DCIT, CHENNAI vs. MEGASOFT LIMITED, CHENNAI

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

All these appeals of the Revenue are directed against the

respective orders of the Commissioner of Income Tax (Appeals),

Chennai, for the assessment years 2007-08, 2006-07, 2008-09,

2010-11 and 2011-12. Since common issue arises for consideration

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in all these appeals, we heard these appeals together and disposing

of the same by this common order.

Representative, submitted that the assessee-company is engaged

in the business of software development and claimed deduction

under Section 10A of the Income-tax Act, 1961 (in short 'the Act').

Referring to the order of the Assessing Officer, the Ld. D.R.

submitted that the unabsorbed loss should not be adjusted before

allowing deduction under Section 10A of the Act. The Assessing

Officer found that this Tribunal in the case of Amnet Systems has

decided the matter in favour of the assessee. Since the issue was

pending before the High Court, to keep the matter alive, the

Assessing Officer rejected the claim of the assessee. However, on

appeal, the CIT(Appeals) by following the order of this Tribunal in

Amnet Systems (supra), directed the Assessing Officer to delete `

87,18,036/-. According to the Ld. D.R., since the matter is pending

before the High Court, the CIT(Appeals) ought not have followed the

order of this Tribunal.

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assessee, submitted that Section 10A of the Act is a provision for

exemption and not a deduction. The losses suffered by other

eligible unit cannot be set off against the profit of Section 10A unit

before giving exemption. According to the Ld. counsel, the benefit

of Section 10A of the Act is available to the assessee in respect of

eligible unit independently and the losses of non-eligible unit needs

to be carried forward and set off against the income in the

subsequent years. A similar view was taken by this Tribunal in

Amnet Systems (supra). The CIT(Appeals) has followed the order

of this Tribunal. The Assessing Officer, after taking note of the

decision of this Tribunal, decided the matter against the assessee

only with an intention to keep the matter alive. According to the Ld.

counsel, the Assessing Officer is bound to follow the order of this

Tribunal.

perused the relevant material available on record. The issue arises

for consideration is set off of business loss / depreciation of the

other units for computing deduction under Section 10A of the Act.

This Tribunal in Amnet Systems (supra) examined the issue and

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found that the eligibility of exemption under Section 10A of the Act

has to be considered independently and the losses of other units

cannot be set off. In fact, the order of this Tribunal in Amnet

Systems was brought to the notice of the Assessing Officer. The

Assessing Officer found that the Department had preferred appeal

befoe the High Court, therefore, to keep the matter alive, he rejectd

the claim of the assessee. This Tribunal is of the considered

opinion that when the matter is pending before the High Court, that

cannot be a ground for not following the order of this Tribunal. It is

not the case of the Revenue that the Madras High Court has stayed

the order of this Tribunal in Amnet Systems (court). When the order

of this Tribunal in Amnet Systems (supra) is not stayed, the

Assessing Officer ought to have followed the order of this Tribunal.

Since the Assessing Officer failed to follow the order of this

Tribunal, the CIT(Appeals) has rightly directed the Assessing Officer

to follow the order of this Tribunal and delete the addition.

Therefore, this Tribunal do not find any reason to interfere with the

order of the lower authority and accordingly the same is confirmed.

assessee under Section 10A of the Act.

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Representative, submitted that in respect of XIUS India Ltd., the

assessee has not filed any declaration upto assessment year 2005-

06 for opting out of the scheme. The assessee has not opted for

deduction under Section 10A of the Act in the initial assessment

year. The first year of the operation of the assessee-company was 2002-03. XIUS India Ltd. suffered a loss of ` 1,07,41,343/-.

However, the book profit to the extent of ` 41,00,700/- was brought

to taxation under Section 115JB of the Act. For the assessment

year 2004-05, the income of the assessee as per regular computation was ` 79,82,112/-. However, the same was set off

against the carry forward losses for assessment year 2002-03 and the book profit of ` 78,09,173/- was taxed under Section 115JB of

the Act. The income determined under regular computation to the extent of ` 79,82,112/- was set off against the carry forward loss of

` 78,09,173/-. The assessee filed Form 56F claiming that the initial

date of registration of STPI unit was 30.03.2001 and the date of

commencement of manufacturing activity was 01.11.2003.

