ACIT CEN CIR-9, MUMBAI vs. SHREEPATI COMPUTER CENTRE, MUMBAI

These four cross appeals have been filed by assessee and Revenue against the orders of Commissioner of Income- Tax (Appeals), Central-VII, Mumbai, for A.Ys. 2000-01 to 2003-04. Since, all appeals pertain to same assessee and on almost similar issue, so they are being disposed of by common order for the sake of convenience.

2. In for A.Y.2000-01, Revenue has filed the appeal on the following grounds:

“1) On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.69,20,471/- on account of disallowance of the claim u/s.80HHE of the I.T. Act, 1961, made by the Assessing Officer.

2) On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs.1,73,985/- on account of disallowance of the Software Development charges, made by the Assessing Officer.”

ITA Nos.889 to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 3 2.1 In for A.Y.2000-01, assessee has filed the appeal on the following ground:

“Ground No.1:

On the facts and in the circumstances of the case and in law, the learned CIT(A), Central VII, erred in restricting the depreciation on car to 50% of the amount claimed of Rs.1,73,650 by the appellant. The appellant prays that the disallowance of Rs.86,825 may please be allowed, as the car was used for the purpose of the appellants business.” for A.Y.2000-01 (Revenue’s appeal)

3. A search and seizure action u/s.132(1) was undertaken on 23.03.2005. Assessee filed the return declaring total income of Rs.19,60,460/-. The firm was stated to be conducting computer training courses and other related activities under the head Computer Training Division. It has stated during the year under consideration Computer Software Development Division for conducting software development and all other related services. It had two divisions of business i.e. (i) Computer Training Service Division and (ii) Computer Software Development Division. From the Software Development Division, it had shown net profit of Rs.79,11,630/-, against which deduction u/s.80HHE claimed was Rs.69,20,471/-. It claimed to have developed software and sold to M/s. Lee & Nee Software (Export) Ltd. Kolkata (hereinafter after called as ‘LNSEL’) and its three to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 4 units viz. (i) M/s. Raj Software & Services, (ii) M/s. L & T Software Services & (iii) M/s. Software Services. Assessing Officer found that these exporters had received export order from one “Apkidukan.com Corporation”, an America based company. Assessee supposedly developed the software for these concerns, which in turn exported it to Apkidukan.Com as under:

Name of Exported in Exported in A.Y. Exported in A.Y. exporter A.Y. 2000-01 2001-02 2002-03 Lee & Nee Rs.6,16,61,250/- Rs.7,60,12,574/- Rs.8,08,68,420/- Software L & T Software Rs. Nil Rs.2,36,69,100/- Rs.3,76,49,577/- M/s. Software Rs. Nil Rs.2,34,39,962/- Rs.3,72,84,952/- Services Raj Software Rs. Nil Rs.2,33,90,640/- Rs.3,72,07,620/- 3.1 It is stated that LNSEL is engaged in trading of software and claimed exemption u/s.10A/B of Rs.2,51,69,603/- for A.Y. 2001-02, Rs.3,19,54,924/- for A.Y. 2002-03 and Rs.59,42,402/- for A.Y. 2004-05 and had also given disclaimer certificate to the assessee u/s.80HHE of the Act. The profit shown from development of software by assessee were Rs.84,76,015/- for A.Y. 2000-01, 9,92,51,800/- for A.Y. 2001-02 and Rs.15,11,25,880/- for A.Y. 2002-03. The Assessing Officer was of the opinion that both the concerns including assessee were not eligible for exemption. Assessing Officer observed that job charges for development of software were bogus. Moreover, in the recorded statements of certain persons claimed to be developers of software, they denied any such job done. Thus, it was concluded that assessee to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 5 had never developed any software which was also found in course of survey at Kolkata and Bhubaneswar which revealed that it never developed any software nor LNSEL procured them form it and never exported. Assessing Officer further noted that on the basis of certain seized papers impounded from the office of LNSEL that assessee had made export of Rs.15,00,000/- in F.Y. 2000-01, Rs.16,00,000/- in F.Y. 2001-02 and Rs.15,00,000/- in F.Y. 2002-03. However, against these exports, assessee had credited exports in its books Rs.10,16,00,000/- in F.Y. 2000-01, Rs.15,57,46,280/- in F.Y. 2001-02 and for F.Y. 2002-03. Assessing Officer also found other deficiencies with regard to present claim of assessee u/s. 80HHE of the Act. In response to above allegations, assessee made a detailed reply during assessment proceedings which is being narrated as under: “(1) The assessee has dealt with LNSL as a supporting manufacturer for their export to M/s. Apkidukaan.Com/ Merikitab.Com with maintenance contract for the same and was not having any direct relation with M/s. Apkidukaan.Com Corporation. Hence, it was not aware /concerned with the company Apkidukaan. Com Pvt. Ltd. or its office.

(2) The job work charges were paid by the assesses to various staff and agencies. Mr. C.L. Deshpande who was Technical Director was looking after operational work and day to day activities has got the work executed by various staff and agencies. He was authorized to make necessary payment to the staff and the expenses incurred in vouchers seized for the same are accounted in the books of accounts towards expenses and has been reflected in the profit & loss account and balance sheets. Further, TDS has also been deducted and paid on such job work charges. to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 6

3) Late Shri. C.L. Deshpande was only aware of technical details and from whom the work has been executed as he was the only person involved in appointing employees or freelancers and other agencies. Other partners were not involved in day to day software development process as they were not technically qualified. Therefore, retraction by some persons after four years and that too under what circumstances could only have been explained by Mr. Deshpande. Further, it was submitted that in case the department wanted to use the statements recorded by the I.T. Dept, of Software Development staff, the same may be made available to us and an opportunity to cross- examining the deponents may also be given to us.

(4) As regard the letter from STP Bhuwaneshwar it was stated that the onus of getting the exports certified by STP is on the LNSEL and not on the supporting manufacture. The assessee had developed software and submitted the same as supporting manufacturer to the exporters.

(7) The documents seized from the Kolkata office of LNSL were relevant to it only. The claim of expenses of Rs.71,42,585/- are genuine job work expenses incurred by us and duly recorded in books of account in the year it pertains. Sales credited by the assessee in its books of account are as per the bills raised on LNSEL and others as a supporting manufacturer, for their exports for which certificates are issued by exporters LNSEL & others in form No.l0CCAG. The claim u/s.80HHE for AY. 2000-01 to 2002-03 are genuine and required to be accepted.

