The order of the Bench was delivered by
RAMIT KOCHAR, ACCOUNTANT MEMBER :-This appeal, filed by the assessee company, being ITA No. 3147/Mum/2014, is directed against the order dated 14-02-2014 passed by the learned Commissioner of Income Tax(Appeals)-17, Mumbai, for the assessment year 2006-07.
2. The assessee company has raised the following grounds of appeal in the memo of appeal filed with the Tribunal:-
“Being aggrieved by the order passed by the Commissioner of Income Tax (Appeals)-17 [CIT(A)], Mumbai , your Appellant submits the following grounds of appeal for sympathetic consideration:
1. The learned CIT(A) has erred in overruling the objections against the validity of initiation of the proceedings under Section 147 of the Act for assessment of alleged escapement of income.
Without prejudice to the generality, the objections, so overruled, are as under:
a) The reasons recorded for the re-opening of the assessment, initially framed under Section 143(3), beyond four years after the end of the relevant assessment year, do not allege that the assessee had failed to disclose fully and truly all material facts necessary for the assessment.
b) No specific finding has been given by the Assessing Officer (AO) that the assessee had failed to disclose fully and truly all material facts necessary for the assessment.
c) Even otherwise, the assessee had disclosed fully and truly all material facts necessary for the assessment.
d) The re-assessment, so made, is the result of mere change of opinion.
e) The assessee has not been provided with the copy of written sanction, said to have been accorded, under Section 151.
2. Without prejudice to the grievance against the validity of initiation of the proceedings under section 147, the learned CIT(A) has erred in confirming the denial of deduction under Section 10A of the Act”.
3. The brief facts of the case are that the assessee company is engaged in the business of providing civil structural designing and detailing services to its overseas affiliated US company. The return of income was filed by the assessee company on 29-11-2006 with the Revenue which was processed u/s. 143(1) of the Income Tax Act,1961 (Hereinafter called “the Act”) . Thereafter, the assessment u/s. 143(3) of the Act was completed by the learned assessing officer (hereinafter called “the AO”) on 28-11-2008. Notice u/s. 148 of the Act was issued to the assessee company by the AO on 30-03- 2012 and served on the assessee company. In response to this, the assessee company requested the AO vide letter dated 10-04-2012 that return of income filed on 29-11-2006 be treated as return of income in response to the notice u/s. 148 of the Act. The assessee company requested the AO to provide the reasons for re-opening vide letter dated 10-04-2012 which were furnished to the assessee company by the AO vide letter dated 14-12-2012 along with notice u/s 143(2) of the Act. The assessee company vide letter dated 10-01- 2013 has objected to the reopening of assessment u/s. 147 of the Act, which has been disposed off by the AO vide orders dated 24-01-2013 passed u/s 147 of the Act disposing of the objections raised by the assessee company and upholding the validity of invoking the provisions of Section 147/148 of the Act. The assessee company has set up the undertaking at Mumbai and Nashik. For the year under consideration, the assessee company got the letter of permission from STPI, Navi Mumbai on 19-09-2005 for 100% Export Oriented Unit (EOU) at Mumbai. It was observed by the AO that assessee company was incorporated on 10th March, 2005 and started rendering services to it’s A.E. M/s. Prothious INC, USA from April 2005 . Thus, the AO observed that manufacturing and export activity from the Mumbai unit is already in existence since April, 2005 and the assessee company has also claimed depreciation on the fixed assets from 1st April 2005 onwards. The assessee company was asked to explain why deduction u/s.10A of the Act should not be disallowed as the undertaking at Mumbai and Nasik was set up for manufacture and export of software since April, 2005, while the Mumbai undertaking got letter of permission from STPI, Navi Mumbai on 19-09-2005 for 100% EOU at Mumbai u/s. 59 & 65 of the Customs Act for manufacture in Bond of Computer Software which was an essential requirement for 100% EOU, since the manufacturing and export activity from the Mumbai undertaking is already in existence since April, 2005 and the assessee company claimed depreciation of Rs. 15,29,036/- from 01-04-2005 to 30-09- 2005 in respect of the Mumbai undertaking which again reinforces that the assessee company had already acquired assets and continuing with manufacturing of computer software and the deduction u/s 10A of the Act should be disallowed. The assessee company submitted that there is no condition in Section 10A of the Act that deduction is eligible from date of approval from STPI. The assessee company submitted that Mumbai unit is a new unit for which the approval from STPI was received in this year on 19-09- 2005 and therefore, it is eligible for the deduction from this initial year. The AO rejected the contentions of the assessee company and held that company right from its inception was rendering services to its A.E. M/s. Prothious INC, USA and continued its business operation with the same old establishment, same management, same employees, same clients and the old and used machinery which was previously used for the assessee company’s business purpose, it was not eligible for any deduction u/s.10A of the Act. Hence, the AO held that there is no Undertaking which came into existence and with the completion or obtaining of the registration with STPI, the same old established unit has continued with its usual business. Thus, the basic requirement for claiming deduction u/s.10A, that the undertaking should be new, is not satisfied on the first year of making the claim and claiming a deduction u/s.10A of the Act, the setting up of the New Unit and it’s registration under STPI are the twin conditions which should be satisfied to be eligible for deduction u/s.10A of the Act. Hence, deduction of Rs. 47,13,192/- claimed by the assessee company u/s 10A was disallowed to the assessee company by the AO vide orders dated 04-03-2013 passed u/s 143(3) of the Act read with section 147 of the Act.
