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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI R. C. SHARMA, AM & SHRI AMARJIT SINGH, JM
O R D E R
PER AMARJIT SINGH, JM:
The revenue has filed the present appeal against the order dated 16.05.2014 passed by the Commissioner of Income Tax (Appeals) -31, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2011- 12.
The revenue has raised the following grounds: - “
1. The Ld ClT(A) has erred on the facts and circumstances of the case and in law in allowing the deduction u/s 10A of the Act amounting to Rs. 61,43,026/- without appreciating the fact that as per clause 32 of the Audit Report u/s 44AB in form No. 3CD submitted by the assessee, the Auditor has mentioned that the firm is into service industries and as per details given by the assessee A.Y.2011-12 vide letter dated 10.01.2014 That the assessee gets fees from M/s Snapnames.Co in sole right of usage of software developed. This is not a consideration for export of computer software as required by section 10A(1) of the Act. The assessee is not deriving income from export of developed software, but it derived income by way of fee from service rendered.
2. On the facts and circumstances of the case in law, the Ld CIT(A) has erred in allowing the deduction u/s 10A of The Act amounting to Rs. 61,43,028/- without appreciating The fact that Mr. Bhavm M. Turakhia, erstwhile prop, of M/s Network Consultancy partnership firm M/s Network Consultancy are not same entities. But one is transferor and other is transferee of undertaking as per section 10A(7A) only in the case of amalgamation of company, a transferee amalgamated company is permitted to enjoy deduction u/s 1QA even after succession. This is an exception in case of other succession transferee is not considered for deduction by the statute.
3. The appellant prays That the order of CIT(Appeals) on the above grounds be set aside and that of the AO be restored.
4. The appellant craves leave to amend or alter any ground or to submit additional new ground which may be necessary.”
3. The brief facts of the case are that the assessee filed its return of income on 24.09.2011 declaring total income to the tune of Rs.257/-. after claiming the deduction u/s 10A of the Act of Rs.61,43,028/-. Subsequently, revised return of income was filed by declaring the same income. The case was selected for scrutiny through CASS. Accordingly, notices u/s 143(2) & 142(1) of the I.T. Act, 1961 were issued and served upon the assessee. On appraisal of the documents, it was observed that the Mr. Bhavin M. Turakhia a partner was carrying proprietary business under the name and style M/s. Net Work Consulting. The proprietary business was started w.e.f. 18.03.2004. Thereafter vide agreement dated 01.06.2009 the proprietary concerned was converted into w.e.f. 01.04.2009 with induction from three following partners (i) Shri Divyank M Turakhia (ii) M.D. Turakhia (HUF) and (iii) Mrs. Priya M. Turakhia along with Bhaving M Turakhia with 2 A.Y.2011-12 equal shares. The proprietary of Network Consultancy enjoyed the deduction u/s 10 of the Act, 1961 in the A.Y. 2010-11 and after the constitution of the firm, it was also claimed under the year of consideration. It was observed that: - “(i) Vide clause 32 of the report u/s 44AB in form No. 3DC, the auditors have mentioned that the firm is into service industries. (ii) It is seen that the assessee gets fee from M/s. SnapNames Co. in for allowing M/s. Snapname Co. in sole right of usage of software developed earlier. This is a fee for usage of software and not a consideration for export of computer software as required by section 10A(1) of the I.T. Act, 1961. (iii) Mr. Bhavin M Turakhia, erstwhile proprietor of M/s. Network Consulancy and partnership firm M/s. Network Consultancy are not same entities. But one is transferor and other is transferee of undertaking. By virtue of section 10A(7A) only in the case of amalgamation of company a transferee amalgamated company is permitted to enjoy deduction us/ 10A even after succession. This is an exception. In case of other successions, transferee is not considered for deduction by the statue. (iv) The firm continued its business with old machinery carried forward from the old proprietary concern. Above facts required to be subjected to the literal test of interpretation of statutory provisions to decide assessee is entitlement of deduction u/s 10A.”