According to the Ld. D.R., the information furnished by the

assessee in Form 56F is contrary to the information available on

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record for the assessment year 2002-03. The assessee claimed

before the Assessing Officer that even though STPI unit was

registered on 30.03.2001, the assessee had chosen to avail

exemption under Section 10A of the Act from the assessment year

2006-07.

Representative submitted that deduction under Section 10A(1) of

the Act is available in respect of profits and gains derived by an

undertaking for a period of ten consecutive assessment years

beginning with assessment year in which the undertaking began to

manufacture or produce the computer software. The Ld. D.R.

further submitted that sub-section (8) of Section 10A provides an

option to the assessee for opting out of the scheme by furnishing

return of income under Section 139(1) of the Act. The XIUS India

Ltd. had not furnished any declaration upto assessment year 2005-

06 for opting out the scheme. However, it expressed its negative

option by returning the book profits for taxation under Section 115JB

of the Act for assessment years 2003-04 and 2004-05. In the

assessment year 2005-06, XIUS India Ltd. was classified as non-

STPI unit. Therefore, according to the Ld. D.R., the assessee is not

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eligible for deduction under Section 10A of the Act. However, on

appeal by the assessee, the CIT(Appeals) found that when there

was loss in a particular year, the question of opting out of the

scheme under Section 10A of the Act does not arise for

consideration. The CIT(Appeals) has also found that the assessee

has filed Form 56F along with return of income. The CIT(Appeals)

has found that when there is statutory obligation to pay tax under

Section 115JB of the Act, it would not tantamount to exercising a

negative option under Section 10A of the Act. The observation of

the CIT(Appeals) is not correct. When the assessee has no taxable

income and paid the tax under Section 115JB of the Act on the book

profit, it has to be presumed that the assessee had exercised

negative option. Therefore, according to the Ld. D.R., the

CIT(Appeals) is not justified in allowing the claim of the assessee.

assessee, submitted that the Assessing Officer denied the claim of

the assessee under Section 10A of the Act on the ground that the

assessee has not furnished the declaration upto assessment year

2005-06 for opting out the scheme. According to the Ld. counsel,

the Assessing Officer has also found that XIUS India Ltd. was a

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STPI unit. According to the Ld. counsel, declaration under Section

10A(8) of the Act, before the due date for filing of the return under

Section 139(1) of the Act would be necessary if the assessee

intends to keep away itself of the scheme. Referring to sub-section

(8) of Section 10A of the Act, the Ld.counsel for the assessee

submitted that it may not be necessary for the assessee to file each

year the declaration with the Department for opting out of the

scheme. Section 10A(8) of the Act begins with non-obstante clause

which indicates that a right was conferred on the assessee to

declare that the provisions of the Act would not be applicable to the

assessee. Therefore, according to the Ld. counsel, it is obvious that

the assessee can exercise the option for opting out the scheme

under Section 10A of the Act. Section 10A of the Act also provides

an option to the assessee to select first year of the ten years and

once this option was exercised, the assessee will get the benefit of

exemption under Section 10A of the Act for the next consecutive

years. Once Form 56F was filed within the time limit, it was deemed

that the assessee has exercised the option and from that year, the

benefit is automatic. It is not necessary that the assessee has to

opt out of the scheme in the earlier years. Once the assessee

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chosen the first year, the same benefit would continue for next ten

consecutive years without any interruption. The assessee, in fact,

opted the assessment year 2006-07 as first year and therefore, it

will continue to have the benefit for the next consecutive ten years.

further submitted that the declaration is required to be filed in the

case the assessee intends to opt out of the scheme. The scheme is

spread over for a period of fifteen years. The assessee was given

the option of selecting the initial year. Even assuming for argument

sake, according to the Ld. counsel, the assessee has opted out of

the scheme, such option would be confined only to that particular

year and the assessee’s opting out of the scheme may deny itself

the benefit of Section 10A of the Act for that particular year. In the

subsequent year, if it does not opt out again, by virtue of default

clause in Section 10A of the Act, should again be applicable to the

assessee. In case there was no profit, the provisions of Section

10A of the Act should not be applicable at all. When the assessee

suffered a loss in a particular year, the question of opting out of the

scheme does not arise at all since Section 10A of the Act may not

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be applicable. According to the Ld. counsel, Section 10A of the Act

would come into opportunity when there is a positive income.

the assessee has opted the benefit from the assessment year 2006-

07, the CIT(Appeals) has rightly found that the assessee is eligible

for exemption under Section 10A of the Act. When Section 10A of

the Act provides an option to the assessee to select the first year of

operation, and the assessee chooses to prefer assessment year

2006-07, there is no reason for rejecting the claim of the assessee.

