Madras H.C : The assessee was eligible for deduction under Section 10A without considering the mandatory conditions to decide eligibility to claim deduction stipulated under Sections 10 A 2(i)(b) and 10A 2(i)(c) of the Act

High Court Of Madras

Nagesh Chundur vs. CIT, Circle-XV, Chennai

Assessment Years : 2003-04 To 2005-06

Section : 10A

Mrs. Chitra Venkataraman And Ms. K.B.K. Vasuki, JJ.

Tax Case (Appeal) Nos. 168, 512 & 513 Of 2011 & 336 & 337 Of 2013

August 19, 2013

JUDGMENT

Mrs. Chitra Venkataraman, J. – Tax Case Appeal Nos.512 and 513 of 2011 and 336 and 337 of 2013, are at the instance of the Revenue raising the common question of law, which read as under:—

“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the assessee was eligible for deduction under Section 10A without considering the mandatory conditions to decide eligibility to claim deduction stipulated under Sections 10 A 2(i)(b) and 10A 2(i)(c) of the Act ?”

2. Tax Case (Appeal).No.168 of 2011 is at the instance of the assessee filed against the order of the Income Tax Appellate Tribunal rejecting the assessee’s appeal filed as against the correctness of the order under Section 263 of the Income Tax Act, 1961 (hereinafter called as the “Act”) passed by the Commissioner of Income Tax raising the following question of law :—

“Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in upholding the order under Section 263 of the Income Tax Act without going into the merits of the case on the issue deduction under Section 10A?”

3. The Tax Case (Appeals) filed by the Revenue, particularly Tax Case (Appeal).No.336 of 2013 relates to the assessment made consequent on the order passed under Section 263 of the Act. The issues raised in Tax Case (Appeal).No.168 of 2011 relates to assessment made consequent on the common order made under Section 263 of the Act. Hence, the same is taken along with the other Tax Case (Appeals) filed by the Revenue viz., TC(A).Nos.512 and 513 of 2011 and 336 and 337 of 2013.

4. The assessee herein is a Proprietory Concern engaged in Electronic Data Transmission (Data Processing). Admittedly, the assessee’s Unit was in operation ever since 1994. The Assessee’s unit was approved as Software Technology Park by the Government of India as 100% Export Oriented Unit for Computer Software on 27.03.2002. Considering its status as 100% Export Oriented Unit, the assessee claimed the benefit of deduction under Section 10A of the Act, particularly for the assessment year 2003-04.

5. Admittedly, the assessee had had the benefit of 100% deduction under Section 10A of the Act for the assessment years 2003-04 and 2004-05. For the assessment year 2005-06, the Commissioner of Income Tax initiated proceedings under Section 263 of the Act on the ground that the assessee got registration as Software Technology Park only on 27.03.2002, whereas, it had commenced production in the Financial Year 1999-2000 itself; as such, the assessee unit was an existing unit wherein the plant and machinery were used for such purposes; by getting permission from the authority as Software Technology Park on 27.03.2002, the assessee had transferred the plant and machinery previously used to the Software Technology Park and the assessee had not registered ever since it commenced production in the Financial Year 1999-2000; in view of the above, the deduction granted was erroneous and prejudicial to the interests of the Revenue. Thus holding, the assessment was sought to be revised. This was contested by the assessee through its reply by placing reliance on the decision of the Income Tax Appellate Tribunal.

6. The Commissioner of Income Tax, however, rejected the contentions of the assessee. He viewed that the Income Tax Appellate Tribunal’s decisions would not be of any assistance, as they were distinguishable on the facts of the case. Further, the Commissioner of Income Tax viewed that the Circular No.1 of 2005 dated 06.01.2005 relied on by the assessee related to the provisions of Section 10B of the Act and has no relevance to the operation of Section 10A of the Act; for the purposes of claiming deduction under Section 10A of the Act, the assessee should have begun the process of manufacture in the Software Technology Park depending on the date of commencement as provided for under Section 10A of the Act; thus, Section 10B of the Act operated on different consideration, thus there could not be any comparison between Section 10A of the Act and Section 10B of the Act. So holding, the Commissioner of Income Tax confirmed its proposal for the assessment year 2005-06.

7. As against this, the assessee went on appeal before the Income Tax Appellate Tribunal in ITA.No.656 of 2010. By order dated 28.02.2011, the Income Tax Appellate Tribunal dismissed the appeal. As against this, the assessee has preferred Tax Case (Appeal).No.168 of 2011. Consequent on the Commissioner’s order, the assessment was made on the assessee. By referring to the reasoning of the Commissioner of Income Tax, the Assessing Officer held that since the assessee had used its old machinery, which was in existence from the assessment year 1999-2000, it was not entitled to the deduction under Section 10A of the Act. Thus, aggrieved by the assessment order, the assessee filed appeal before the Commissioner of Income Tax (Appeals), who agreed with the assessee.