4. Aggrieved by the orders dated 04-03-2013 of the AO passed u/s 143(3) of the Act read with Section 147 of the Act, the assessee company filed first appeal before the CIT(A) and submitted that re-assessment proceedings are not justified in law in view of the decision of the Hon’ble Supreme Court in the case of Kelvinator of India Ltd., [(2010) 320 ITR 561(SC)] and also relied on the decision of ITAT, Indore Bench in [302 ITR 42]. Ld. AR of the assessee company also contended that there is absence of sanction u/s. 151 of the Act and also absence of allegation in the recorded reasons that the assessee company did not disclose fully and truly all material facts necessary for the assessment. The AO has not pointed out the precise material facts which were not disclosed by the assessee company and mere change of opinion of the AO without any tangible material, which has surfaced after the conclusion of the assessment proceedings. The Ld. AR also placed reliance on the decision of the ITAT, Delhi Bench in the case of Cadtrium Engineering Solutions (P) Ltd., Vs. ITO in ITA No. 3372/Del/2012. The CIT(A) observed that the AO has issued notice u/s. 148 of the Act and conveyed the reasons for reopening vide letter dated 14-12-2012. The assessee company has raised objections against the reopening vide letter dated 10/01/2013 , which has been disposed off by the AO by passing a speaking order dated 24/01/2013 u/s 147 of the Act . The AO has clearly made a reference in his order DATED 24/1/2013 stating inter-alia that since the return of income was filed u/s. 139 of the Act and the assessee company has not disclosed fully and truly all material facts necessary for its assessment for that year, therefore, there is a prima facie evidence on record that the income has escaped assessment by reason of the omission or failure on the part of the assessee company to truly and fully disclose the material facts. Accordingly, a notice was issued and served u/s. 148 of the Act after recording such reasons which was valid and legal. The manner in which the specific requirements of law, regarding recording of the reasons, the same was not recorded. However, it can be impliedly inferred that the omission was on account of assessee’s failure. The CIT(A) also observed that proper permission has been obtained by the AO from CIT-8,Mumbai before initiating proceedings u/s 147/148 of the Act. The CIT(A) observed that AO has brought on record that assessee company since its inception was rendering services to its A.E. M/s. Prothious INC, USA and continued its business operation with the same old establishment, same management, same employees, same clients and the old and used machinery which was previously used for the assessee company’s business purpose, it was not eligible for any deduction u/s.10A of the Act. Thus, it proves that pre-registered unit which was not eligible for claim of deduction u/s.10A of the Act, specifically claimed deduction on the basis of a certificate. The assessee company was incorporated on 10-03-2005 and started rendering services to its AE and therefore the manufacturing and export activity from the Mumbai Unit was also in existence since April, 2005 and assessee company also claimed depreciation on the fixed assets. Thus, CIT(A) held that there is no new industrial undertaking which came into existence and the same old established company continued to do its business with the same clients and hence, the CIT(A) held that assessee company is claiming deduction u/s.10A of the Act which clearly envisages the setting up of new industrial unit which in this case is not the case and hence, the claim of deduction u/s.10 of the Act was denied to the assessee company by the CIT(A) vide orders dated 14-02-2014.
