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TMI Blog2020 (11) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.T.A.No.574-577/Viz/2019 and 609/Viz/2019, I.T.A.No.607/Viz/2019 and 608/Viz/2019 - - - Dated:- 24-11-2020 - Shri V. Durga Rao, Judicial Member And Shri D.S. Sunder Singh, Accountant Member For the Assessee : Shri G.V.N.Hari, AR For the Revenue : Shri D.K.Sonowal, CIT, DR ORDER PER BENCH : These appeals are filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [CIT(A)]-3, Visakhapatnam in Appeal No.87-90/2015-16/CIT(A)-3/VSP/2019-20 dated 30.07.2019 for the Assessment Years (A.Ys) 2007-08 to 2010-11 and by the revenue in Appeal No. 89 91/2015-16/CIT(A)-3/VSP/2019-20, dated 30.07.2019 for the A.Y.2009-10 and 2011-12. Since the issues involved in these appeals are common, these appeals are clubbed, heard together and a common order is being passed for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicate the issue. Since the issue goes to the root of the assessment , the Ld.AR requested to admit the additional grounds and adjudicate the issue. 2.2. We have heard both the parties and admit the additional grounds raised by the assessee for the Assessment Years (A.Y.) 2007-08 to 2009-10. 3. The first issue which is common for the A.Ys.2007-08 to 2011-12 is denial of exemption claimed by the assessee u/s 10A of the Income Tax Act, 1961 (in short Act). The assessee has claimed exemption u/s 10A for the A.Ys 2007-08 to 2011-12 which the Assessing Officer (AO) disallowed as per the details given hereunder : A.Y. Exemption (in Rs.) 2007-08 27,82,846 2008-09 76,48,516 2009-10 11,71,115 2010-11 36,70,252 2011-12 1,81,692 4. Brief facts of the case: For the sake of convenience, the facts are extracted from the A.Y.2007-08 which are common to all the impugned A.Ys except change in the amounts. The assessee is a company in which public are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice, Hyderabad and the server was available at his residence in Piduguralla, Guntur District and there were no operations at present. The AO found that the assessee has leased out the company to M/s E2S Corporation for the F.Y.2007-08 and the equipment was sold to M/s KRB Financial Services, thus, viewed that the assessee has not carried out any software development and the entire furniture and fixtures were given on lease to Decoders Info Services in the beginning of F.Y.2007-08, thus held that the claim of export of software by the assessee is bogus with an intention to claim bogus deduction u/s 10A of the Act. The AO collected the information with regard to registration, Softex forms and agreement with the client and observed that the company got approval for setting up of 100% export oriented unit for manufacture and export of computer software under the head Software Development . The Vendors Services Agreement was entered in to between the First Tek Private Limited, Hyderabad and First Tek Technologies Inc. USA which was signed by Sri Bhavanasi Satyakumar representing First Tek Private Limited, Hyderabad in the capacity of President of the Company and Ashok Shetty, repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee further submitted before the CIT(A) that the assessee has paid the salaries, engaged sufficient staff and infrastructure. In support, the assessee furnished the salary payment details along with payment of EPF and ESI. Therefore, argued that the all the evidences that are required for establishment of software development and export was furnished, hence requested the CLd.IT(A) to allow the appeal of the assessee. The Ld.CIT(A) considered the remand report of the AO, reply of the assessee and found that the assessee has not produced any evidence before the AO to substantiate the export of software and the documents furnished by the assessee were only related to various authorities and viewed that the receipt of funds from banking channels does not establish export of software. Payment of PF, ESI also does not lead to any evidence with regard to engagement of staff without furnishing the details of salary payment etc., therefore, held that the AO has rightly denied the exemption claimed u/s 10A of the Act. Accordingly, confirmed the addition and dismissed the appeal of the assessee on this ground. 6. Against which the assessee filed appeal before us. For the A.Y. 2007- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had let out the building and receiving the rent from the beginning of the year 2007-08, thus the assessee failed to establish that it had carried the export activity. The assessee did not furnish any evidence called for by the AO to prove the software development and the export of the software products. The defects brought out by the AO in the assessment order clearly show that the assessee failed to establish that it was in software development or software export. The inward remittances were only to claim the deduction u/s 10A, therefore submitted that the AO rightly disallowed the deduction claimed by the assessee u/s 10A, hence, argued that on merits also, the assessee s case deserves to be dismissed. 