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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: JUSTICE P.P. BHATT & SHRI WASEEM AHMED
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeals have been filed at the instance of the Assessee against the separate orders of the Commissioner of Income Tax (Appeals)–1, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)- VI/DCIT, Cir-1/137 and 39/2013-14 Now-245 & 244/CIT(A)-1 dated 27/02/2015 & 20/02/2015 arising in the assessment order passed under s.143(3) r.w.s.147 of the Income Tax Act, 1961(hereinafter referred to as "the Act") and penalty order passed u/s.271(1)(c) of the Act dated 21/03/2013 and 26/03/2013 relevant to Assessment Years (AYs) 2007- 08 & 2008-09 respectively.
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
The assessee has raised the following ground in its appeals:- In ITA No.1161/Ahd/2015 for AY 2007-08 The learned CIT(A) erred in law while denying exemption of Rs.46,37,858/- u/s.10A of Income Tax Act, 1961.
In ITA No.1162/Ahd/2015 for AY 2008-09
The learned CIT(A) erred in law in upholding penalty u/s.271(1)(c) of Income Tax Act, 1961.
First, we deal with assessee’s appeal in ITA No.1162/Ahd/2015. The solitary issue raised by the assessee is that the Ld.CIT(A) erred in confirming the penalty imposed by the Assessing Officer u/s 271(1)(c) of the Act.
Briefly stated facts are that the assessee is a limited company and engaged in the business of software development and IT enabled services. The assessee for the year under consideration filed its return of income declaring loss of Rs. 8,21,23,365/- only. The Assessing Officer in the assessment framed u/s 143(3) of the Act vide order dated 30/11/2010 determined the loss at Rs. 8,06,05,099/- after making the disallowances/additions to the total income of the assessee. Among other things, there was a disallowance of software expenses amounting to Rs. 6,26,672/- only. As such, the assessee claimed software expenses amounting to Rs. 10,47,700/- as Revenue expenses. However, the
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
- 3 - Assessing Officer treated the same as capital in nature and accordingly disallowed the same after deducting the depreciation thereon. Subsequently, the Assessing Officer initiated penalty proceedings by issuing notice u/s 274 r.w.s. 271(1)(c) of the Act on account of furnishing inaccurate particulars of income.
However, the assessee failed to reply in response to the notice issued by the Assessing Officer. Therefore, the Assessing Officer held the assessee guilty for furnishing inaccurate particulars of income and accordingly levied the penalty of Rs. 3,52,656/- being 100% of the amount of tax sought to be evaded.
The aggrieved assessee preferred an appeal to the Ld.CIT(A). The assessee before the Ld.CIT(A) submitted that the addition made by the Assessing Officer on account of software expenses was a debatable issue. Therefore, penalty u/s.271(1)(c) of the Act cannot be imposed.
6.1. The assessee also submitted that he had not filed the appeal against the quantum addition confirmed by the Ld.CIT(A) to buy the peace of mind.
6.2. However, the Ld.CIT(A) disregarded the contention of the assessee by observing that the admission of the disallowance of the claim to buy the peace of mind does not absolve the assessee from the penalty to be imposed u/s 271(1)(c) of the Act. The Ld.CIT(A) also observed
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
- 4 - that the assessee had not made any specific submission against the penalty imposed by the Assessing Officer. Accordingly, the Ld.CIT(A) confirmed the order of the Assessing Officer.
Being aggrieved by the order of Ld.CIT(A), now the assessee is in appeal before us
The Ld.AR before us reiterated the submissions as made before the Ld.CIT(A), whereas the Ld.DR supported the orders of the authorities below.
We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has incurred an expense on the software amounting to Rs. 10,47,700/- which was considered by the AO as capital nature. Accordingly, the AO added the same to the total income of the assessee after allowing depreciation on such expenditure. Accordingly, the AO in his assessment order framed under section 143(3) of the Act initiated penalty proceedings on account of furnishing inaccurate particulars of income which was subsequently levied in the penalty order and confirmed in by the learned CIT (A).
9.1. Now the issue before us arises whether the assessee has furnished inaccurate particulars of income by treating software expenses as revenue in nature. In this regard, we find that the assessee has furnished all the particulars of software expenses claimed in the income tax return. As
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
- 5 - such there was no deliberate act on the part of the assessee to furnish inaccurate particulars of income by claiming software expenses as revenue in nature. Therefore, in our considered view the penalty levied under section 271(1)(C) of the Act is unsustainable in the given facts and circumstances. In this regard we find support and guidance from the judgment of Hon’ble Punjab and Haryana High Court in the case of CIT vs. Siddhartha Enterprises reported in 184 taxman 460 wherein it was held as under: “5. We are unable to accept the submission. The judgment of the Hon'ble Supreme Court in Dharamendra Textiles Processors' case (supra) cannot be read as laying down that in every case where particulars of income are inaccurate, penalty must follow. What has been laid down is that qualitative difference between criminal liability under section 276C and penalty under section 271(1)(c) had to be kept in mind and approach adopted to the trial of a criminal case need not be adopted while considering the levy of penalty. Even so, concept of penalty has not undergone change by virtue of the said judgment. Penalty is imposed only when there is some element of deliberate default and not a mere mistake. This being the position, the finding having been recorded on facts that the furnishing of inaccurate particulars was simply a mistake and not a deliberate attempt to evade tax, the view taken by the Tribunal cannot be held to be perverse.”