(8) Further, the assessee clarified that the firm was formed somewhere in the year 1992-93 with the object of earning income through business of development of software and by running training institute by appointing Shri.C. L. Deshpande as Technical Director and initially, the revenue was earned only by running training institute. Subsequently, one of the partners of the assessee firm came in the contact of Shri. S.M. Gupta, Director of M/s. Lee & Nee Software (Export) Ltd. as they were in the same field. Shri. S.M. Gupta proposed for the to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 7 business of developing software for his company, which was accepted by the assessee firm in consultation with technical director Mr.C. L. Deshpande and the first contract was entered into on 28-12-1999 as a test and case was completed successfully, which led to the receipt of even a larger contracts dated 28-7-2000 from Lee & Neo Group. For this purpose, the premises were taken on lease at Bhubnneshwar. On gaining more confidence, the assessee decided to apply for setting up of 100% export oriented unit under Software Technology Park of India (STPI), Bhubaneshwar, which was done vide application dated 16-12-2000 and the STPI granted permission on 1/1/2001. It has enclosed copies of 4 agreements with Lee & Nee Group dated 28-7-2000 and also the scope of work carried out. Further, it is reiterated that Shri C.L. Deshpande was the whole and sole person to manage the said division, who is no more. Further, it is staled that the premises were taken on lease, electricity expenses were incurred, new computers were purchased for fulfilling the contract. It has also filed sample copy of SOFTEX .which is a declaration for export of software by LNSL to Aapkidukan.Com Corporation, USA. It is also clarified that LNSL and its group was eligible to issue disclaimer certificate as the only requirement to be fulfilled for claiming 80HHE is that there should be an export of computer software and it is immaterial whether the same is developed by the assessee or purchased from market and exported.”

3.2 On taking into consideration of above reply, Assessing Officer observed that assessee did not know anything about the development of software, did not know the precise nature of business or technical activities of M/s. Shreepati Computer Centre, as per the statement of main partner Sri R. R. Chaturvedi recorded during course of survey. It had no previous expertise in development of software or export thereof, still it had entered into a correct with LNSL for to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 8 development of software to be exported to M/s Aapkidukaan.Com Corporation, USA. Shri Chaturvedi, in his statement could not give the value of software developed. Assessee also could not produce any evidence of developing any software. It was further stated that LNSEL was only engaged in trading of software and was not manufacturing any software. The so called exporter was not entitled to give any disclaimer u/s.80HHE of the Act to supporting manufacturer. By giving disclaimer certificate to assessee, it violated the provisions of the Act.

3.3 It was also stated that Shri S. M. Gupta, Principal Officer of LNSEL had not authority under any provisions of Act to issue a disclaimer u/s.80HHE of the Act to M/s. Shreepati Computer Centre as it claimed exemption u/s.10B of the Act. On the same profit for same export, double exemption cannot be allowed. Furthermore, LNSEL was itself having in-house facilities at Calcutta, Bhuvaneswar and Rourkela and its centres were in existence at Software Technology Parks at these places since long. Had these software development transactions with Aapkidukaan.com been indeed genuine, LNSL with a better infrastructure facility would have been in a better position to execute it, especially when the profits margin was so high.

3.4 Assessing Officer further stated that in order to verify the genuineness of the export software transactions of M/s. Lee & Nee Software (Export) Ltd. with Aapkidukaan.com to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 9 Corporation, USA, a reference was made to the Foreign Tax Division, CBDT, New Delhi, who in turn had made the enquiries and submitted its report which is narrated as under:

their returns of income for the Aapkidukaan.Com would own financial years covering the period the U.S. operations, however, April 1, 1999 to March 31,2002. this agreement was never materialized.

3.5 On the basis of avove report, it was observed by the Assessing Officer that Aapkidukaan.com Corporation was never active. LNSEL had exported nothing and alternatively, assessee did not develop any software and nor exported. In response to further query made in this regard, assessee contended that as Aapkidukaan.Com Corporation dealt with LNSL, who issued disclaimer Certificate to assessee.

3.6 After taking into account the above explanation of the assessee, Assessing Officer observed that though assessee stressed on the admissibility of exemption u/s.10B of the Act claimed and allowed by the department to the exporter company to whom permission was granted by STPI vide letter dated 30.04.1992 and if this was a case, then what is the fate of a certificate of recognition of Software Export House w.e.f. 01.04.2002 issued by the Jt. Director General of Foreign Trade, Kolkata vide No.013420 dated 03.04.2003 addressed to M/s. Lee & Nee Software (Export) Ltd. As regards to the source code, it was stated that the documents were lying with the department, therefore, the assessee was not in a position to provide any further clarification. According to Assessing Officer, a prudent businessman could not forget the basic ingredients of any products manufactured by him by which he has flourished and therefore, the plea that documents were with the department to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 11 could not be accepted by him. Regarding export of software, it had enclosed a copy of Softex Form certified by the STPI, in which name of the assessee appeared as supporting manufacturer. According to Assessing Officer, the Foreign Tax Division had not come across any transaction in its inquiries. It has found that Aapkidukaan.com, USA was never active. Foreign Tax Division also found that agreement between Aapkidukaan.com and Lee & Nee Software Ltd. never materialized.

3.7 It was further stated by the Assessing Officer that assessee was unable to establish as to how it had explained the source code of the products manufactured by it and sold to LNSL, who in turn had exported and received foreign exchange for claiming exemptions/deductions as it stated that it was not able to explain how the two bank accounts were operated by Aapkidukaan.com Corporation, but receipts of foreign exchange were received by LNSL for export of software to Aapkidukaan.com Corporation. If the assessee had developed the software transmitted to LNSEL, who in turn transmitted to Aapkidukaan.com Corporation, there would have been any instance detected during the course of inquiry by Foreign Tax Division, the assessee would have been able to preserve the source code, employees would have been able to answer positively and there would not have been any ambiguity in the bank accounts held by Aapkidukaan. to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 12 com Corporation, USA, from which foreign exchange has been received by the principal exporter.

3.8 It was observed by Assessing Officer that assessee had received advance payments of Rs.10,84,05,000/- from LNSL without having made any sales. All the purchases were quarter ending June, 2002 to March, 2005, but assessee claimed deduction U/S.80HHE on above receipts for AY 2002-03.

3.9 It was further stated by Assessing Officer that the managing partner of firm viz. Shri Rajendra Chaturvedi in his statement recorded under sec.132(4) of the Act on 24.03.2005 was confronted on this issue and assessee had made disclosure of additional income of Rs.7crore. However, assessee retracted the declaration made vide its affidavit dated 30.08.2005 on the count that it was made in frustration and compulsions and conditionally i.e. subject to detection of undisclosed income from the books of accounts and documents found during the search. This was not found correct and acceptable by Assessing Officer. According to Assessing Officer, there was also no compulsion. Secondly, the statement recorded was dated 24.03.2005 and the retraction date is 30.08.2005. Thus, it was found an after thought by Assessing Officer.

3.10 In view of above, Assessing Officer held that assessee firm had not developed and exported any software as to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 13 assessee engaged a number of under graduate students both at Mumbai and Bhubaneswar. They totally denied having developed any software and they did not know the assessee firm. In addition to above, summons were issued and statements were recorded certain other persons who also denied having developed any software for assessee. Even these persons did not know Shri. C. L. Deshpande at all. Assessing Officer further observed from the documents impounded from LNSL during the course of survey u/s 133A of the Act on 23.03.2005 that it had made exports of 26,41,08,562/- during F.Y.1999-2000 to 2001-02 (F.Y. 1999-2000 Rs.72,27,568/-, F.Y. 2000-01 Rs.7,60,12,574/- & F.Y. 2001-02 Rs.8,08,68,420/-). However, total software reportedly developed and exported by assessee during the said period was Rs.26,59,96,280/-. It was further stated that as per letter addressed to assessee on 03.03.2003 by the Addl. Director, STPI, Bhubaneshwar seeking report on the performance of assessee and impounded from the office of the Lee & Nee Software that assessee had made export during the F.Y.2000-01 to 2002-03 of Rs.15,00,000/-, 16,00,000/- and Rs.15,00,000/- respectively and as against the above exports, the assessee has credited in its books exports of sale of Rs,10,16,00,000/- in F.Y. 2000-01 and Rs.15,57,46,280/- in F.Y.2001-02, which itself proves that the exports claimed to have been made by LNSL of the software developed by assessee was bogus. to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 14 3.11 According to Assessing Officer, as per letter dated 07.07.2003 of STP Bhuwaneshwar, assessee had not started any commercial production within the initial validity period of three years. In view of above discussion, the deduction claimed u/s.80HHE of the Act and job work charges pertaining to A.Ys. 2001-02 and 2002-03 were also disallowed on the same reasoning being bogus.

4. Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assessee. CIT(A) has allowed the claim of assessee by observing as under:

“7. I have carefully considered the above facts and find sufficient force in the contentions of the appellant. The disallowance made by the Assessing Officer is based on half baked findings and without appreciating the facts of the case properly. The conclusion is drawn against the appellant mainly on presumptions and surmises and is not substantiated with cogent evidences. The observations and findings of the Assessing Officer have been properly countered by the appellant and after evaluating such replies/arguments, my own findings are narrated in the coming paras below.

7.1 In so far as the lack of requisite expertise held by the partners as observed by the Assessing Officer is concerned, on going through the contents of the statement of Sri Chaturvedi, it is quite evident that he was fully aware of the affairs of the appellant firm vis-a- vis the transactions with LNSEL though he could not offer plausible answers to certain technical questions which is not so unusual as he having many other business affairs to handle, there is nothing to disbelieve that such affairs were taken care of by Sri Deshpande. The said person expressed his inability to answer such querries is to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 15 understandable but cannot be brushed aside and made the basis for doubting the entire transaction entered into with LNSEL. Thus, not much significance is attributed such observation of the Assessing Officer. Moreover, the Assessing Officer has not brought on record any material fact to disbelieve the fact that the technical aspects of the deal were being looked after by Late Sri Deshpande. The appellant was engaged in such IT related business for several years though had taken up the software development on such a large scale for the first time. In the present age of outsourcing, execution of such a work assigned could be consummated with ease with the help of IT professionals and therefore, it is not essential requirement of the partners to be conversant with technicalities of such job.

7.2 As regards undue importance attached to the disclosure of additional income by the managing partner, I find sufficient merits in the submissions of the appellant. On careful consideration of the stated facts, it is evident that the Assessing Officer has heavily relied upon the disclosure made by the managing partner in the course of search, though it is also stated that such disclosure was retraced later. In this case, the appellant firm had already been assessed by the department with regard to the returns filed well before the search and no infirmity was found by the Assessing Officer though the assessment was also framed after due scrutiny. Sri Chaturvedi retracted from the surrender on the basis of such an argument which cannot be disbelieved. Moreover, the retraction was made within a reasonable period of time after pondering over the whole scenario, consequent to the search operations. In the retracted affidavit, it is clearly stated that the statement u/s 132(4) was made subject to detection of undisclosed income from the books of account and documents found during search. It was stated that export proceeds received were duly recorded in the regular books of account on accrual basis and as and when the income accrued, deduction was claimed as per the Act and was also allowed in respective assessment orders. No addition could be made on the basis of such statement unless and until, it is corroborated with to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 16 evidences. In the present case, it appears that the managing partner made such a disclosure more in a confused state of mind, rather than making a conscious declaration, more so, in the light of disclosed facts as per the returns filed much earlier than the search. Therefore, some element of coercion cannot be ruled out completely. The corroborative evidences brought on record are not conclusive and infallible and have been successfully rebutted by the appellant.

7.3 It may be stated here that similar disclosure and subsequent retraction has been a matter of dispute before various courts from time to time. Reference could be made to the case of DCIT vs Samita Marine Kakinada(2007) 10 SOT 335(Mum) where it was held that even though the assessee had made certain declaration during survey regarding the expenditure incurred being bogus and had also surrendered such expenses as undisclosed income, the Assessing Officer was not found justified in making such addition when the assessee did not declare such additional income in the return filed. It was held that the appellant did incur such expenditure in course of carrying on the business and the Assessing Officer failed to bring on record any documentary evidence to prove the non- genuineness of the expenses. In another case of DCIT vs Pramukh Builders (2008) 112 ITD 179 ITD 179 (Ahm) (TM) where the partners surrendered certain undisclosed statement in the course of search but retracted the same while filing the return, it was held that no addition could be justified merely on the basis of such a statement, in absence of any evidence regarding charging of on money by the said builder. The partner made the disclosure under utter state of confusion. Therefore, not much significance could be attached to such disclosure and the matter needs to be evaluated in the light of the evidences gathered consequent to the search operations. Reliance could also be placed on Kailashben M.Choksi vs CIT(2008) 174 Taxman 466(Guj) in which on identical circumstances, it was held that addition could not be made on such statement as the revenue despite retraction could not find any corroborative evidence. Similarly in the case of First Global Stockbroking P. Ltd vs ACIT(2008) to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 17

115 TTJ 173(Mum), it was held that disclosure or admission u/s 132(4) during search proceedings is an admissible evidence but not a conclusive one. If the assessee is able to demonstrate with the help of some material that such admission was made under a mistake or misconception of facts, no addition can be made solely on the basis of such admission, Further, addition based on retracted declaration is not safe. In another case of ITO vs Leela Devi Badola(2008) 116 TTJ 214(Jodh) it was observed that though a surrender on the basis of the statement recorded during survey is binding on the assessee, he is entitled to retract from the same, if the assessee leads infallible evidence to show that the surrender was extracted by coercion or was made with a misunderstanding. Similar decisions were rendered in Prabal Lakhotia vs ACIT(2008) 114 TTJ 938(Jodh) and ITO vs Lanyard Foods Ltd(2008) 25 SOT 71(Mum)(URO).

7.4 In respect of the observations made by the Assessing Officer that LNSEL did not make any export, on careful consideration of the above facts and going through the copies of SOFTEX forms, I do not find any merit in the conclusion drawn by him. Under the provisions of Foreign Exchange Management Regulations, 2000/Exim Policy etc such type of business is required to make a declaration of export of software in Softex form which is necessarily to be submitted to the designated official of the Department of Electronics, Government of India at the Software Technology Parks of India (STPIs) etc. Perusal of such forms submitted by LNSEL and related concerns clearly shows that the competent authority on behalf of Department of Electronics, in the space provided in the said form, has duly certified that the software described above was actually transmitted and the export/royalty value declared by the exporter has been found to be in order and accepted by them.