8. We have heard rival contentions and gone through the orders of the lower authorities. In this case, the assessee filed the returns of income and declared the exports and claimed the deduction u/s 10A in respect of software development and exports made by the assessee. A search u/s 132 was conducted in this case and during the course of search, no material was found to establish that either exports were bogus or the assessee has not made any exports. With some stray leads, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submit the information from time to time with regard to software exports, furnish softex forms etc. to the STPI. The Reserve Bank of India also monitors the exports and accord permission for receipt of money in foreign exchange. Though the search was conducted in the instant case, no evidence was gathered by the department to establish that either the exports were bogus or the assessee has not made any exports. As stated by the Ld.AR the company was defunct by the time search was conducted and the entire furniture and fixtures were taken out of unit and located at his residence. The AO himself had accepted in the assessment order for the A.Y.2007-08 that the assessee has raised invoices exporting software product to its client, First Tek Technologies Ltd., and submitted softex forms to the STPI, Hyderabad for issuing clearance for foreign inward remittances. The details were also extracted by the AO in the Assessment order. In reply to the remand report, the assessee submitted a rejoinder as under before the CIT(A): For the assessment year 2007-08, the issue involved is with regard to exemption u/s.10A of the I.T. Act. According to the Assessing Officer, the appellant is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee u/s 10A of the Act. 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. The 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 recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t did not find any material to hold that there was no export or bogus exports. No incriminating material was found by the AO in the course of search except vendor agreement, softex forms found and seized. Softex forms support the claim of the assessee, vendor agreement shows that the assessee has entered into the agreement for augmentation of the staff activities and services also. Vendor agreement does not show any negative evidence to deny the claim of deduction u/s 10A of the Act. Therefore, it is found from the orders of the lower authorities that no evidence was found during the search proceedings to deny the exemption u/s 10A of the Act. The company was closed since the business was defunct. Therefore, closure of the company also does not give any material to the AO to hold adverse inferences. Therefore, it is amply clear from the order of the AO and Ld.CIT(A) that the deduction u/s 10A was denied solely on the material available in the assessment records which was declared by the assessee. It is settled issue that without incriminating material in the search assessments, no additions are permitted to be made by the AO in completed assessments. In the instant case, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A for the A.Y. 2007-08 to 2009-10 on legal grounds also. Accordingly, appeal of the assessee is allowed for the A.Y. 2007-08 to 2011-12 on the issue of exemption u/s 10A. 10. The next issue in assessee s appeal for the A.Y. 2009-10 and 2010-11 is with regard to the disallowance made u/s 14A of the Act. For the A.Y.2009-10, the assessee raised the additional ground stating that the addition made by the AO in respect of 14A amounting to ₹ 1,07,499/- is outside the scope of assessment u/s 143(3) r.w.s. 153A of the Act. As discussed earlier in this order, 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 of the Act. Similarly, during the course of search, no evidence was found relating to income derived by the assessee u/s 14A of the Act. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of ₹ 4,70,19,016/- as income of the assessee, thus the entire outstanding advances were brought to tax. 12.1. The assessee filed appeal challenging the addition of ₹ 4,70,19,016/- and also raised the additional ground requesting for relief of ₹ 4,23,00,000/- also which was admitted as income in the return of income. The assessee submitted before the Ld.CIT(A) that the advance represented the capital receipt, but not revenue receipt. The assessee also submitted that no part of the advance was ceased to exist and the entire advance was payable to the creditors. The assessee further submitted before the Ld.CIT(A) that the nature of receipt was a capital receipt and it would get converted as a revenue receipt only when the services are rendered by the assessee to the foreign company. The services were rendered during the financial years 2005-06 to 2009-10 and the foreign company was debited with appropriate amounts. The balance of amount cannot therefore, be considered as a revenue receipt. It still remains as payable to the foreign company. Further, the assessee alone cannot decide whether the amount of ₹ 4,23,00,000/- is payable or not It cannot be an u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO in respect of the outstanding advances of ₹ 4,70,19,016/- was unsustainable, accordingly, deleted the addition. 