9.2. We also note that the Hon’ble court delivered the above judgement after considering the judgement of Hon’ble Supreme Court in the case of Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277/ 174 Taxman 571. Thus we hold that there was no deliberate act on the part of the assessee to treat capital expenses as revenue in nature.
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
- 6 - 9.3 We also note that the assessee has claimed software expenses under the head “software expenses” as evident from the order of the AO which shows that the software expenses were claimed as revenue in nature under the bona fides belief. Had the intention of the assessee been malafide then it should have claimed the same under any other head to avoid the attention. In this regard we place our reliance on the order of ITAT Pune bench in the case of Kanbay Software India Pvt. Ltd. 122 TTJ 721 wherein it was held as under: “Whether or not a person has acted bona fide reflects the state of his mind in respect of his conduct, and, therefore, the assessee has his inherent limitations in establishing this aspect of the manner. All that the assessee can do is to explain the circumstances in which he has acted in a particular manner and set out the related facts. The explanation for bona fides, at the cost of repetition, needs to be considered in a fair and objective manner and in the light of human probabilities. As long as the explanation given by the assessee is in the light of the human probabilities, there are no factual errors or inconsistencies, and it is supported by reasonable supporting evidences regarding factual elements embedded therein, if any, the bona fides should be taken as proved. The assessee's explanation regarding bona fides of the claim does not suffer from any apparent consistencies or factual errors and it is quite in tune with the human probabilities. There is no good reason to reject the same as unacceptable for the purpose of making of the claim of deduction being covered by the deeming fiction under Explanation 1 to section 271(1)(c).”
9.4. In view of the above, we hold that the penalty levied by the AO and subsequently confirmed by the learned CIT (A) under section 271(1)(c) of the Act is not sustainable. Therefore, we reverse the order of the lower authorities. Hence the ground of appeal of the assessee is allowed.
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
- 7 - ITA No.1161/Ahd/2015 for AY 2007-08
The solitary issue raised by the assessee is that learned CIT(A) erred in upholding the order of the AO by denying the exemption of Rs. 46,37,858/- u/s.10A of Income Tax Act, 1961.
The facts of the case are that the assessee in the present case is a limited company and engaged in the business of software development and IT enabled services. The AO determined the total income of the assessee for the year under consideration in the order framed under section 143(3) of the Act dated 29th December 2009 at ₹1,64,25,801/- only.
11.1. There was also brought forward loss of Rs. 41,45,011/- pertaining to the assessment year 2005-06.
11.2. The AO while determining the deduction available to the assessee under section 10A of the Act firstly set off the brought forward losses for Rs. 41,45,011/- against the income determined under section 143(3) of the Act at ₹1,64,25,801/-. Thus the AO worked out the deduction available to the assessee under section 10A of the Act on the balance amount of ₹ 1,22,80,790/- only. The AO as such worked out the deduction under section 10A of the Act at ₹ 1,15,43,943/- after setting off the brought forward losses.
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
- 8 - 12. Aggrieved assessee preferred an appeal to learned CIT (A) who also confirmed the order of the AO.
Being aggrieved by the order of the learned CIT (A) assessee is in appeal before us.
The learned AR before us submitted that the deduction under section 10A of the Act is available before setting off the eligible loss.
The learned DR before us vehemently supported the order of the lower authorities.
We have heard the rival contentions and perused the materials available on record. The solitary issue in the instant case relates to the fact whether the deduction under section 10A needs to be worked out after setting off the brought forward losses. In this regard, we note that the impugned issue is well settled now by the judgment of Hon’ble Supreme Court in the case of CIT & ANR. vs. M/s Yokogawa India LTD. in Civil Appeal No. 8498 of 2013. The relevant extract of the case (supra) is as under:
“17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
- 9 - independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income.”
16.1. From the above judgment of the Hon’ble Supreme Court there remains no ambiguity that the assessee shall work out the deduction under section 10A of the Act from its total income before allowing the brought forward losses. We hold accordingly. Hence the ground of appeal of the assessee is allowed.
In the result, both the appeals of the assessee are allowed. This Order pronounced in Open Court on 21/01/2019
Sd/- Sd/- ( JUSTICE P.P. BHATT ) ( WASEEM AHMED ) PRESIDENT ACCOUNTANT MEMBER
Ahmedabad; Dated 21/01/2019
ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS
ITA Nos.1161 & 1162/Ahd/2015 Decision Craft Analytics Ltd. vs. DCIT Asst.Years - 2007-08 & 2008-09
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-1, Ahmedabad �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad
Date of dictation 9.1.19(dictation pad 8 pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member 9.1.19 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S … 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….25.1.2019 7. Date on which the file goes to the Bench Clerk…………………25.1.2019 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………