8. As regards the assessment year 2005-06, aggrieved by the order of the Commissioner of Income Tax (Appeals), the Revenue went on appeal before the Income Tax Appellate Tribunal, which, in turn, followed its order for 2006-07 and 2007-08 and allowed the appeals. This is so in respect of assessment years 2008-09 too. Thus, the present appeals are preferred by the Revenue.

9. It may be noted that in the mean time, the Commissioner of Income Tax (Appeals) passed the order in the assessee’s own case for the assessment years 2006-07 and 2007-08 holding that the assessee registered its Unit under Section 10A of the Act, thus, following the order of the Income Tax Appellate Tribunal in the case of ITO v. Heartland K.G. Information Ltd. [2010] 131 TTJ 216 (Chennai), the Commissioner of Income Tax (Appeals) allowed the appeal.

10. A reading of the order of the Income Tax Appellate Tribunal relating to the assessment year 2006-07 and 2007-08 involved in Tax Case (Appeals) 512 and 513 of 2011 shows that it followed the decision given by the Income Tax Appellate Tribunal in the case of Heartland K.G. Information Ltd. (supra), which considered the case as falling under Section 10A(2)(c) of the Act. This order of the Income Tax Appellate Tribunal is the subject matter of the Tax Case (Appeal) before this Court in TC(A).No.625 of 2009, which is considered by this Court in a separate order. We may however point out that the facts in Tax Case (Appeal).No.625 of 2009 is of a total different nature having no relevance to the facts of the present cases.

11. Leaving this aside, in considering the claim of the assessee, the Income Tax Appellate Tribunal pointed out to the decision of the Karnataka High Court in the case of CIT v. Expert Outsource (P.) Ltd. [2012] 20 taxmann.com 481, wherein, the Karnataka High Court held that the purpose of the Software Technology Park scheme was to encourage exports and gain valuable foreign exchange for the country; even though the assessee had begun operations on 17.12.2003, it had its registration on 04.08.2004; that the Software Technology Park authorities could also permit the conversion of an existing unit into a STPI unit. Thus, based on the decision of the Karnataka High Court, the Income Tax Appellate Tribunal allowed the assessee’s claim, that, the fact of the assessee being in the business prior to the date of the registration of the STPI would not stand in the way of granting relief to the assessee.

12. Learned Standing counsel appearing for the Revenue took us through the provisions under Section 10A of the Act and Section 10B of the Act and submitted that the reliance placed on by the assessee on the decision of the Karnataka High Court has no relevance, because it operated on a different field; the relief under Section 10A of the Act has to be seen in the context of the provisions contained therein.

13. Reiterating the stand taken before the Income Tax Appellate Tribunal as well as the order passed against the assessee in the course of assessment proceedings, learned Standing counsel appearing for the Revenue submitted that the admitted fact is that the assessee commenced its business even before the date of registration i.e., on 27.03.2002 and when the Section contemplates deduction only in respect of industries which have commenced production after the dates mentioned in Section 10A(2) of the Act and registered as Technology Park from therein, the claim of the assessee could not be sustained as per the provisions contained in Section 10A of the Act.

14. In short, the contention of the Revenue is that the assessee, which is already in existence cannot take the benefit of Section 10A of the Act and only such of those assessees, who have commenced production with the registration as Software Technology Park as given therein under Section 10A(2) of the Act alone can claim to benefit of Section 10A of the Act. Consequently, according to the learned Standing counsel appearing for the Revenue, the Income Tax Appellate Tribunal committed serious error in applying the decision of the Karnataka High Court in the case of Expert Outsource (P) Ltd. (supra).

15. We do not agree with the said line of reasoning of learned Standing counsel appearing for the Revenue. At the outset, we may say that we are in respectful agreement with the Karnataka High Court decision in the case of Expert Outsource (P) Ltd. (supra). Pointing out to the purpose of the STP scheme to encourage exports and gain valuable foreign exchange for the country, the Karnataka High Court held that “The STP scheme provides the benefit of converting a DTA unit into a STPI unit and the same should also hold good for tax purposes.” Referring to Circular No.1 of 2005 dated 06.01.2005, the Karnataka High Court pointed out that the said Circular grants certain benefits under Section 10B of the Act; though this was in the context of Section 10B of the Act, the ratio of the Circular No.1 of 2005 dated 06.01.2005 would apply to Section 10A of the Act too. Thus it held that the mere fact that the assessee was in existence prior to its date of registration on 04.08.2004 as Software Technology Park would not disentitle the assessee from claiming deduction under Section 10A of the Act.