7.5 The contention of the Assessing Officer regarding duplication in the claim is unfounded. Perusal of the copies of certificate issued by LNSEL and associates in Form no10CCAC in terms of Rule 18BBA(8) clearly shows that they have duly certified that they have not claimed to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 18 deduction u/s 80HHE(1) in respect of the export turnover attributed to the appellant. Such a certificate is duly authenticated by the respective Principal Officers and the auditors. In the Disclaimer certificate, it is categorically stated that the said concerns would not claim and export performance for issue of i) export performance certificate ii) Export/Trading Certificate and iii) Special import license. Nothing has been brought on record by the Assessing Officer in this regard to show that such documents and declarations were false or fabricated. Thus, there is no case of double deduction claimed by the exporters and the appellant. It may also be stated here in a letter from LNSEL, it is categorically stated that it made claim u/s 10A/B for AYs 2000-01 to 2002-03 in respect of such export profit after deducting the expenses including purchases made from the appellant. Hence, any case of double deduction has been vehemently denied by them as well. It is also stated by it that the claim of deduction u/s 10A/B made in the respective years was duly accepted by the department in the assessments made and there was no dispute in this regard excepting in AY 2000-01 in the case of one of the erstwhile amalgamating company, M/s L.T. Estate P.Ltd in which disallowance of deduction u/s 10B was on account of non-receipt of foreign exchange was allowed by the Hon'ble ITAT, Kolkata Bench in its order dated 12.5.2004.It may also be stated here that on correspondence made by the undersigned with the Assessing Office/ concerned of LNSEL, Kolkata, it has been intimated vide letter dated 10.12.2008 that there was no dispute pending with regard to the claim of deduction u/s 10B of the Act and no recourse was taken to the provisions of section 147 for AYs 2000-01 to 2002- 03.Thus.the issue regarding claim of deduction u/s 10B in this case of which the appellant is a supporting manufacturer, is settled and accordingly fully allowed. As such, the claim of the appellant cannot be denied on this ground also.

7.6 The observations of the Assessing Officer that if LNSEL had been granted permission by STPI vide letter dated 30-4-92, what was the fate of certificate of recognition of Software Export House w.e.f. 1-4-02 vide to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 19 letter dt. 3-4-2003 issued by Jt. Director General of Foreign Trade, Kolkata, has been duly rebutted by the appellant. I find that the issue raised by the Assessing Officer is not relevant at all. Apart from the certificate being irrelevant for the years under consideration, the Assessing Officer cannot ignore the certificate issued by STPI to LNSEL from 30.4.1992. The declarations made in the softex form from time to time makes such an objection all the more irrelevant., having no bearing on the genuineness of the claim of the exporter as well that of the appellant in the capacity of supporting manufacturer.

7.7 Regarding the failure of the appellant to state that source code, re is evident that the Assessing Officer was duly intimated of the reasons for non furnishing of the same. The Assessing Officer has not made any counter comments on such unavoidable circumstances stated by the appellant and went on to link up such non-production to the genuineness of the export itself though the same was a fait accompli. Had in his opinion source code carried such an importance, nothing prevented him to verify the contentions of the appellant which appears to have been completely overlooked. No effort seems to have been made with the Investigation Wing of the department which carried out the search and survey operations. Accordingly, not much importance could be attributed to such an issue.

7.8 The Assessing Officer has laid too much stress on the report of the FTD but has conveniently forgotten to take in cognizance the softex declaration and acceptance of the same by the competent authorities of Department of Electronics. It may be stated here that the said authority has been entrusted and authorised a specific duty relating to export of software and a certificate issued by them giving credence to the entire factum of export cannot be brushed aside lightly, as done by the Assessing Officer. The genuineness of the certificates has .not been disputed by the Assessing Officer who jumped to an adverse conclusion based on report which suited his purpose, Moreover, it may also be stated here that the report of FTD is directly pertaining to the transactions of LNSEL to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 20 vis-a-vis Aaapkidukaan.com and not to the appellant. As slated in preceding paras, the Assessing Officer of LNSEL did not find any infirmity in the genuineness of the claim of the appellant. In such a situation, the Assessing Officer of the appellant has no locus standi in the matter to disbelieve the bonafides of the said transactions. It also appears that the report of FTD does not wholly falsify the claim of export made by LNSEL. and it concerns more the business activities of Aapkidukaaan, rather than the alleged bogus nature of transactions. Accordingly, it is held that the point raised by the Assessing Officer does not carry much significance vis-a-vis the appellant, so long as the export made by LNSEL have been accepted to been genuine by the Assessing Officer concerned in its case. He has not brought on record any contrary fact.

7.9 In so far as statements of certain job workers is concerned, I have carefully considered the above facts. It is evident that the Assessing Officer has heavily relied upon the statements of certain persons to show that no software was developed by the appellant and also on the letter of STPI in this regard. It is evident that the statements were recorded subsequent to the post-search proceedings sometime in early 2005 and not during assessment proceedings which was completed in December, 2008. The Assessing Officer has merely adopted the findings of the Investigation Wing and no independent finding has been forthcoming from him the payments made were duly recorded in the books of accounts and relevant vouchers found during the search only corroborate the genuineness of such payments. The Assessing Officer has also overlooked the fact that TDS was duly deducted and paid to the government account. Nothing has been brought on record to show that all such facts borne from the books of account were bogus or incorrect as the books have not been rejected either. Moreover, there is nothing to show that the appellant was allowed the opportunity to cross-examine the said persons as per request made during assessment proceedings though the statement of the said persons were used against the appellant and in a way, they were used as witnesses of the department. The reasons for denial of to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 21 natural justice is not comprehensible though the facts remains that such statements have been treated as clinching evidence by the Assessing Officer. Thus, the Assessing Officer has violated the principles of natural justice in the matter. It may be stated here in the case of State of Kerala vs K.T.Shaduli Grocery Dealer AIR 1977 SC 1627, the Hon'ble Apex Court held that a Taxing Officer is under obligation to comply with the principles of natural justice in reaching the conclusion. In another case of K.I.Shepherd vs Union of India AIR 1988 SC 686, it was observed that natural justice requires that persons liable to be directly affected by proposed administrative act, decision or proceedings be given adequate notice of what is proposed so that they may be in a position to make representation on their own behalf or to appear at a hearing or enquiry and effectively prepare their own case and to answer the case, if any, they have to meet. It may also be staled here that in a recent case of Prakash Chand Nahta vs CIT(2008) 301 ITR 134(MP), the assessment order itself was treated as invalid where the assessment was based on the statement of a third party who also retracted his statement and the assessee was not allowed opportunity to cross examine this third party. It was held that though the AO had powers for issuing summons, despite request of the assessee, he did not summon and such an evidence could not be used against the assessee and in the absence of affording opportunity of a reasonable opportunity of being heard, the assessment order was vitiated. Similar decision was rendered in the case of Dharam Pal Prem Chand Ltd(2008) 295 ITR 105(Del) and Heirs and LRs late Lakshmibai S. Patel vs CIT(2008) 174Taxman 206(Guj).

7.2 Moreover, the matter requires to be considered in the light of the fact that Department of Electronics, Govt. Of India as well as the Assessing Officer of LNSEL have accepted the export made by it to be genuine. Since the appellant is merely a supporting manufacturer, the transactions made with LNSEL which ultimately resulted in export, it is quite logical to treat such sales to be genuine, notwithstanding the denial of involvement of certain persons in development of software. It may also be to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 22 stated here that the Assessing Officer has used the statements of such persons in proving the transaction as bogus but has conveniently lost sight of affidavits of as many as five persons which included software experts who have, in no uncertain terms admitted having done such job for the appellant. One Sri Rajesh Chaturvedi in the affidavit dated 3.12.2007 submitted to the Assessing Officer has stated he was associated with the appellant during the year 2000 to 2003 as computer professional and had undertaken job work under the supervision of Sri Deshpande. From the TDS certificate dated 31.3.2003 issued by the appellant, it is evident that TDS was duly made on job work charges. Likewise, another computer profession Ms. Prajakta Shinde in the affidavit dated 3.12.2007 affirmed similar facts. It is also stated by her that she confirmed job work charges to the department consequent to search operations in March 2005. Besides, It may also be staled here that the appellant could not counter the findings of the Assessing Officer as such persons could not be traced out as the matter was quite old and the appellant had stopped such activity long time back. Thus, it could not be expected to do an impossible task. However, it has to be appreciated that the appellant had to undergo search and seizure operation and the vouchers and bills relating to such job work were found during search. In fact, presence of such evidences at the time of search only strengthens the contentions of the appellant that actual work in this regard was done or else no such evidences could have been found, had the claim been bogus and cooked up. Thus, such reliance on the statements, contrary to overwhelming evidences in favour of the claim of the appellant, cannot be considered enough for sustaining the disallowances made.

