EXCELRA KNOWLEDGE SOLUTIONS PRIVATE LIMITED,HYDERABAD vs. DCIT., CIRCLE-8(1), HYDERABAD

5. Aggrieved with the order of the Ld. CIT (A), the assessee is now in appeal before us. At the outset, the Learned Authorized Representative (“Ld. AR”) submitted that the solitary issue involved out of the grounds of the appeal of the assessee is the penalty of Rs.54,45,894/- levied by the Ld. AO under section 270A of the Act. In this regard, the Ld. AR further submitted that the assessee is undisputedly eligible for deduction under section 10AA of the Act. He invited our attention to Note No. 17 of the audited financial statements placed at page no. 3 of the paper book, wherein the assessee has clearly and separately disclosed the interest income of Rs.3,27,09,605/- earned on fixed deposits under the head of “other income”. The Ld. AR also submitted that the assessee had fully disclosed all primary facts and there was no concealment or furnishing of inaccurate particulars. The interest was disclosed both in the computation and in the audited accounts. The Ld. AR also submitted that the assessee claimed deduction under section 10AA of the Act under a bona fide belief, relying on the judgment of the Hon’ble Karnataka High Court in the case of CIT v. Hewlett-Packard Global Soft Ltd. 403 ITR 453, wherein it was held that interest on bank deposits formed part of the business income of the eligible unit for the purpose of deduction under sections 10A/10B of the Act. He again explained that, although this decision pertained to section 10A/10B of the Act, the assessee reasonably believed that the same principle extends to section 10AA of the Act, which is also an incentive provision. It was further submitted that section 270A(6)(a) of the Page 4 of 8 Act provides that where the assessee furnishes a bona fide explanation and discloses all material facts, the case shall not be treated as under-reporting of income. Since the assessee has disclosed every detail in the audited financials and acted under a bona fide legal understanding, no penalty can be imposed. Thus, the Ld. AR prayed for deletion of penalty.

6. Per contra, the Learned Departmental Representative (“Ld. DR”) supported the orders of the Ld. AO and Ld. CIT(A). He argued that the assessee was not eligible for deduction under section 10AA of the Act on interest income from bank deposits. In this regard, the Ld. DR relied on the judgment of the Hon’ble Madras High Court in the case of CIT v. Menon Impex Pvt. Ltd. (259 ITR 403) wherein it was held that unless there is a direct nexus between the interest income and the eligible undertaking, such income cannot qualify for deduction. Accordingly, the Ld. DR submitted that the interest earned by the assessee does not have any immediate nexus to the eligible unit, and therefore, the claim for deduction under section 10AA of the Act was incorrect, justifying penalty under section 270A of the Act.

Page 5 of 8 Therefore, there is a complete disclosure of income by the assessee in its return of income. We observe that the assessee has claimed deduction under section 10AA of the Act based on the judgment of the Hon’ble Karnataka High Court in the case of CIT vs. Hewlett- Packard Global Soft Ltd. (Supra), forming a bona fide belief that the principle applicable to sections 10A/10B of the Act would also apply to section 10AA of the Act. The assessee has also fully disclosed the nature of income, source of income, and computation of income. On the contrary, the Ld. DR relied on the decision of CIT vs. Menon Impex Private Limited (Supra) to contend that interest income is not eligible for 10AA deduction. In our considered view, the contention of the Ld. DR may be relevant for quantum proceedings, it cannot by itself establish mala fides for the purpose of penalty. Further, we have gone through the provisions of section 270A(6) of the Act, which is to the following effect: 270A. Penalty for under-reporting and misreporting of income. (1)…… 2……. 3……... 4……… 5…….. .(6)The under-reported income, for the purposes of this section, shall not include the following, namely:— (a)the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

Page 6 of 8 (b)the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom; (c)the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance; (d)the amount of under-reported income represented by any addition made in conformity with the arm's length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and (e)the amount of undisclosed income referred to in section 271AAB.”