Commissioner Of Income Taxchennai v. M/S.live Connection Software

In the High Court of Judicature at Madras Coram The Honourable Mr.JUSTICE R.SUDHAKAR and The Honourable Mr.JUSTICE G.M.AKBAR ALI Tax Case (Appeal) No.1328 of 2009 Commissioner of Income TaxChennai. .... Appellant/Appellate Vs. M/s.Live Connection Software Solutions Pvt. Ltd., 34-D, Nutech Arcade, I Avenue,Ashok Nagar, Chennai - 600 083. .... Respondent/Respondent APPEAL under Section 260A of the Income Tax Act against theorder of the Income Tax Appellate Tribunal 'C' Bench, Chennai dated05.06.2009 made in I.T.A.No.2056/Mds/2008 against the order ofCommissioner of Income Tax [Appeals] III Chennai, dated 8/7/2008made in ITA.No.CIT(A)/III/CHE/231/07-08 against the assessmentorder dated 2/11/2007 passed in the Assistant commissioner ofIncome Tax, Company Circle-II(4) Chennai in PAN/GPI.No.AAACE 9460 Afor the assessment of year 2005-06. For Appellant : Mrs.Hema Muralikrishnan Standing Counsel for Income TaxFor Respondent : Mr.G.Ashokpathy for M/s.Pass Associates------J U D G M E N T (Delivered by R.SUDHAKAR,J.) This Tax Case (Appeal) filed by the Revenue as against theorder of the Income Tax Appellate Tribunal for the assessment year2005-06 was admitted by this Court on the following substantialquestion of law: https://hcservices.ecourts.gov.in/hcservices/ "Whether on the facts and in the circumstances ofthe case, the Tribunal was right in holding that theregistration with STPI is not a pre-requisite for grantof deduction under Section 10B of the Income Tax Act?" 2. The brief facts are as follows: The respondent/assessee is a company engaged in softwaredevelopment. The assessee company was incorporated on 19.12.2003and started business operations from January, 2004. The assesseeprepared accounts for the period 19.12.2003 to 31.3.2005. For thefirst time, for the assessment year 2005-06, the assessee claimeddeduction under Section 10B of the Income Tax Act and filed returnof income declaring total income of Rs.38,430/- on 19.10.2005. Thesaid return was processed under Section 143(1) of the Income TaxAct on 18.3.2006 and subsequently, the case was taken up forscrutiny. The Assessing Officer, while dealing with the claim ofdeduction under Section 10B of the Income Tax Act, found that theassessee had applied for registration as 100% EOU to SoftwareTechnology Parks of India (STPI) on 24.3.2005 and obtained approvalonly in May, 2005; hence, as per Circular No.1 of 2005 dated06.01.2005 of the CBDT, the assessee was not eligible for thebenefit under Section 10B of the Act. Accordingly, the AssessingOfficer disallowed the entire claim of deduction under Section 10Bof the Income Tax Act on the ground that the assessee had obtainedapproval from STPI only in May, 2005, which was after the end ofthe previous year relevant to the assessment year 2005-06. 3. Aggrieved by the order of the Assessing Officer, theassessee preferred an appeal before the Commissioner of Income Tax(Appeals), who partly allowed the appeal holding as follows: "It is settled proposition of law that an exemptionhas to be granted as and from the assessment year in whichthe conditions prescribed in the section have beensatisfied until the end of the holiday period. (C.I.T. Vs.Gopal plastics Ltd., 215 ITR 136 Mad). This view is alsosupported by the decision of the Hon'ble Supreme Court inthe case of Textile Corporation Ltd. Vs. C.I.T. 107 ITR195. In the case of the appellant it is found that theappellant is engaged in the manufacturing and export ofcomputer software and has commenced hundred percent exportof computer software during the A.Y.2005-06. 7.2. It will not be out of place here to mention that itis a settled proposition often reiterated by the Hon'bleApex Court that in cases where two views are possible, theone favourable to the assessee should be adopted. C.I.TVs.Podar Cements Ltd. and another 226 ITR 625 (SC) andMysore Minerals Ltd. Vs. C.I.T 239 ITR 775 (SC) https://hcservices.ecourts.gov.in/hcservices/ 7.2. It will not be out of place here to mention that itis a settled proposition often reiterated by the Hon'bleApex Court that in cases where two views are possible, theone favourable to the assessee should be adopted. C.I.TVs.Podar Cements Ltd. and another 226 ITR 625 (SC) andMysore Minerals Ltd. Vs. C.I.T 239 ITR 775 (SC) https://hcservices.ecourts.gov.in/hcservices/ 7.3 In view of the above facts and in the circumstancesof the case, it is held that the appellant has fulfilledall the conditions specified u/s 10B and has correctlyclaimed deduction under that section. The Assessingofficer, therefore was not justified in denying the claimof deduction, consequently, he is directed to allow thesame as per the claim made by the appellant in the returnof income. This ground of appeal is allowed." 4. Aggrieved by the order of the Commissioner of Income Tax(Appeals), the Revenue preferred an appeal before the Income TaxAppellate Tribunal. 