7.3 In so far the letter to STPI is concerned, giving certain ad hoc figures of exports made, it may be stated here that when the appellant submitted such a break-up of export but at the relevant point of time, the books of account did reflect the actual sales turnover which were also duly disclosed in the returns of income of the relevant assessment years and the said exports were duly accepted to be genuine in the original assessment orders. to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 23

Thus, not much importance can be attributed to such a declaration which also appears to have been made on estimate and ad hoc basis only.

7.4 In the light of above discussion, it is held that the appellant made a bona fide claim for deduction u/s 80HHE and the job work charges paid during the relevant years were genuine. The Assessing Officer is directed to allow deduction u/s 80HHE for all the AYs 2000-01 to 2002-03 4.1 Before us, ld. Departmental Representative submitted that CIT(A) erred in deleting the addition of Rs.69,20,471/- on account of disallowance of claim u/s.80HHE of the Act made by Assessing Officer. In view of this, ld. Departmental Representative submitted that the order of CIT(A) be set aside and that of Assessing Officer be restored. In this regard, ld. Departmental Representative took us the different findings of Assessing Officer and to establish the felicity of order of CIT(A) also relied upon certain case laws in this regard. On the other hand, ld. Authorized Representative supported the order of CIT(A) with various reasonings coupled with case laws on the points invoked in this case.

5.1 On successful completion of the same, one large contract was received by the appellant firm. The details of the contracts are as under:

Name of the Party Date of Contract

M/s. Lee & Nee Software (Exports) Ltd. (LNSEL) 28.07.2000 M/s. L T Soft & services 28.07.2000 M/s Raj Soft & Services 28.07.2000 M/s. M S Soft & Services 28.07.2000 Out of the above four parties, M/s. L T Soft & Services, M/s. Raj Soft & Services and M/s. M S Soft & Services amalgamated with LNSEL vide Calcutta High Court order dated 18.09.2000 w.e.f. 28.02.2000. Hence virtually all the to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 25 four contracts were entered with LNSEL. Copy of all the above contracts has been enclosed in Paper book (Refer page 103 to 114) before us, which is not in dispute.

5.2 On gaining even more confidence, the appellant decided to apply for 100% Export Oriented Unit (EOU) under Software Technology Park of India, Bhubaneswar Centre for the development of computer software which was done vide application dated 16.12,2000. The STPI granted permission on 01.1.2001. For the purpose, the premises were also taken on lease. The contract of Lee & Nee group was huge enough to engage assessee in export related work. As already stated above, assessee firm had already appointed Shri C.L. Deshpande as technical director as none of the partners were familiar with the Information Technology industries.

5.3 The software development work pursuant to the above contracts was initially carried out in Bombay office i.e. for A.Y. 2000-01 and 2001-02, under the supervision of Shri Deshpande. The said software developed were sold to LNSEL, which in turn, after making the value addition in the software developed by the appellant firm as well as in the software, development of which was outsourced to other parties, the said LNSEL exported the same to M/s. Aapkidukan.com Corporation, which was a US based company. Though, the appellant firm did not directly export the said softwares, being a supporting manufacturer, on to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 26 receipt of disclaimer certificate from LNSEL, it was eligible to claim deduction u/s.80 HHE on profits earned from the sale of the said software.

5.4 The details of sales made to LNSEL and the details of deduction u/s.80HHE claimed are as under:

Assessment Amount of Amount of turnover (Rs.) deduction U/S. 80HHE (Rs.) 2000-2001 86,50,000 69,20,471 2001-2002 10,16,00,000 7,67,33,710 2002-2003 15,57,46,280 10,33,88,045 5.5 Background of LNSEL Group is that it is a listed company and is an established software developing company and is also engaged in export of softwares. Copy of its financials are detailed in the paperbook page no 239 to 286 filed by assessee before us. LNSEL has been approved as Software Technology Park by Department of Electronics vide letter of permission dated 30.04.1992. Since then, LNSEL is eligible for exemption u/s.10B of the Act. LNSEL, on 27.01.2000, undertook a major project being an order received from Aapkidukaan.com Corporation, which is a US based company, for developing a portal of Aapkidukaan.com. The main object of the said portal was to grab US market for Indian goods and services and thus to create a largest online shopping mall for Indian goods in US Market. Said Indian company, Aapkidukaan.com Pvt. Ltd. was established in 2001, which was engaged in the marketing of the said portal to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 27 in India, by procuring clients in India to have their virtue shops on the portal through its offices/associates in Kolkata, Pune, Banglore, Bhubhaneshwar or its franchises.

5.6 LNSEL itself designed the main portal of Aapkidukan.com and decided to outsource designing of various modules and templates for the said software. For said purpose, orders were placed wih various other software developers apart from the appellant firm. Once the work outsourced was completed and received by LNSEL through email, the various parts outsourced to different developers were assembled and linked with the main portal. To this extent, there was a value addition by LNSEL. On the said value addition, exemption u/s. 10B was claimed by LNSEL and same was accepted by the department in ITAT. Copy of said ITAT order in case of L&T Estate is enclosed in paper- book page no. 297-300 to justify chain transaction in this regard.

5.7 Subsequently, assessee claimed deduction u/s.80HHE of the Act on supply of above device to LNSEL as supporting manufacturer. Assessing Officer has disallowed deduction u/s.80HHE of the Act claimed by the appellant firm. The reasons mentioned by Assessing Officer at various places in the assessment order for disallowing the said claim are enumerated below: 1. Shri R. R. Chaturvedi was not having any knowledge about the development of software and to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 28 the appellant firm had no previous expertise in development and export of softwares. The said business proposition had come to Shri R. R. Chaturvedi, through luck and not through efforts or knowledge.

to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 29

5. The source code of the softwares developed could not be provided by the appellant firm as well as by Director of M/s. LNSEL, Shri S.M. Gupta.