5. Aggrieved by the orders dated 14-02-2014 passed by the CIT(A), the assessee company filed appeal before us.
6. The Ld. Counsel for the assessee company submitted that the proceedings u/s. 147 and 148 of the Act has not been properly initiated and the proceedings need to be dropped on this short ground itself, the Ld. Counsel submitted that assessee company filed its return of income u/s. 139 of the Act and the assessee company made true and full disclosure in the return of income which was filed with the Revenue. The case was originally processed u/s. 143(3) r.w.s. 143(2) of the Act and the assessment order u/s 143(3) of the Act was framed by the AO dated 28-11-2008, whereby the AO has duly considered the claim of the assessee company u/s. 10A of the Act on merits after application of mind as under:
“The assessee who commenced the activities in the previous year relevant to this assessment year itself, is engaged in the business of providing civil structural designing and detailing services to its overseas affiliate US company which is charged 85% of the service charges charged to the end customers of the US company as per the statutory documents filed pursuant to the transfer pricing regulations.
The assessee has set up the undertakings at Mumbai and Nashik. In the year under consideration, only the undertaking at Mumbai is registered in the Software Technology Park with effect from October, 2005. Accordingly, the claim for exemption under section 10A is restricted by the assessee to the operations of the Mumbai undertaking for the period after the commencement of operation in the STP. The revenues and expenses have been bifurcated and allocated as per the basis adopted and stated in form no. 56 filed along with the return of income and accordingly, from the total income of Rs. 76,37,920/- the claim is made for exemption under section 10A of Rs. 47,43,192 being the profits and gains of part period of Mumbai STP undertaking”.
The Ld. Counsel of the assessee company submitted that the AO has duly applied his mind before framing original assessment order u/s 143(3) of the Act and no new tangible material has come to the notice of the AO before reopening the assessment u/s 147/148 of the Act and it is a case of change of opinion on same set of facts before the AO which was there at the time of framing original assessment order dated 28-11-2008 u/s 143(3) of the Act . The Ld. Counsel for the assessee company submitted that this is the first year of operation of the assessee company as the assessee company was incorporated on 10th March, 2005 only. The assessee company set up a new undertaking at Mumbai and Nashik and commenced operation from April, 2005. The assessee company made an application in the month of July, 2005 with the Software Technology Park, for which the permission was granted by STPI vide approval letter dated 19th September, 2005, which is placed in the Paper Book filed with the Tribunal. The assessee company submitted that it has claimed exemption u/s. 10A of the Act amounting to Rs. 47,43,192/- w.e.f. 1st Oct, 2005 till 31st March, 2006. The assessee company submitted that the whole unit which has been set up at Mumbai is a new unit and is not an old unit and the only thing is that, after the unit has been set up and started operating from April, 2005, the permission was applied in July, 2005 which was granted by the Software Technology Park on19th September, 2005 with respect to Mumbai unit. Hence, the Ld. Counsel contended that Mumbai unit is not an old unit rather it is a new unit set up in April 2005 having obtained STPI approval on 19-09-2005. Thus, Ld. Counsel of the assessee company submitted that the reopening has been done based on the audit objection after four years from the end of the relevant assessment year which is not tenable in law as the assessee company has disclosed fully and truly all the material facts and there is no failure on the part of the assessee company whereby the assessee company has truly and fully declare the facts in the return of income filed with the Revenue and in the original assessment proceedings carried out u/s. 143(3) r.w.s. 143(2) of the Act. The assessee company submitted that while granting approval for reopening u/s 147/148 of the Act, it is noted by the AO vide proposal for approval from CIT dated 30th March, 2012 as under:
“2. In this case, the order u/s. 143(3) was passed on 28/11/2008 assessing the total income at 29,93,879/- after allowing the exemption u/s.10A amounting to Rs. 47,43,192/-. The revenue audit vide para 1 of 49th Cycle has raised an objection that that assessee company was incorporated on 10-03-2005 and started rendering service to A.E. Prothious INC, USA. Assessee set up undertaking at Mumbai and Nashik and started manufacturing and export of software since April 2005 from both the undertakings. Further, it was observed that Mumbai undertaking got letter of permission from STPI, Navi Mumbai on 19-09-2005 for 100% Export Oriented Unit. Licence u/s. 59 & 65 of the Customs Act for Manufacture in Bond of Computer Software which was an essential requirement for 100% EOU. As the manufacturing and export activity from the Mumbai undertaking is already in existence since April, 2005 and assessee claimed depreciation of Rs. 15,29,036/- from 01-04-2005 to 30-09-2005 in respect of Mumbai undertaking which again reinforces the assessee had already acquired assets and continuing with manufacturing of computer software, it is obvious that the claim of assessee for deduction of profit in respect of its Mumbai unit u/s. 10A is not in order and same should be disallowed.
