ACIT, CHENNAI vs. MEGASOFT LTD., CHENNAI

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 in all these appeals, we heard these appeals together and disposing of the same by this common order.

Dr. Milind Madhukar Bhusari, the Ld. Departmental 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').

On the contrary, Dr. C.P. Ramaswami, the Ld.counsel for the 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.

We have considered the rival submissions on either side and 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.

The next ground of appeal is with regard to claim of the assessee under Section 10A of the Act.

Dr. Milind Madhukar Bhusari, the Ld. Departmental 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/-.

Referring to Section 10A(1) of the Act, the Ld. Departmental 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 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.

On the contrary, Dr. C.P. Ramaswami, the Ld.counsel for the 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 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 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.

Dr. C.P. Ramaswami, the Ld.counsel for the assessee, 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 be applicable. According to the Ld. counsel, Section 10A of the Act would come into opportunity when there is a positive income.

The Ld.counsel for the assessee further submitted that since 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.

We have considered the rival submissions on either side and 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 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.

We have carefully gone through the order of the 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.

The Revenue has raised one more ground for the assessment year 2006-07 towards bad debt.

Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that it is only a provision, therefore, it cannot be allowed.

On the contrary, Dr. C.P. Ramaswamy, the Ld.counsel for 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.

We have considered the rival submissions on either side and 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 next ground of appeal raised for the assessment year 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.

We have heard Dr. C.P. Ramaswamy, the Ld.counsel for the assessee also. This Tribunal is of the considered opinion that there is no bearing on profits, income, losses or assets of the assessee.

In the result, all the appeals of the Revenue stand dismissed.