7. The appellant firm never developed any software as during the course of search, field enquiries were made with the persons to whom appellant firm had claimed to have paid job work charges denied having worked for them. Further letter received from STPI Bhubaneshwar also states that no activity had been carried out.

to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 30 5.8 All of the allegations of Assessing Officer are being dealt with hereunder:

5.8.1 First objection of Assessing Officer is that Shri R. R. Chaturvedi was not having any knowledge about the development of software and the appellant firm had no previous expertise in development and export of software's. The said business proposition had come to Shri R. R. Chaturvedi,, through luck and not through efforts or knowledge. A person can carry on any business without having any previous knowledge with respect to said business. Shri R. R. Chaturvedi grabbed an opportunity on receipt of proposal since he had at his disposal, Shri C. L. Deshpande who was technically qualified. He undertook a responsibility to get developed software as required by LNSEL. Unfortunately, at the time of search, Shri C. L. Deshpande was no more alive. The main reason for arriving at this conclusion by Assessing Officer was that the technical questions raised by the search party could not be answered by Shri R. R. Chaturvedi. So far as agreements and finance was concerned, Shri R. R. Chaturvedi was very much aware of the same, as decision making and control of the business was entirely in his hands. There is no necessity to have technical expertise to carry on any business as same may be delegated to expert person of field, Late Shri C. L. Deshpande as discussed above. Other objections raised by Assessing Officer is that the said business proposition come to Shri R. to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 31 R. Chaturvedi through luck and not through efforts or knowledge. Mr. R. R. Chaturvedi himself has stated the same in answer to Q. 19 of the statement recorded on 24.03.05. In answer to Q. 2 of the said statement, Shri R. R. Chaturvedi has described the situation under which he got this proposal. The possibility of luck in getting business proposals could not be ruled out. Thus both the allegations of Assessing Officer that no business could be carried on without having any previous knowledge for the same as well as the business proposition should come only through efforts or knowledge are baseless. The Assessing Officer has not brought on record any material fact to disbelieve the fact that technical aspect of the deal were being looked after by late Shri Deshpande. As discussed above, in the present age, execution of such specialised work can be completed with the help of IT professionals and therefore, it is not essential requirement of the partners to be conversant with technicalities of such job.

5.8.2 Next objection of Assessing Officer was that Shri. R. R. Chaturvedi voluntarily declared Rs. 7 Crores in his statement dated 24.03.05, which was subsequently retracted vide his affidavit dated 30.08.05., which was found by Assessing Officer as an after thought. In this regard, we find that Statement recorded u/s.132(4) of the Act is forming part of paper book on page nos.199-231. From the contents of same, we find that the said disclosure was made without prejudice to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 32 to his contention that accounting method adopted by the firm is correct. A perusal of the answers to question Nos.11 to 57 would indicate that the said disclosure was prompted by an alleged mistaken claim u/s. 80HHE of the Act without analyzing merit of claim. It is for that reason that in the answer to question 78 Mr R.R. Chaturvedi made the disclosure. Subsequently, in consultation with Chartered accountants, when it was realized by Shri R. R. Chaturvedi that the claim made by the assessee firm was very much in accordance with law, the statement was retracted by filing an affidavit dated 30-8-05 which is forming part of paperbook page no 232 - 235. The CIT(A) has rightly accepted the justification of assessee in para 7.2 page 27 of his order by stating that "No addition could be made on the basis of such statement unless and until it is corroborated with the evidence. In other words, the retraction can be made on the basis of validity of claim.

5.8.3 Regarding M/s. LNSEL is only engaged in trading of software and they are not manufacturing any software. Further, there was no mention in the return of income of LNSEL that it had given disclaimer certificate to the appellant firm and thus it has violated the provisions of Income Tax Act. LNSEL claimed exemption u/s. 10 A on the same profits on which the assessee firm claimed deduction u/s. 80 HHE. At para 7, page no.8 of the assessment order, Assessing Officer has commented that LNSEL is engaged in to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 33 only trading of software and not in manufacturing of software. On the same page 8 of the assessment order, in the beginning para, Assessing Officer has stated that the assessee firm has filed sample copy of SOFTEX form, which is a declaration for export of software by M/s. LNSEL. The SOFTEX form has to be submitted to the designated official of department of electronics of Government of India at the STPI and the said export is done under the supervision of competent authority i.e. Director of STPI. Apart from the above, it was certified by the said officer that the software described in the SOFTEX form was actually transmitted and the export value by the exporter has been found in order and accepted by the said authority. Further the export through STPI is allowed only when certificate of STPI is granted. Copy of sample SOFTEX form filed by LNSEL is forming part of paper book page nos. 141-160. Further the claim of assessee LNSEL would be proportionately reduced when disclaimer certificate is issued to the supporting manufacturer. In the instant case, LNSEL is eligible to issue disclaimer certificate, as it is an exporting company. Further LNSEL claimed deduction u/s.10B of the Act on the value addition. LNSEL issued disclaimer certificate in form 10CCAG to assessee company with respect to appellant company's share in software export. The copy of Form 10CCAG is forming part of paperbook page nos. 44-60. In this regard, during the appellate proceedings, CIT(A) had corresponded with the Assessing Officer of LNSEL, Kolkata ITA Nos.889 to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 34 wherein he was intimated vide letter dated 10.12.2008 that there was no dispute pending with regard to the claim of deduction u/s.10B of the Act and no recourse was taken to the provision of section 147 for AYs 2000-01 to 2002-03. The CIT(A) has recorded this fact in Para 7.5 at Page 29 of his order which reads as follows: "It may also be stated here in a letter from LNSEL, it is categorically stated that it made a claim u/s 10A/B for AYs 2000-01 to 2002-03 in respect of such export profits after deducting the expenses including purchases made from the appellant. Hence, any case of double deduction has been vehemently denied by them as well. It is also stated by it that the claim of deduction u/s 10A/B made in respective years was duly accepted by the department in the assessment made and there was no dispute in this regard excepting in AY 2000-01 in case of one of the erstwhile amalgamating company M/s L. T Estate Pvt Ltd in which disallowance of deduction u/s 10B was on account of non-receipt of foreign exchange was allowed by the Hon'ble ITAT Kolkata Bench in its order dated 12.5.2004. It may also be stated here that on correspondence made by undersigned with the assessing officer concerned of LNSEL, Kolkata, it has been intimated vide letter dated 10.12.2008 that there was no dispute pending with regard to claim of deduction u/s 10B of the Act and no recourse was taken to the provisions of section 147 for AYs 2000-01 to 2002-03. Thus the issue regarding claim of deduction u/s 10B in this case of which the appellant is supporting manufacturer, is settled and accordingly fully allowed. As such, the claim of the appellant cannot be denied on this ground also."

Thus, it is clear on the basis of material on record that claim of assessee u/s.80HHE of the Act is in order. to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 35 5.8.4 Next issue is that the source code of the softwares developed could not be provided by the assessee firm as well as by Director of M/s. LNSEL, Shri S.M. Gupta. The said statement made by Assessing Officer on page no. 14 para 10 of the assessment order. In this regard, it was submitted that the source code as requested Assessing Officer was very much provided to the search team during the course of investigation on 14.06.05, at Mumbai Income Tax office. The said information was provided to Assessing Officer vide letter dated 14.11.07 and same has also been reproduced in the assessment order on page 11 of the assessment order. During the search, CDs containing source code were seized and same were with the department. Copy of the panchnama which is is on page no 125 to 134 of the paperbook clarifies this fact in nutshell that the source code information was already in the possession of the income tax authorities and the appellant firm was handicapped on account of the seizure from producing the relevant source code. CIT(A) in para 7.7 page 30 of his order has accepted the assessee's justification of non-furnishing of source code. Nothing prevented the Assessing Officer from verifying the contentions of the assessee as the relevant material was in the possession of the Department from the date of the search Operations itself. This fact has been completely overlooked by the Assessing Officer, which is not justified. So, CIT(A) was justified on taken favourable view.