4. Thereafter the notice was given and after considering the reply of the assessee in which it was stated that the claim of the assessee was allowed by the CIT(A)-31, Mumbai by virtue of order dated 19.08.2013 for the A.Y. 2010-11 but the AO declined the claim of the assessee u/s 10A of the Act and the claim to the extent of 61,43,028/- was added to the income of the assessee and the total income of the assessee was assessed to the tune of Rs.61,43,290/-. Feeling aggrieved, the assessee filed an appeal before the 3 A.Y.2011-12 CIT(A) who allowed the claim of the assessee, therefore, the revenue has filed the present appeal before us.
ISSUE NOs. 1 & 2:-
Issue nos. 1 & 2 are inter-connected, therefore, are being taken up together for adjudication. Under these issues the revenue has challenged the allowance of the claim of the assessee u/s 10A of the Act. Before going further, we deemed it necessary to advert the finding of the CIT(A) on record.:-
“5. I have carefully considered the facts relating to the disallowance of that claim u/s 10A as they emerge from the impugned assessment order and that submissions made in appeal. I find that all material facts in relation to that said claim remain unchanged from those relevant to A.Y. 2010-11 for which the appeal was decided vide my order no, CIT(A) 31/ IT-I37/ITO 20(2)(3)/1Z-13 dated 19.03.2013 wherein I concluded that the deduction claimed was allowable to the appellant for the following reasons: "5, / have carefully considered the /acts relating to the claim of deduction u/s 10A as reflected in the assessment order and the submissions made during these proceedings. 5.1 Section IDA of the Income-tax Act, 1951 provides for 100% deduction of profits and gains derived by an undertaking from export of articles or things or computer software manufactured or produced by it. The deduction is satiable for 3 period of ten consecutive assessment years beginning with the assessment yes relevant to file previous year in which the undertaking begins to manufacture or produce such articles or things or computer software. The tax benefit under section 10A is available to an undertaking that fulfills all the following conditions? 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 1-4-1981, in any Free Trade Zone; or (b) commencing on or after 1-4-1994, in any Electronic Hardware Technology Park or Software Technology Park; or (c) commencing on or after 1-4-2001, in any Special Economic Zone; It is not formed by the splitting up or the reconstruction of a business specified in section 33B of the I.T. Act.
4 A.Y.2011-12 It is not formed by the transfer to & new business of machinery or plant previously used for any purpose. 5.2 Clause(i) of Explanation 2 following sub-section 8 to Section 10A further clarifies as follows: (i) "computer software" means - (a) any computer programmer recorded or/ any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from to any place outside India by any means;" 5.3 In the case of the appellant, the first year of claim of deduction was A.Y. 20Q5-Q6, when it was a proprietary concern, The proprietary concern was converted to a partnership firm w.e.f 01.0^.2009 i.e. in F.Y.' 2009-10 relevant to A.Y. 2010-11. The present assessment year is therefore the 6:r< year of deduction claimed u/s 10A of the Act which-has thus far been at/owed to the appellant, The contention of the A.O. is that the deduction is not allowable to the appellant after its conversion to the status of a partnership firm because such conversion contravenes the provisions of 10A(2)(H) and (Hi), He has also observed that for a successor undertaking to be eligible for deduction u/s 10A, the transfer has to be as per the provisions of Section 1QA(7A) because as per the said section only in the case of amalgamation end demerger is a transferee company get the deduction. 5-4 It is pertinent to note that w.e.f. A.Y. 2Q01-Q2, Section 10A is no longer an 'exemption' provision, but a 'deduction' provision. It is a well-accepted principle that the deduction is granted with reference to the undertaking and not the owner thereof. Thus, it is unit or undertaking specific and not assessee specific, from this it follows that the mere conversion of a proprietary concern to a partnership firm does not change the fundamental nature of [he entity or undertaking that claims the deduction, 5.4.1 Attention is a/so invited to Board's Circular dated 13.12.1963 which-reads as under: "The Board agrees that the benefit of 84 of the JT Act, 1961, attaches to the undertaking and not to the owner thereof. The successor will be entitled to be benefit for the unexpired period of five years provided the undertaking is taken over as a running concern." The said circular was Issued with reference of the section #4 which was replaced by s. 80J w.e.f. 1st April, 1968. Though section 80J was omitted by Finance Act No. 2 of 5 A.Y.2011-12 1996 w.e.f. 1st April, 1589, its provisions were similar to the provisions of s, 84/80} and 80-1C in the context of benefit of deduction