13. With regard to addition of ₹ 4,23,00,000/-, the Ld.CIT(A) observed that the said amount was offered for tax u/s 132(4) and also filed the return of income. The assessee also has not filed retraction, therefore, the Ld.CIT(A) dismissed the additional ground raised by the assessee. 14. Against which the department is in appeal for deleting the addition of ₹ 4,70,19,016/- and the assessee is in appeal for relief of ₹ 4,23,00,000/-. During the appeal hearing, the Ld.AR submitted that the sum of ₹ 4,23,00,000/- was capital receipt which was admitted as income in the return of income filed for the A.Y.2011-12 in response to the notice issued u/s 142(1). The said amount was outstanding and there was no waiver by the creditor and hence requested for relief. 14.1. With regard to addition of ₹ 4,70,19,016/-, the Ld.AR submitted that the AO has not invoked any section of the Act for making the addition. The said sum was payable to the creditor and the amount was not written off. No evidence was found during the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) seeking relief of ₹ 4,23,00,000/- 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. Therefore, we do not find any 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. 17. With regard to revenue s appeal in respect of addition made by the AO amounting to ₹ 4,70,19,016/-, we find that the AO has not invoked any of the provisions of the Act. We find from the assessment order that the outstanding advance was opening balance, which was brought forward from the earlier years. Therefore, the AO is not permitted to make addition u/s 68 of the Act, since the credit was not made in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A). 21. Having heard the rival contentions, we find that the assessee admitted the turnover of ₹ 91,77,720/- as per the invoices raised by the assessee. The 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. Unless there is an evidence to show that the assessee has made the sales outside the books of accounts or suppressed the turnover, there is no case for making the addition. 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. Hence, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the revenue on this ground is dismissed. 22. The next issue in the department s appeal is with regard to the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2% 5 600000 bal 2000000 2% 1 40000 Vijetha Constructions 23/07/2008 10000000 2% 10 2000000 Vijetha Foundation Constn P. Ltd. b/f loan 20000000 2% 12 4800000 M. Durga Reddy b/f loan 10000000 2% 7 1400000 M. Durga Reddy 30/05/2008 4000000 2% 3 240000 M. Venkatanarayana b/f loan 4000000 2% 4 320000 M. Venkatanarayana bal 2000000 2% 9 360000 Kotha Raghu Ramaiah b/f loan 950000 2% 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atham for the amounts advanced to M.Venkata Narayana for interest of 2% per month for an amount of ₹ 40 lakhs. On the basis of above promissory note, the AO charged the notional interest on the entire outstanding advances and brought to tax the sum of ₹ 1,07,08,000/-. We find from the orders of the lower authorities that there was no evidence found during the course of search, evidencing collecting of interest on the amounts advanced to other parties i.e. Vijetha Constructions, Vijetha Foundation Construction P.Ltd., M.Durga Reddy, Saimagadha Land Developers etc. All the loans are brought forward loans except Vijetha Constructions. 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 misdirecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant to the A.Y. 2011-12, the outstanding closing balance was of ₹ 58,83,698/-. Since the operations of the company were closed, the AO viewed that there was no liability on account of H1B Visa on unsuccessful candidates, hence, outstanding amount of ₹ 58,83,698/- was treated as undisclosed income of the assessee and brought to tax. 31. Against which the assessee went on appeal before the CIT(A) and stated that there was no seizure of liability and the amounts are payable and argued that the company is not entitled to treat the same as income. The details of candidates are available, hence, argued that there is no justification for making the addition. The Ld.CIT(A) after considering the submissions of the assessee deleted the addition. 32. We have heard both the parties and perused the material placed on record. In this case, the amount outstanding as at the end of the year was ₹ 58,83,698/-. The AO misdirected himself that since the company has ceased its operations and the advances were received on revenue account, the company has no liability and hence the same was assessed as income. From the order of the lower authorities, it is found that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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