ITA Nos.889 to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 36 5.8.5 Next objection of Assessing Officer was that enquiry made by Foreign tax Division with respect to the transmission of software developed to Aapkidukan.com Corporation, did not come across any such transaction. Further the said company had two bank accounts but the owners of Aapkidukan.com were not the owners of these accounts. Assessing Officer doubted the export of software. In this regard, stand of assessee has been that SOFTEX form through which the software has been exported by LNSEL, was certified by competent authority i.e. Director of STPI, which is a Government authority. Thus, the stand of the Assessing Officer is a mere surmise and in contradiction to the Competent Authority which is the Director STPI. Assessee firm was also required to explain why M/s. Apakidukaan.com Corporation had two bane accounts but the owners of Aapkidukaan.com were not the owners of these accounts. In response to this, it was reiterated by assessee firm that the Bank certificate SOFTEX form proves the receipt of foreign exchange by LNSEL. The appellant firm cannot be expected to know the internal affairs of Aapkidukaan.com Corporation with whom, assessee firm had no privity of contract or transaction. As assessee firm had direct transaction with LNSEL, it has tried to enquire with them and provide as many information as is relevant to establish the claim of assessee firm. The assessee firm was never in direct touch with M/s. Aapkidukaan.com Corporation and hence to providing such information was to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 37 beyond the scope of assessee firm. CIT(A) rightly held that the report of FTD does not falsify the claim of export made by LNSEL and it concerns itself more about the business activities of Aapkidukan and its existence as an entity. On both these counts the report of the FTD confirms the existence and business activities. Accordingly, it was rightly held that the point raised by Assessing Officer does not carry significance vis-à-vis the appellant, so long as the export made by LNSEL have been accepted to be genuine by Assessing Officer in its case. In view of above discussion, this object was rightly noted out by CIT(A) while granting relief to assessee.

5.8.6 Next objection is that assessee firm never developed any software as during the course of search, field enquiries were made with the persons to whom assessee firm had claimed to have paid job work charges denied having worked for them. Further letter received from STPI Bhubaneswar also states that no activity had been carried out. Assessing Officer observed that the assessee could not establish its job work done. Shri R. R. Chaturvedi was also confronted with the statements of 5 persons, who had totally denied having developed any software for assessee firm. However, Shri Chaturvedi reiterated that the responsibility of getting developed the software was of Shri C. L. Deshpande, who was no more alive at relevant point of time. These statements w-ere never furnished to the assesse during to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 38 assessment proceedings even though during the course of assessment proceedings, the assessee firm had specifically requested Assessing Officer to provide cross examination of such persons who have given statement against the appellant firm, vide assessee's letter dated 27.09.2007, in reply to Q. 5 of Assessing Officer’s questionnaire as detailed on page 35 and 36 point 5 of the paper book. No such opportunity of cross examination was provided to the appellant firm. Issue of non grant of cross examination of these parties was raised in the Statement of Facts filed before the CIT(A). All these four statements remained untested by cross examination. Without prejudice to above, we find that the four statements deal with an amount of approximately Rs 2 lakhs out of a total amount of job work claimed in the four years of Rs.71,42,585/- and therefore forms an insignificant 2.5% of the total amount. The extrapolation cannot be made of this magnitude on the basis of a few stray comments. It is relevant to note that the appellant firm has filed affidavits of several job workers/salaried people, Shri Rajesh Chaturvedi, Ms. Pheona Miranda, Ms. Vidya Sawant, Mr. Sachin Owal and Ms. Prajakta Shinde vide letter dated 14-12-07, which have not been considered by the Assessing Officer while making detailed comments on this point in the assessment order. The CIT(A) mentioned that the Assessing Officer has merely adopted the findings of the investigation wing and no independent finding has been forthcoming from him. The ITA Nos.889 to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 39 payments made were duly recorded in the books of accounts and relevant vouchers found during the search only corroborate the genuineness of such payments. The assessing officer has also overlooked the fact that TDS was duly deducted and paid to the government account. Nothing has been brought on record to suggest that all such facts borne from the books of account were bogus or incorrect as the books of account have not been rejected. Moreover, there is nothing to show that the appellant was allowed the opportunity to cross examine the said persons as per request made during the assessment proceedings though the statement of the said persons were used against the appellant and in a way, they were used as witnesses of the department, which is not justified.

5.8.7 Other objection of Assessing Officer has been that there was some discrepancies with regard to quantum of the export, which was observed by him from the communication of Additional Director, STPI addressed to assessee. Assessing Officer observed that commercial production has not started and quantity of production was also disputed. In this regard, stand of assessee has been that assessee submitted clarification vide letter dated 15.07.2003 inter alia submitted that they had already started commercial production from A.Y. 2002-03 in Bhubaneswar. Copy of same has been placed on page nos. 165-166 of the paperbook filed by assessee and requested that in these to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 40 circumstances, claim of assessee u/s.80HHE of the Act must be allowed as LNSEL being exporter has been allowed the claim. Claim has become final as observed by CIT(A)’s finding listed at page no.33 of his order. LNSEL is a listed company and its claims were supported by the filing of SOFTEX forms that have never been rejected. Assessing Officer has put the main reliance on statements, for which, no opportunity of cross examination was given to assessee. Further, Assessing Officer placed reliance on certain replies, which were not acceptable as the full content of the same were never confronted to assessee in any manner. Proceedings made by the enforcement directorate against the assessee on similar grounds as contended by Assessing Officer has already been dropped, which is evident from page no.306 of paper book. This takes care the issue of disallowance of software development charges of Rs. 1,73,985/-. Similar disallowance on account of software development charges arose in A.Ys.2001-02 & 2002-03 raised in Revenue’s appeals. Facts being similar, so, following same reasoning, this issue is taken care in favour of assessee in view of our observation on this point in A.Y. 2000-01.

5.8.8 In view of above factual and legal discussion, CIT(A) was justified in allowing the claim of deduction as claimed by assessee u/s.80HHE of the Act. Same is upheld.

6. Similar issue of deduction u/s.80HHE of the Act arose in 2001-02 and 2002-03 and CIT(A) granted relief in both the to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 41 years on the same reasoning. Facts being similar, so following same reasoning, we are not inclined to interfere with the order of CIT(A) who has allowed the deduction u/s.80HHE of the Act as claimed. Same are upheld.

7. In the result, appeal filed by Revenue in for A.Y. 2000-01 is dismissed. for A.Y. 2000-01 (Assessee’s appeal)

8. The only issue in assessee’s appeal in A.Y. 2000-01 is with regard to depreciation on car. Assessing Officer disallowed Rs.1,73,650/- on account of depreciation on car. In appeal, same was restricted to 50% of the amount claimed of Rs.1,73,650/- by assessee. Under these circumstances, this reasoned factual finding of CIT(A) with regard to restriction of 50% on depreciation on car, needs no interference from our side. We uphold the same.

“1) On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.7,67,33,946/- on account of disallowance of the claim u/s.80HHE of the I.T. Act, 1961, made by the Assessing Officer.

2) On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 42

Rs.23,08,200/- on account of disallowance of the Software Development charges, made by the Assessing Officer.”