to be allowed to an undertaking. The provisions of section 1QA are on similar tines. Thus, the clarification provided by this Circular, that the benefit of deduction was available on an undertaking basis, can by extension be applied to claims of deductions u/s 10A also. 5.4.2. In the decision of CIT v Bullet International reported at 349 ITR 267 (AH.)', the Hon'ble Court held that a proprietary concern is entitled to exemption u/s" 1QA even after it is converted to & partnership concern. The relevant portion of the judgment reads as under: ' "5, It may not be out of place to mention that sub-sections (9) and (9A) Of Section 10-A of the Act, 1961 are omitted by the Finance Act, 2003, w.e.f. 1-4-2004. For the sake of convenience Sub- sections (9) and (9A) of Section 10-A of the Act, 1961, as they were existing prior to omission, are reproduced before: "(9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by the deduction under subsection (1) shall not be allowed to the assessee for the assessment year relevant ro such previous year and ttte subsequent years. (9A) Notwithstanding anything contained in sub-section (9), where 05 result of reorganization of business, 3 firm or a so/e proprietary concert is succeeded by 3 company and the ownership or beneficial interest it the undertaking of the firm or the sole proprietary concern is transferred to the company, the deduction under sub-section (1) in respect of suci undertaking shall be allowed to the company, as they would haw been a//owed to such firm or sole proprietary concern, as the sarne would been such firm or so/e proprietary concern, as the cast may be, if the reorganization had not taken place-Provided that, - (a) in the case of s firm the aggregate of the shareholding in company of the partners of the firm i$ not less than fifty- one per cent of the total voting power in the company and their shareholding continue to be as such for the period for which the company is eligible of deduction under this section; (b) In the case of a sole proprietary concern, the shareholding of the sob proprietor in the company is not less then fifty-one percent of the tote voting power in the company and his shareholding continues to remain a such for the period for which the company is eligible for deduction under this section."
6 A.Y.2011-12
Obviously, the afore-stated sub-sections (9) and (9-A) were n longer in existence w.e.f, 1/4/2QQ4 i.e. for assessment year 2004-2005 -There is no other provision for disallowance of benefit to assesses under section 10-A of the Act the C.I.T. (A) in his order has quoted th-relevant extract from the Board's Circular No, 7/2003 dated 05/9/200 and has come to the conclusion the Board agrees 'that benefit attached to the undertaking and not to owner thereof- It is a. acknowledged position that beneficial circular issued by CBOT t binding on the department, Reference can be made in this regard to . recent judgment of Supreme Court in Catholic Syrian Bank Ltd. Vs Commissioner of Income Tax,, JT 2012 (2) SC 493. Paragraph. 21 is reproduced below: "21. Now, we shaft proceed to examine the effect of the circulars which are force and are issued by the Centre! Board of Direct Taxes (fc short, 'the Board') in exercise of the power vested in it under Section 11 of the Act. Circulars can be issued by the Board to explain or tone down the rigors of law and to ensure fair enforcement of its provisions. These circulars have the force of few and are binding on the income ta authorities, though they cannot be enforced adversely against the assessee, Normally, these circulars cannot be ignored. A circular override or detract from the provisions of the Act but it can seek t mitigate the of a particular provision for the benefit of th assesses in certain specified circumstances. So long as the circular is i. force, it aids the uniform and proper administration and application of th provisions of the Act. {Refer to UCQ Bank, Calcutta v. Commissioner (. Income Tax, W,8. (1999) 4 SCC 599]}." 7. by the teamed counsel for the appellant. CIT (1992) 193 ITR, 543 is misplaced one. Altogether a differed controversy was involved therein. There construction of povision granting incentive to particular income was not in issue. It wa rendered in the context of development rebate and is therefore distinguishable. 8. It is not disputed before us that for the earlier assessment year exemptions been granted to the undertaking. In this view of the matter, the Tribunal was justified in homing that the assesses is entitled to get exemption tinder Section 10-A of the Act, 2961. The argument t the learned counsel for the department that since the proprietorship has been converted into partnership, therefore, this disentitles the assesse to claim benefits under Section 10-A of the Act, 1$61 totes not borne 01 either fro/n the plain language of sub- sections (9) and (9A) of Section 1C-A of the Act, 1$61 or in view of the Circular of the CBDT referred to above. No substantial question of law is involved in the appeal.”