16. As far as the present case is concerned, there is no denial of the fact that the assessee is in business right from 1999-2000. It got its registration as STPI on 27.03.2002. The Department accepted the claim of the assessee for two assessment years 2003-04 and 2004-05 and the assessment had become final. It is not as though the facts relating to the assessee’s existence prior to its registration on 27.03.2002 is not a fact that the Department did not know and by mistake it allowed the benefit for the year 2003-04 and 2004-2005.

In the circumstances, with the orders thus becoming final, principally stating, we do not find any justifiable ground for the Revenue to question the claim of the assessee from the assessment year 2005-06.

17. Even otherwise, we find that the claim of the Revenue could not be sustained. The provisions contained in Section 10A of the Act grants 100% deduction on profits and gains derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software. Section 10A(2) of the Act refers to the undertaking which are entitled to the benefit of Section 10A of the Act. The Section reads as under:—

“Section 10A(2):— This Section applies to any undertaking which fulfils all the following conditions, namely :—

(i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year —

(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or

(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park;

(c) commencing on or after the 1st day of April, 2001 in any special economic zone;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.”

Explanation 2-(vii) defines Software Technology Park as follows:—

“(vii) “software technology park” means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry.”

A reading of the provisions referred to above point out that the Section grants 100% deduction to an undertaking, which has begun or begins to manufacture or produce articles or things or computer software as per Sub clause (i) of Sub Section 2 of Section 10A of the Act. The dates mentioned therein show the conditions regarding the year of manufacture for the purpose of reckoning the exemption/ deduction for ten consecutive years with reference to the undertaking set up in different locations viz., for the industries in free trade zone, units in electronic hardware technology park or software technology park, units in special economic zone. The second requirement under Sub Section 2 of Section 10A of the Act is that it is not formed by splitting up or the reconstruction of a business already in existence and Sub clause (iii) of Sub Section 2 of Section 10A of the Act states that it is not formed by the transfer of machinery or plant previously used for any purpose to a new business.

18. As far as the present case is concerned, the assessee is in Software Technology Park. The assessee took advantage of the scheme notified by the Government of India in the Ministry of Commerce and Industry of the “software technology park” and sought for registration as STPI on 2002. In so getting the registration, the question that arises for consideration is as to whether the claim of the assessee would be covered by Clause (b) of Sub clause (i) of Sub Section 2 of Section 10A of the Act. A reading of the above Sub Section shows that in order to claim deduction, an undertaking in hardware technology park or software technology park must be in existence commencing its production on or after the 1st day of April, 1994. Given the fact that the assessee is not formed by splitting up or transfer to a new business and got registration even since 2002, the fact that it has been in existence ever since 1999, does not militate against the applicability of Section 10A of the Act. The case on hand falls under Section 10A(2)(b) of the Act. As already pointed out, even the cursory reading of Section 10A(2)(i) of the Act shows that it has relevance to industry that has begun to manufacture or produce articles or things or computer software on or after the 1st day of April, 1994. Thus, the moment the assessee satisfies this clause and it goes for the second requirement namely, registration as a Software Technology Park in accordance with the scheme of Government of India, the assessee stands benefited by the provisions of Section 10A of the Act.

19. Learned Standing counsel appearing for the Revenue however pointed out to the second proviso to Section 10A(1) of the Act and submitted that the Section will have relevance to the industry.

20. We do not think it so. The second proviso to Section 10A(1) of the Act states that where the undertaking located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which it had started manufacture or produce such articles or things or computer software in the free trade zone or the export processing zone or otherwise, and clarifies that the benefit would continued to be available to the balance of period available to the free trade zone which has been subsequently got converted into special economic zone.

21. Given the scope of the scheme formulated by the Government of India, Ministry of Commerce and Industry in locating the Software Technology Park, which either may be done by the Government itself or by the individual unit, we do not find any conditions in the Section, throwing the assessee out of benefit of Section 10A of the Act solely by reason of it being in existence already but became STPI subsequently. In the circumstances, we have no hesitation in rejecting the Revenue’s appeal, thereby confirming the order of the Income Tax Appellate Tribunal.

22. Considering the order passed now in Tax Case (Appeals).Nos. 512 and 513 of 2011 and 336 and 337 of 2013, we do not think that we need to go into the correctness of the order of the Income Tax Appellate Tribunal on the question of jurisdiction of the Commissioner of Income Tax to invoke Section 263 of the Act to revise the order, which is now the subject matter of appeal in Tax Case (Appeal).No.168 of 2011, preferred at the instance of the assessee. In the circumstances, the Tax Case (Appeal).No.168 of 2011 stands disposed of.

23. Tax Case (Appeals).Nos.512 and 513 of 2011 and 336 and 337 of 2013 stand dismissed. No costs.

[Citation : 358 ITR 521]