3. The objection raised by the revenue audit is not acceptable. F.Y. 2005-06 is the first year of operation of the assessee company. It is pertinent to mention here that assessee has commenced business from April, 2005 as per the Registration Certificate of Establishment dated 05-04-2005 by the Sr. Inspector Shops & Estt. K/W. Bombay Shops and Establishments Act, 1948 wherein it can be seen that assessee has commenced business during the year under consideration. The bills furnished during the course of assessment proceedings further support that the same were purchased during the year under consideration and accordingly qualifies for exemption u/s. 10A and depreciation was rightly claimed from the date of asset put to use which was found to be in order”.
The Ld. Counsel submitted that perusal of the above proposal of the AO will itself shows that the assessee company is entitled for deduction u/s. 10A of the Act. The Ld. Counsel submitted that the deduction has been denied u/s. 10A of the Act merely on the ground that assessee company has received the approval from STPI on 19th September, 2005 while it commenced operation from April, 2005. The Ld. Counsel also submitted that approvals from the CIT has been obtained by the AO on the same date of sending the proposal i.e. 30-03-2012 and the assesse company has placed on record in paper book the documents relating to the proposal dated 30-3-2012 sent by the AO to the CIT and the approval dated 30-03-2012 granted by the CIT, which in the opinion of the assessee company is grant of approval in mechanical manner by the CIT without application of mind as the same is granted on the same date by the CIT without any comments. The Ld. Counsel for the assessee company relied on the following decisions to contend that the assessee company is entitled for the deduction u/s. 10A of the Act:
i. Nagesh Chundur Vs. CIT [(2013) 358 ITR 521] (Mad);
ii. Super Auto Forge Ltd., Vs. Add. CIT [(2014)365 ITR 318] (Mad);
iii. CIT Vs. Foresee Information Systems (P) Ltd., [(2014)365 ITR 335] (Kar);
iv. CIT Vs. Excel Softech Ltd [(2008)175 Taxman 257 (P&H-HC)];
v. CIT Vs. Quantum Coders Ltd [ITA No. 542 of 2013] (Del)
7. On the other hand, Ld.DR relied on the orders of the authorities below.
8. We have heard the rival contentions and perused the material on record. We have observed that the assessee company was incorporated on 10th March, 2005 and has commenced its operations w.e.f. April, 2005. The assessee company submitted its return of income u/s. 139 on 29-11-2006 which was processed u/s. 143(3) of the Act and assessment was framed vide orders dated 28-11-2008. During the course of the original assessment proceedings u/s 143(3) read with Section 143(2) of the Act , the AO has asked for the details of deduction claimed by the assessee company u/s.10A of the Act. The assessee company has duly replied vide reply dated 10-12-2007 to the AO in original assessment proceedings and on being satisfied, the assessment has been framed u/s. 143(3) of the Act by the AO vide orders dated 28-11-2008 whereby deduction of Rs. 47,43,192/- u/s 10A of the Act was duly granted to the assessee company by the AO. The assessee company has duly submitted form no 56F being report under Section 10A of the Act dated 10.10.2006 issued by auditors-chartered accountants of the assessee company certifying that the assessee company is entitled for deduction u/s 10A of the Act of Rs. 47,43,192/- during the assessment year. It is also emerging from the records and also from the orders of the authorities below that the assessee company has set up a new undertaking for the manufacture and export of the computer software under bond at Mumbai which was set up in April 2005 but the assessee company obtained STPI approval on 19-09- 2005 and claimed deduction u/s 10A of the Act w.e.f. 01-10-2005. In our considered opinion, the assessee has truly and fully disclosed all the material facts in the return of income filed u/s 139 of the Act with the Revenue and also during assessment proceedings u/s 143(3) of the Act read with Section 143(2) of the Act with respect to material and relevant facts concerning setting up and commencement of operations of new unit at Mumbai w.e.f. April 2005 and the registration/approval obtained from STPI dated 19-09- 2005 and its claim of deduction u/s 10A of Rs. 47,43,192/- w.e.f. 01-10-2005 , which