7 A.Y.2011-12 5.5 From the above-cited decisions, it is dear that the mere fact of conversion from proprietary concern to partnership firm will not cause the appellant to be ineligible to claim deduction u/s IDA of the Act, 5.6 Another reason that formed the foundation for the dental of the appellant's claim by the Assessing Officer, was that the expenses debited to the P & L A/c, were not rentable to the activity of manufacture of software. • The Assessing Officer also observed that the fee received by the appellant for allowing usage of software developed in the past did not qualify for deduction-This observation of the A.O. stems from his perception that claim of deduction by the appellant is made with reference to 'software development' activity. In view of the nominal expenses incurred by the appellant, the A.O. has concluded that no software is manufactured act hence no deduction is allowable. 5.7 Section 1QA grants 1QQ% deduction of the profits and gains derived from export of computer software, "Computer Software" has been further defined in Cause(i) of Explanation 2 to include '''any customized electronic data, or any product or services". These products and services have been further elaborated in the Notification No. 11521/F. No. 142/49/2000 TPL and 89Q(E) Dated 26.09.2000. At this point, it is worthwhile to peruse the contents of this notification issued by the CBDT to clarify the range of l.T enabled products or services eligible for deduction u/s 1QA* The notification reads as under: '7/i exercise of the powers conferred by clause (b) of item (i) of Explanation 2 of section 10A, clause (b) of item (i) of Explanation 2 of section 10B and clause (b) of Explanation to section 80HHE of the Income Tax Act, 1961 (43 of 1961), the. Central Board of Direct Tuxes hereby specifies the following information technology enabled products of services, as the case may £e, for the purpose of said clauses, namely (i) Back office operations; (xv) Web-site services." The said notification thus clarifies that the above fisted activities within include 'any customized electronic data or any product or- service Of similar nature, as may be notified by this Board'. 5.7.1 7~ne appellant has licensed software Co M/s Snap names Inc., using which, the said party is ab/e to provide its customers access to 'dropped and a available' domain names. This software requires continuous up-gradation that is carried out on an annual basis by the appetent. It is for this work that the appellant receives a fee and has consequently claimed the deduct/on under item (xv) of the above notification. Thus the appellant's operations constitute the design and maintenance of a customized product designed to enable the detection of dropped and available domain names, The ambit Of "web-Site services" is of wide ampetude and the service of domain name registration as well as tools enabling their service, would constitute an integral part thereof within the meaning of the 8 A.Y.2011-12 notification dated 26th September 2000 issued by the CBDT. Therefore, the proceeds received by the appellant from these operations will accordingly qualify for deduction u/s 10A. 5.8 Thus in view of the facts and position of taw discussed above, the denial of deduction u/s 10A in the case of the appellant is deleted. Accordingly, the grounds raised by the appellant are allowed.”