5. The Tribunal, after referring to the provision underSection 10B of the Income Tax Act and the Explanation to Section10-B came to hold that if the assessee satisfies the belowmentioned three conditions they will be granted the benefit underSection 10B of the Income Tax Act ii) was not formed by the splitting up, or thereconstruction, of a business already in existencesubject to the provisions of section 33B of the Act and The Tribunal also held that there is no pre-condition that theassessee company has to obtain registration from STPI before makinga claim under Section 10B of the Act; the Circular of the CBDTcould not override the plain provisions of the Act and thecirculars of the CBDT were either in the nature of clarification orrather explanatory in nature. The Tribunal further held that theSTPI agreement/certificate nowhere mentioned that it was forclaiming deduction under Section 10B of the Act. The Tribunal alsoheld "a claim which is allowed by the plain provisions of the Actcannot be restricted by imposing conditions which cannot be carriedout" . The Tribunal also held that beneficial, promotional andincentive provisions like the provisions of Section 10B of Act,which was aimed at promoting software industry in India, should beliberally construed and should not be defeated on technicalgrounds. The Tribunal also held that from a reading of Section 10Bof the Act, approval or registration under STPI have not beenmandatory and the same could not be read in a different manner andthe CBDT circulars are binding on the Department alone. 6. The Tribunal relying upon the decision of this Courtreported in 215 ITR 136 (CIT V. Gopal Plastics Ltd.) held asfollows: "The Hon'ble Madras High Court while deciding thecase in CIT vs. Gopal Plastics Ltd. (215 ITR 136) hasclearly observed that when an exemption is granted byany provision of the Act, from its very inception, andthe conditions laid down therein are fully satisfactoryuntil the end of the holiday period, the same has to beallowed. This view has been fortified by the Hon'bleSupreme Court in the case of Textile Corporation vs.CIT (107 ITR 195). In any worst situation, when fromthe analysis of any provision two view are possible,the one which favours the assessee has to be adopted.In this regard, the decision of the Hon'ble SupremeCourt in Mysore Minerals (239 ITR 775) can be referredto. Hence the claim of the assessee correctly fits inthe jacket formula laid down by section 10-B and theassessee is entitled to the impugned deduction. In ourconsidered opinion, the learned Commissioner (A) hascommitted no error in directing the Assessing Officerto allow the claim of the assessee made under section10-B of the Act. Accordingly, we do not find any meritin the grounds of this appeal. Hence we dismiss thesame." 7. Aggrieved by the order of the Tribunal, the Revenue haspreferred the present Tax Case (Appeal) raising the substantialquestion of law referred supra. 7. Aggrieved by the order of the Tribunal, the Revenue haspreferred the present Tax Case (Appeal) raising the substantialquestion of law referred supra. 8. Learned Standing Counsel appearing for the Revenue submitsthat Explanation 2 (iv) of Section 10B of the Income Tax Actdefines 100% EOU as one approved by the Board. The ten year periodcommences from the date of such approval. She further submits thatwhen the STPI registration itself was beyond the financial year,the assessee is not entitled to the benefit of exemption prior tothe date of approval and the assessee is entitled to the benefit ofexemption from the next assessment year only. Also the circular ofthe CBDT is not contrary to the statute but it is only clarifiedthe position. Hence, the order of the Tribunal is liable to be setaside and this appeal may be allowed. 9. Per contra, learned counsel appearing for the assesseesubmits that the asssessee had fulfilled the conditions prescribedunder Section 10B of the Income Tax Act and hence eligible forexemption. The provision does not make it mandatory that STPIregistration should be obtained before making a claim under Section10-B of the Income Tax Act. Hence, the Tribunal is correct ingranting benefit of exemption under Section 10-B of the Act to theassessee. https://hcservices.ecourts.gov.in/hcservices/ 10. Heard learned Standing Counsel appearing for the Revenueand the learned counsel appearing for the assessee and perused thematerials placed before this Court. 11. It is seen that the respondent/assessee, which is acompany engaged in software development, has applied forregistration as 100% Export Oriented Unit on 24.3.2005 before thecompetent authority and got the approval in May, 2005. The assesseeclaimed benefit of exemption under Section 10-B of the Act, whichfalls under Chapter IV, for the assessment year 2005-06. What isrelevant for seeking benefit under Section 10-B is deduction ofprofits or gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things orcomputer software for a period of ten consecutive assessment yearsbeginning with the assessment year relevant to the previous year inwhich the undertaking begins to manufacture or produce articles orthings or computer software, as the case may be, shall be allowedfrom the total income of the assessee. Clause (iv) of Explanation 2to Section 10B of the Act defines 100% Export Oriented Unit, whichreads as follows: (i) ........ (ii) ........ (iii) ........ (iv) "hundred per cent export-oriented undertaking"means an undertaking which has been approved as a hun-dred per cent. export-oriented undertaking by the Boardappointed in this behalf by the Central Government inexercise of the powers conferred by section 14 of theIndustries (Development and Regulation) Act, 1951 (65 of1951), and the rules made under that Act” 12. A reading of the above provision makes it clear that a100% EOU as provided under Section 10B(1) will be one that isapproved by the Board appointed in this behalf by the CentralGovernment in exercise of the powers conferred by Section 14 of theIndustries (Development and Regulation) Act, 1951 (65 of 1951), andthe Rules made under that Act. Admittedly, in this case, suchapproval was granted during May, 2005 only and therefore, prior tothat date or the assessment year, relevant to the date ofregistration, the benefit of Section 10-B would not be available asthe requirement of approval by the competent authority is notavailable as on the date, from which the assessee claimedexemption. Hence, we have no hesitation to hold that Section 10Bis very clear and unambiguous that approval by the competentauthority is pre-requisite for grant of benefit under Section 10-B.https://hcservices.ecourts.gov.in/hcservices/Hence, it will not be appropriate for the Tribunal to hold that there is no pre-condition that the assessee should have obtain STPIregistration before making the claim under Section 10-B of theIncome Tax Act. That finding of the Tribunal is totally wrong andcontrary to the provisions of the Act. 13. The provisions of Section 10-B of the Income Tax Act makeit clear that the benefit will flow if there is a certificate ofapproval issued by the Board appointed in this behalf, namely,STPI. Hence, we find that the Tribunal is not justified to holdthat the claim allowed by the provision of Section 10B cannot berestricted by imposing certain conditions. We hold that thisfinding of the Tribunal is totally contrary to Clause (iv) toExplanation (2) of Section 10B of the Income Tax Act. TheDepartment, no doubt, clearly states that for the next assessmentyear the benefit would automatically flow. We do not find anyjustification to be swayed by the view of the Tribunal that thepromotion of software industry should not be scuttled bytechnicalities. 14. We are also aware of the fact that the benefit grantedunder Section 10B is more in the nature of exemption, for whichcertain pre-requisite conditions, namely, approval by theappropriate Board, have to be complied with in the mannerprescribed. Unless and until the assessee gets an approval in themanner prescribed under Section 10-B, the question of granting thebenefit does not arise. The Tribunal's opinion that if there aretwo views, then the view in favour of the assessee should beaccepted is fully inadmissible on the facts of the present case.We hold that the Circular is nothing but clarification of what theSection 10B really provides for. It is of no avail either to theassessee or to the Department when the provisions of Section 10-Bis clear. 15. It is to be noted that there is no second opinion on thefacts of the ratio decided by this Court in the case of C.I.T. Vs.Gopal plastics Ltd., reported in 215 ITR 136 (Mad) that exemptionwill be available from the inception if the conditions are fullysatisfied, which fact is not available to the facts of the presentcase. We hold that the assessee in this case will be entitled tothe benefit of Section 10-B only on complying with the conditionscontained prescribed in Section 10-B of the Income Tax Act, and itdoes not enure to the benefit for the assessment year in question,namely, 2005-06. The decisions relied on by the Tribunal have norelevance to the facts of the present case. We, therefore, holdthat the question of law raised by the Revenue is answered infavour of the Revenue and against the assessee. Accordingly, theorder of the Tribunal stands set aside and the Tax Case (Appeal)stands allowed. No costs. 16. Learned counsel appearing for the assessee submits thatif there is any material to show that the assessee has got theapproval earlier, the assessee may be given liberty to produce thehttps://hcservices.ecourts.gov.in/hcservices/same before the Assessing Officer for availing the benefit. It is open to the assessee to submit the certificate of approval, if any,to show that on earlier date, it has obtained approval and seekrectification in accordance with law. Sd/- Assistant Registrar / True copy / Sub Assistant Registrar sl To1. The Income Tax Appellate Tribunal 'C' Bench, Chennai.2. The Commissioner of Income Tax (Appeals)-III, Chennai - 34.3. The Assistant Commissioner of Incometax, Company Circle-II(4), Chennai.4. The Section Officer, V.R.Section, High Court, Madras-104+ 1 cc to Mr.T.Ravikumar, Standing counsel for IT Departmentsr.39404+ 1 cc to M/s.Pass Associates Advocate sr.39703T.C.(A) No.1328 of 2009KCK RR 18/09/2014