“Ground No.1:

On the facts and in the circumstances of the case and in law, the learned CIT(A), Central VII, Mumbai, grossly erred in confirming the A.O.’s action of making an addition of Rs.50,00,000/ on account of unexplained loan from Shri G Suramma. The appellant prays that the addition of Rs.50,00,000/- may please be deleted.

Ground No.2:

On the facts and in the circumstances of the case and in law, the learned CIT(A), Central VII, Mumbai, grossly erred in enhancing the income of the appellant by making a disallowance of Rs.40,000 u/s 40A(3) on account of cash payment made exceeding Rs.20,000 towards job work charges. The appellant prays that the disallowance of Rs.40,000/- may please be deleted.”

16.1 Before us, ld. Authorized Representative submitted that CIT(A) erred in confirming the action of Assessing Officer. So, addition in question be deleted. On other hand, learned Departmental Representative supported the order of CIT(A).

16.2 After going through rival submissions and material on record, we find that assessee has failed to discharge its onus to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 44 and has neither established the identity and creditworthiness of alleged lender nor proved the genuineness of credit. Even though, the said persons were stated to have expired long time back, assistance of the legal representatives/relatives of the said person could have been availed for the said purposes. Assessee has merely stressed upon the fact that the transaction was entered through banking channels which meets the test of Section 68 of the Act. But this contention was not accepted by Revenue authorities as transactions through cheques cannot be considered to be sacrosanct in the absences of failure of assessee to prove the creditworthiness of lender as also the genuineness of transaction. The burden is on assessee to rebut the same, but assessee has not discharged the burden cast upon him in this regard to addition is question. Taking all facts and circumstances into consideration, even though transaction is through banking channel, as assessee could not prove the same with cogent evidence, so, CIT(A) was justified in confirming the same. Same is upheld.

“1) On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.10,33,88,045/- on account of disallowance of the to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 45 claim u/s.80HHE of the I.T. Act, 1961, made by the Assessing Officer.

2) On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs.23,50,400/- on account of disallowance of the Software Development charges, made by the Assessing Officer.”

“Ground No.1:

On the facts and in the circumstances of the case and in law, the learned CIT(A), Central VII, Mumbai, grossly erred in enhancing the income of the appellant by making a disallowance of Rs.6,000 u/s 40A(3) on account of cash payment made exceeding Rs.20,000 towards job work charges. The appellant prays that the disallowance of Rs.6,000/- may please be deleted.

Ground No.2:

On the facts and in the circumstances of the case and in law, the learned CIT(A), Central VII, Mumbai, grossly erred in partly disallowing the job work charges of Rs.22,64,000. The appellant prays that the disallowance of Rs.22,64,000/- may please be deleted.

Ground No.3:

On the facts and in the circumstances of the case and in law, the learned CIT(A), Central VII, erred in restricting the depreciation on car to 50% of the amount claimed of Rs.2,50,028 by the appellant. The appellant prays that the disallowance of Rs.1,25,028 may please be allowed, as the car was used for the purpose of the appellant’s business.”

2) On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.15,00,000/- made by the Assessing Officer.”

28.1 In the written submission, it was stated that so far as disallowance of job work charges are concerned, it was stated that assessee clarified before the Assessing Officer that though there was no activity carried out in the software division during the A.Y. 2003-04, there were some job work charges provisions made in the previous A.Y. i.e. AY 2002- 03, which was made on an estimate basis as the same were worked out on hourly basis. Subsequently, the provision fell to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 49 short. Hence, the actual payment of short provision was made in A.Y. 2003-04 and the same was debited to Profit & Loss account. However, as the job work charges were disallowed by Assessing Officer even in earlier years and the amount claimed in the aforesaid assessment year was a short provision of the same job work charges, the Assessing Officer disallowed job work charges in aforesaid assessment year also, which was deleted by CIT(A) by observing as under: “5. I have carefully considered the above facts. In so far as the estimation of business income of Rs.15 lakh is concerned, I do not find any merit therein. As regards the letter to STPI, it is evident that only certain ad hoc figures of exports were stated therein, as actual exports were done in the earlier years and the books of account did reflect the actual sales turnover which were also duly disclosed in the returns of income of the relevant assessment years and the said exports were duly accepted to be genuine in the original assessment orders. No business activity, not to speak of any export has been carried on during the relevant year. Moreover, there was no corroborative evidence to show that the appellant was engaged in any such business activity during the relevant year Thus, not much importance can be attributed to such a declaration which also appears to have been made on estimate and ad hoc basis only with a bona fide business expediency. Accordingly, the addition made is deleted.”

28.2 Same has been opposed before us on behalf of Revenue inter alia submitted that the order of CIT(A) be set aside and that order of Assessing Officer be restored. Ld. Authorized Representative supported the order of CIT(A). to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 50 28.3 After going through rival submissions and material on record, we find that in so far as estimation of business income of Rs.15lacs is concerned, CIT(A) rightly did not find any merit therein. As regards the letter to STPI, it was found evident that only certain ad hoc figures of exports were stated therein, as actual exports were done in the earlier years and the books of account did reflect the actual sales turnover which were also duly disclosed in the returns of income of the relevant assessment years and the said exports were duly accepted to be genuine in the original assessment orders. No business activity, not to speak of any export has been carried on during the relevant year. Moreover, there was no corroborative evidence to show that assessee was running any such business activity during the relevant year. Each year is independent in its facts and circumstances. Thus, not much importance can be attributed to such a declaration which also appears to have been made on estimate and ad hoc basis only with a bona fide business expediency. Accordingly, addition deleted by CIT(A) needs no interference from our side. Same is upheld.

Ground No.1: On the facts and in the circumstances of the case and in law, the learned CIT(A), Central VII, Mumbai, grossly ITA Nos.889 to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03

04. (M/s. Shreepati Computers) Page 51 erred in enhancing the assessment by treating interest income of Rs.5,89,717/- as income from other sources. The said interest income is emanating from business transactions and ought to have been treated as income from business. The appellant prays that the said income should be treated as business income.

Ground No.2:

Without prejudice to the above ground no.1, alternatively, it is contended that the Hon’ble CIT(A) grossly erred in enhancing the assessment by disallowing all the expenses claimed in the profit & los at Rs.15,57,488. The appellant prays that the said expenses may be allowed.”

“6. I have carefully considered the arguments of both sides and perused the material placed before me. I find that in the assessment year 2006-07, the Assessing Officer considered the facts of the assesse’s case in detail while allowing the business loss of Rs.36,41,385/- and he to 892, 1481, 1527, 1528 & 1402/Mum/09 A.Ys. 00-01 & 03-04 (M/s. Shreepati Computers) Page 52 has accepted that the business continued since the assessment year 2002-03. Considering the totality of the facts of the case and the arguments of both sides, in my opinion, it is the case of temporary lull in the business in the year under consideration and therefore, it cannot be said that there was a closure of the business. Accordingly, the Assessing Officer is directed to allow the business expenditure in accordance with law.”

Pronounced in the open Court on this the 18th day of August, 2016.

Sd/- Sd/- (RAJESH KUMAR) (SHAILENDRA KUMAR YADAV) CCOUNTANT MEMBER JUDICIAL MEMBER Mumbai: Dated 18/08/2016 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाइल / Guard file. By order/आदेश से,

उप/सहायक पंजीकार, आयकर अपील�य अ�धकरण, मुंबई ।