6. On appraisal of the above said finding, we noticed that the CIT(A) has decided the issues in favour of the assessee on the basis of the order passed by the CIT(A) dated 19.08.2013. The said order has been reproduced by the CIT(A) in his order which has been mentioned above, therefore, there is no need to repeat the same. At the time of argument, the Ld. Representative of the Department has drew the attention of the Tribunal toward the decision of the Hon’ble ITAT in the assessee’s own case for the A.Y. 2010-11 in dated 06.11.2015 in which the order passed by the CIT(A) for the A.Y. 2011-12 has been upheld. The relevant para nos. 12, 13, 14 & 15 are hereby reproduced below for ready reference.:-
“12. We have heard both the parties and perused the material available on record. It is necessary to peruse the contents of the notification issued by CBDT to clarify the range of IT enabled products or services eligible for deduction u/s 10A reads as under: - “In exercise of the powers conferred by clause (b) of item (i) of Explanation 2 of section 10A, clause (b) of item (i) of Explanation 2 of section 10B and clause (b) of Explanation to section 80HHE of the Income Tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the following information technology enabled products of services, as the case may be, for the purpose of said clauses, namely (i) Back office operations; 13. The aforementioned notification clarifies that the above listed activities will include ‘any customized electronic date or any product or service of similar nature, as may be notified by the Board.’ 14. After considering the aforementioned notification, we are of the view that the CIT(A) has rightly held that assessee has licence software to M/s Snapnames. Inc. using which, the said party is able to provide its 9 A.Y.2011-12 customers access to dropped and available’ domain names. This software requires continuous up-gradation that is carried out on an annual basis by the assessee. It is for this work that under item (xv) of the above notification. Thus the assessee's operations constitute the design and maintenance of a customized product designed to enable the detection of dropped and available domain names.
Considering the orders passed by the lower authorities, we are of the considered view that the proceeds received by the assessee from these operation will accordingly qualify for deduction u/s 10A and thus the aforementioned grounds is rejected.”
7. In the said appeal the issue no. 1 is hereby mentioned as under:-
1 The Ld. CIT(A) has erred on the facts and circumstances of the case and in law in allowing the deduction u/s 10A of the Act amounting to Rs.48,82,912/- without appreciating the fact that as per clause 32 of the audit Report u/s 44AB in form no.3DC submitted b the assessee, the auditor has mentioned that the firm is into service industries and as per details given by the assessee vide letter dated 27.06.2012 that the assessee gets fees from M/s. Snapnames.co.in sole right of usage of software developed. This is not a consideration for export of computer software as required by section 10A(1) of the Act. The assessee is not deriving income from export of developed, software but it derived income by way of fee from service rendered.
8. In the said appeal the issue no. 2 is hereby reproduced below.: - “2 On the facts and circumstances of the case in law, the Ld. CIT(A) has erred in allowing the deduction u/s 10A of the Act amounting to Rs.48,82,912/- without appreciating the fact that Mr. Bhavin M. Turakhia, erstwhile prop. Of M/s. Network Consultancy partnership firm M/s. Network Consultancy are not same entities. But one is transferor and other is transferee of undertaking. As per section 10A(7A) only in the case of amalgamation of company, a transferee amalgamated company is permitted to enjoy deduction u/s 10A even after succession. This is an exception. In case of other succession, transferee is not considered for deduction by the statute.”
10 A.Y.2011-12
The Tribunal has given the finding upon the issue no. 2 which is mentioned in para nos. 22, 23 & 24 which are reproduced below.: - “22. We have also gone through the decision relied upon by the AR titled CIT vs. Bullet International reported at 349 ITR 267(Allh) wherein the Hon’ble Court held that a proprietary concern is entitled to exemption u/s 10A even after it is converted to a partnership concern. The relevant portion of the judgment reads as under: "5. It may not be out of place to mention that sub-sections (9) and (9A) of Section 10-A of the Act, 1961 are omitted by the Finance Act, 2003, w.e.f. 1-4-2004. For the sake of convenience Sub-sections (9) and (9A) of Section 10-A of the Act, 1961, as they were existing prior to omission, are reproduced below: "(9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under subsection (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years. (9A) Notwithstanding anything contained in sub-section (9), where as a result of reorganization of business, a firm or a sole proprietary concern is succeeded by a company and the ownership or beneficial