has been duly considered by the Revenue while framing original assessment u/s. 143(3) of the Act and granting deduction of Rs. 47,43,192/- u/s 10A of the Act. The assessee company has claimed depreciation from 1st April, 2005 on the fixed assets, while the assessee company claimed deduction u/s.10A of the Act from 01st October 2005 as the permission has been obtained from STPI from 19th September, 2005 . In our considered view, the proceedings u/s. 147 and 148 of the Act initiated against the assessee company need to be dropped as the same was not validly initiated and is merely a change of opinion by the AO based upon the audit objections and AO has not independently applied his mind before re-opening the proceedings u/s 147/148 of the Act against the assessee company while there is no failure on the part of the assessee company in truly and fully disclosing all material and relevant facts concerning the Mumbai unit, as the proceedings have been initiated after four years from the end of the relevant assessment year and the proviso to Section 147 of the Act is applicable , the original assessment having being processed u/s. 143(3) of the Act culminating into an assessment order dated 28-11-2008. Even alternatively otherwise on the merits of the appeal, we have observed that assessee company has set up a new undertaking in the month of April, 2005 and obtained permission from STPI w.e.f. 19th September, 2005 by making an application in the month of July, 2005 which is one of the important condition for grant of approval u/s 10A of the Act. It is not the case of the Revenue that the assessee company has utilized the old machinery/computers etc. while setting up the new undertaking in Mumbai in April 2005 rather the case of the Revenue is that the assessee company set up an undertaking in the month of April, 2005 while it applied for the permission from STPI in July 2005 and the permission was received on 19th September 2005 while the deduction u/s. 10A of the Act was claimed w.e.f. 1st October 2005 and hence the revenue is contending that when STPI approval was received by the assessee company on 19th September 2005, it was already an existing unit being set up in April 2005 i.e. anterior to the receipt of STPI approval on 19-09-2005 and Mumbai unit cannot be classified as the new unit and it will be deemed to be old unit at that time and hence there is reconstruction of business from domestic tariff area unit to 100% EOU when STPI permission was received, thus making it ineligible for deduction u/s 10A of the Act as the same is hit by Section 10A(2) of the Act. However, in our considered view, the assessee company is not hit by the Section 10A(2) of the Act as it could not be said that it is formed by splitting up or reconstruction of business already in existence nor it is brought on records that there is transfer to a new business of machineries or plant previously used for any purpose. The circular no 1 of 2005 issued in context of Section 10B of the Act which is reproduced below supports the stand of the assessee company :
“Certain clarification regarding Tax holiday under section 10B of the Income-tax Act to 100% Export Oriented Undertaking
CIRCULAR NO. 1/2005, DATED 6-1-2005
1. Section 10B of the Income-tax Act provides for 100% deduction of profits derived by a hundred per cent Export Oriented Undertaking, from export of articles or things or computer software manufactured or produced by it. The deduction is available for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software. However, no deduction under section 10B is available after assessment year 2009-10.
2. The deduction under section 10B is available to an undertaking which fulfils all the following conditions:-
(i) it manufactures or produces any article or thing or computer software;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence except in the circumstances specified under section 33B of the IT Act.
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
3. Representations have been received from various quarters as to whether an undertaking set up in Domestic Tariff Area, which is subsequently approved as 100% EOU by the Board appointed by the Central Government in exercise of powers conferred under section 14 of the Industries (Development and Regulation) Act, 1951, is eligible for deduction under section10B of the Income-tax Act.
