/- per month. The appellant has also claimed her to be a system analyst , although she was working as a receptionist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tands exposed submission of Ms Jyoti, as mentioned in 'h' above, in which she has stated that she worked as a receptionist . (m) The A.O., during the course of the second assessment proceedings, had required the assessee to submit the details of the output of the workers claimed to have been employed in the manufacturing process, in response to which the appellant /responded that the output cannot be identified individually . 7.4 It is clear from the above-mentioned facts that the assessee failed to establish that 10 or more workers were actually employed by it throughout the year in the manufacturing process . The appellant did not even have enough machinery to justify the deployment of 10 or 11 persons. The claim of the appellant regarding the employment of the staff is apparently exaggerated and without any basis. As per the conditions laid down in clause (v) of sub-section (2} of section 80IA, in a case where the industriaf undertaking manufactures or produces, articles and things, the undertaking has to employ 10 or more workers in a manufacturing process carried on with the aid of power. Thus 10 r more workers should be employed in the manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for salaries as reported by it. The assessee has failed to discharge the onus cast upon it. 7.6 In view of the discussion above, it is held that the appellant is not eligible for deduction u/s 80IA in respect of the income earned by it as it has failed to satisfy the basic condition, pre-requisite for claim of deduction u/s 80IA. 7.7 Without prejudice to above, it is considered appropriate to discuss the second finding given by the A.O. that the assessee was not engaged in the development of any computer software, and that at best it was only duplicating the software. Apart from the primary fact that the assessee did not have the requisite skilled manpower to develop any computer software, it has also been mentioned by the A.O. that no expenditure was incurred by the assessee on the printing of the literature (Instruction Manual) which could act as a guiding material for the use of the so-called software developed by the assessee. It is common knowledge that every software which is commercially sold in the market does carry some operating manual. Similarly, not even a single chair was purchased by the assessee during the year under consideration although i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, no part of its income shall qualify for deduction u/s 80IA of the Act. The A.O.'s action to this effect is upheld. 7.9 Although I have already held that the appellant is not entitled to deduction u/s 80IA due to non-fulfillment of the conditions laid down in the given section, it is also considered necessary to respond to the appellant's argument that the Ld. A.O. has treated the activities of the assessee as the duplication of the software and the same should be treated as eligible for deduction u/s 80IA of the Act in view of the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Oracle Software India Ltd. (2010) 320 ITR 546. 7.10 A perusal of the judgment relied upon by the appellant reveals the following important facts: (a). It was rendered in the context of section 801A (1) read with section 80IA (12)(b) read with Explanation (2) to section 33B of the I.T.Act as it stood then, i.e. in the A.Y. 1995-96 and 1996-97. (b) As per Explanation to section 33B of the Act , Industrial undertaking means any undertaking which is inter-alia engaged in the manufacture or processing of goods. (c) It was made amply clear by the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. ..... we are of the view that the marketed copies are goods and if they are goods that the process by which they become goods would certainly fall within the ambit of s. 80-IA(I2)[b) r/w s. 33B because an industrial undertaking has been defined in s. 33B to cover manufacture or processing of goods. [Emphasis supplied) 7.11 Thus it would be obvious from the judgment of Hon'ble Apex Court in the case of Oracle Software that it was rendered in a different context where it was not simply the manufacture, but also the processing of goods which was eligible for deduction. Accordingly the Honb'le Court observed in para 7 of the order that .... One has to interpret the meaning of the expression manufacture or processing of goods . On the contrary, the deduction u/s 80IA in the instant case is to be examined as per the amended provisions of section 80IA, when the processing of goods stood excluded from its ambit. 7.12 Without prejudice to above, the Hon'ble Apex Court had delivered the judgment in the case of Oracle Software on its own peculiar facts and after fully appreciating the complex process of commercial duplication carried out by Oracle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore persons. {ii) Prima-facie no software development was undertaken by the appellant with there being no skilled manpower, machinery, experience and expertise, R D facilities, training facilities, physical infrastructure, market availability etc. (iii) Even if any simple duplication of some software was carried out by the appellant, it does not qualify as manufacturing for deduction u/s 80IA of the Act. 6. The ld CIT(A) has categorically held in para 7.13 and 7.14 that appellant has not explained even the basic process for development of software, fulfilling the capability of its staff. During the course of hearing on query from the bench about the nature of the software developed and the computer language which was used for development of software and availability sources codes thereof of the ld AR of the appellant could not explain it. Further, it was also submitted that during the course of hearing that the business of the assessee was carried out only for one year. In view of the above startling facts, it is apparent that the assessee has failed miserably to substantiate its claim that it manufacture software, profit from which is eligible for deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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