interest in the undertaking of the firm or the sole proprietary concern is transferred to the company, the deduction under sub-section (1) in respect of such undertaking shall be allowed to the company, as the same would have been allowed to such firm or sole proprietary concern, as the same would have been allowed to such firm or sole proprietary concern, as the case may be, if the reorganization had not taken place: (a) in the case of a firm the aggregate of the shareholding in the company of the partners of the firm is not less than fifty-one per cent of the total voting power in (he company and their shareholding continues to be as such for the period for which the company is eligible for deduction under this section; (b) In the case of a sole proprietary concern, the shareholding of the sole proprietor in the company is not less than fifty-one percent of the total voting power in the company and his shareholding continues to remain as such for the period for which the company is eligible for deduction under this section." 6. Obviously, the afore-stated sub-sections (9) and (9-A) were no longer in existence w.e.f. 1/4/2004 i.e. for assessment year 2004-2005. There is no other provision for disallowance of benefit to assessee 11 A.Y.2011-12 under section 10-A of the Act. The C.I.T. (A) in his order has quoted the relevant extract from the Board's Circular No. 7/2003 dated 05/9/2003 and has come to the conclusion that the Board agrees that benefit is attached to the undertaking and not to owner thereof. It is an acknowledged legal position that beneficial circular issued by CBDT is binding on the department. Reference can be made in this regard to a recent judgment of Supreme Court in Catholic Syrian Bank Ltd. Vs. Commissioner of Income Tax, Thrissur, JT 2012 (2) SC 493. Paragraph 21 is reproduced below: "
Now, we shall proceed to examine the effect of the circulars which are in force and are issued by the Central Board of Direct Taxes (for short, 'the Board') in exercise of the power vested in it under Section 119 of the Act. Circulars can be issued by the Board to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored. A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain specified circumstances. So long as the circular is in force, it aids the uniform and proper administration and application of the provisions of the Act. {Refer to UCO Bank, Calcutta v. Commissioner of Income Tax, W.B. (1999) 4 SCC 599p."
Reliance placed by the learned counsel for the appellant on Tarun Bhai Vs. CIT (1992) 193 ITR, 543 is misplaced one. Altogether a different controversy was involved therein. There construction of exemption provision granting incentive to particular income was not in issue. It was rendered in the context of development rebate and is therefore distinguishable.
It is not disputed before us that for the earlier assessment years, exemptions have been granted . to the undertaking. In this view of the matter, the Tribunal was IL stifled in holding that the assessee is entitled to get exemption under Section 10-A of the Act, 1961. The argument of the learned counsel for the department that since the proprietorship has been converted into partnership, therefore, this disentitles the assessee to claim benefits under Section 10-A of the Act, 1961 does not borne out either from the plain language of subsections (9) and (9A) of Section 10-A of the Act, 1961 or in view of the Circular of the CBDT referred to above. No substantial question of law is involved in the appeal."
12 A.Y.2011-12
In this particular case of assessee, we have noticed that the first order of claim of deduction was AY-2005-06, that it was a proprietary concern. Proprietary concern was converted into the partnership firm w.e.f. 01.04.2009 i.e. in FY-2009-10 relevant to AY-2010-11, the present assessment year is therefore, the sixth year of deduction claimed u/s 10A of the Act which has thus far been allowed to the assessee but now the condonation of the AO is not sustainable to the effect that the deduction is not allowable to the assessee after its conversion to the status of the partnership firm. 16 M/s Network Consulting 24. We respectfully follow the citations relied upon by the assessee titled as CIT vs. Bullet International and while relying upon the said judgment and taking into consideration the facts and circumstances of the case. We are of the considered view, that mere fact of conversion from proprietary concerned to partnership firm will not cause the assessee to be ineligible to claim deduction u/s 10A of the Act, therefore, the said ground is rejected.” 10. In view of the decision of the Hon’ble ITAT in the assessee’s own case for the A.Y. 2010-11 in ITA. No.6081/M/2013 dated 06.11.2015, it is quite clear that the case of the assessee has squarely covered by the said decision hence by honoring the judgment of the Hon’ble ITAT (supra) in the assessee’s own case, we confirm the finding of the CIT(A) on all the issues and dismissed the appeal of the revenue. Accordingly, these issues are being decided in favour of the assessee against the revenue.