4. The matter has been examined and it is hereby clarified that an undertaking set up in Domestic Tariff Area (DTA) and deriving profit from export of articles or things or computer software manufactured or produced by it, which is subsequently converted into a EOU, shall be eligible for deduction under section 10B of the IT Act, on getting approval as 100% export oriented undertaking. In such a case, the deduction shall be available only from the year in which it has got the approval as 100% EOU and shall be available only for the remaining period of ten consecutive assessment years, beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as a DTA unit. Further, in the year of approval, the deduction shall be restricted to the profits derived from exports, from and after the date of approval of the DTA unit as 100% EOU. Moreover, the deduction to such units in any case will not be available after assessment year 2009-10.
5. To clarify the above position, certain illustrations are given as under:-
(i) Undertaking ‘A’ is set up in Domestic Tariff Area and starts manufacture or production of computer software in Financial Year 1999-2000 relevant to assessment year 2000-01. It gets approval as 100% EOU on 10th September, 2004 in the financial year 2004-05 relevant to assessment year 2005-06. Accordingly, it shall be eligible for deduction under section 10B from assessment year 2005-06 i.e., the year in which it fulfils the basic condition of being a 100% EOU. Further, the deduction shall be available only for the remaining period of ten years i.e. from assessment year 2005-06 to assessment year 2009-10. This deduction under section 10B for assessment year 2005-06 shall be restricted to the profits derived from exports, from and after the date of approval of the DTA unit as 100% EOU.
(ii) Undertaking ‘B’ set up in Domestic Tariff Area, begins to manufacture or produce computer software in financial year 1996-97 relevant to assessment year 1997-98. It gets approval as 100% EOU in financial year 2007-08 relevant to assessment year 2008-09. No deduction under section 10B shall be admissible to undertaking B as the period of 10 years expires in financial year 2005-06 relevant to assessment year 2006-07, prior to its approval as 100% EOU.
(iii) Undertaking ‘C’ is set up in Domestic Tariff Area in the financial year 2000-01 relevant to assessment year 2001-02 and engaged in the business of providing computer related services, other than those notified by the Board for the purposes of section 10B. In financial year 2002- 03, it acquires more than 20% of old plant and machinery and starts manufacturing computer software. It also gets approval as 100% EOU in financial year 2002-03. Undertaking ‘C’ shall not be eligible for deduction under section 10B, as there has been transfer of old plant and machinery.
(iv) Undertaking ‘D’ is set up and starts producing computer software in financial year 2003-04 relevant to assessment year 2004-05. It gets approval as 100% EOU in financial year 2006-07 relevant to assessment year 2007-08. It shall be eligible for deduction under section 10B from assessment year 2007-08. However, the deduction shall not be available after assessment year 2009-10.
(v) Undertaking ‘E’ is set up and starts producing computer software prior to 31-3-1994. It gets approval as 100% EOU in financial year 2004-05 relevant to assessment year 2005-06. Undertaking ‘E’ shall not be eligible for deduction under section 10B as the period of deduction of 10 years expires prior to assessment year 2005-06.”
The following case laws also support the stand and contentions of the assessee company:
i. Nagesh Chundur Vs. CIT [(2013) 358 ITR 521] (Mad);
ii. Super Auto Forge Ltd., Vs. Add. CIT [(2014)365 ITR 318] (Mad);
iii. CIT Vs. Foresee Information Systems (P) Ltd., [(2014)365 ITR 335] (Kar);
iv. CIT Vs. Excel Softech Ltd [(2008)175 Taxman 257 (P&H-HC)];
v. CIT Vs. Quantum Coders Ltd [ITA No. 542 of 2013] (Del)
Thus, we hold that assessee company is duly entitled for exemption u/s. 10A of the Act and in our considered view, the assessee company has rightly claimed deduction of Rs. 47,13,192/- u/s. 10A of the Act w.e.f. 1st October , 2005 which the assessee company is duly entitled for the said deduction of Rs. 47,13,192/- u/s 10 A of the Act. Hence, we set aside the orders of the CIT(A) and hold that the assessee company is entitled for the deduction of Rs. 47,13,192/- u/s.10A of the Act w.e.f. 1st October, 2005 which has been rightly claimed by the assessee company in the return of income filed with the Revenue. We order accordingly.
9. Accordingly, the appeal of the assessee company is allowed.
The order pronounced in the open court on 18th January , 2016