When the assessee exercised the option for the assessment year

2006-07, the benefit would continue for next ten consecutive year.

Therefore, according to the Ld. counsel, the CIT(Appeals) has

rightly allowed the claim of the assessee.

perused the relevant material available on record. The assessee

claimed exemption under Section 10A of the Act in respect of XIUS

India Ltd., Hyderabad, the claim of the Revenue appears to be that

XIUS India Ltd., Hyderabad was classified as non-STPI unit in the

assessment year 2005-06. The Revenue has also contended that

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the assessee has not filed any declaration upto assessment year

2005-06 opting out of the scheme as provided in Section 10A(8) of

the Act. Therefore, the Assessing Officer disallowed the claim of

the assessee.

CIT(Appeals) and provisions of Section 10A of the Act. Section 10A

of the Act provides for deduction for ten assessment years out of 15

assessment years. An option was given to the assessee to select

the assessment year in which the deduction is to be allowed. When

the assessee has not claimed any deduction for earlier assessment

years and selected the assessment year 2006-07, this Tribunal is of

the considered opinion that the CIT(Appeals) has rightly allowed the

claim of the assessee. For the assessment year 2005-06, XIUS

India Ltd. suffered a loss. The loss suffered in the assessment year

2005-06 was carried over to set off against the income of the

assessment year 2006-07. When the assessee selected the initial

assessment year 2006-07, this Tribunal is of the considered opinion

that the CIT(Appeals) has rightly allowed the claim of the assessee.

This Tribunal do not find any reason to interfere with the order of the

lower authority and accordingly the same is confirmed.

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assessment year 2006-07 towards bad debt.

Representative, submitted that it is only a provision, therefore, it

cannot be allowed.

the assessee, submitted that while computing book profit under

Section 115JB of the Act, the Assessing Officer disallowed a provision for doubtful debt to the extent of `1.30 Crores. According

to the Ld. counsel, the Assessing Officer failed to consider

Explanation 1 to Section 115JB of the Act. Referring to the

judgment of Supreme Court in CIT v. HCL Comnet Systems &

Services Ltd. (305 ITR 409), the Ld.counsel submitted that the debt

payable by the assessee is different from the debt receivable by the

assessee. In this case, the debt is not payable by the assessee but,

receivable by the assessee. Therefore, the provision for bad and

doubtful debt was made to cover the probable diminution in the

value of asset. Hence, the CIT(Appeals) has rightly allowed the

claim of the assessee.

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perused the relevant material available on record. It is not in

dispute that what was claimed as bad debt is the amount receivable

by the assessee and not payable by the assessee. Therefore,

Explanation 1 to Section 115JB of the Act may not be applicable.

The debt payable by the assessee was reflected in the asset side in

the balance sheet which is not in dispute before the authorities

below. Therefore, this Tribunal do not find any reason to interfere

with the order of the lower authority and accordingly the same is

confirmed.

2006-07 is with regard to adjustment made by the Assessing Officer towards arm's length price to the extent of `57,16,936/- on

corporate guarantee.

assessee also. This Tribunal is of the considered opinion that there

is no bearing on profits, income, losses or assets of the assessee.

The CIT(Appeals) by following the order of this Tribunal in

Redington (India) Ltd. v. JCIT (40 taxmann.com 146) found that

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corporate guarantee given by the assessee does not have bearing on profits, income or assets of the assessee. Therefore, there is no any arm's length price adjustment. In view of the above, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Order pronounced on 24th August, 2016 at Chennai.

sd/- sd/- (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) (A. Mohan Alankamony) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 24th August, 2016.

Kri.

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A)-IV, Chennai 4. आयकर आयु�त/CIT – IV, Chennai 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.