Ita/662/2023 Of Pr. Commissioner Of Income Tax-3 v. M/S Sasken Technologies Ltd

Digitallysigned by K GRENUKAMBALocation:High Court ofKarnataka IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 2 DAY OF DECEMBER, 2024 PRESENT THE HON'BLE MR JUSTICE V KAMESWAR RAO AND THE HON'BLE MR JUSTICE S RACHAIAH INCOME TAX APPEAL NO. 662 OF 2023 BETWEEN: 1. PR. COMMISSIONER OF INCOME TAX-3, KORAMANGALA, BANGALORE. KORAMANGALA, BANGALORE. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 6 (1) (1), BANGALORE. INCOME TAX, CIRCLE 6 (1) (1), BANGALORE. …APPELLANTS (BY SRI. SANMATHI .E.I, ADVOCATE) AND: M/S. SASKEN TECHNOLOGIES LTD. NO. 139/25, AMARJYOTHI LAYOUT, RING ROAD DOMLUR, BANGALORE-560 071. …RESPONDENT (BY SRI. K. SURYANARAYANA, SENIOR ADVOCATE FOR SMT. TANMAYEE RAJKUMAR, ADVOCATE) THE ADVOCATE FOR THE APPELLANT HAS FILED THE ABOVE ITA / INCOME TAX APPEAL UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED - 2 - 16/05/2023 PASSED IN IT(TP)A NO. 150/BANG/2023, FOR THE ASSESSMENT YEAR 2010-11.PRAYING THAT THIS HONBLE COURT MAY BE PLEASED TO (1) DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 16/05/2023 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, ‘B’ BENCH, BANGALORE, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN IT(TP)A NO. 150/BANG/2023 FOR A.Y. 2010-11 (ANNEXURE A) AND GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE. THIS APPEAL COMING ON FOR ORDERS THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER: CORAM: HON'BLE MR JUSTICE V KAMESWAR RAO and HON'BLE MR JUSTICE S RACHAIAH ORAL JUDGMENT (PER: HON'BLE MR JUSTICE V KAMESWAR RAO) The learned counsel for the appellants has filed a memo for framing an additional issue. 2. Sri. K. Suryanarayana, learned Senior counsel for the respondent has no objection, if the prayer as made in the memo for raising an additional substantial question of law in the following manner is allowed: “4. Whether on the facts and in the circumstances of the case, the Tribunal has right in - 3 - law in holding that no disallowance is can be made under Section 14A read with the Rule 8(D) of the Act, ignoring CBDT Circular No.5 of 2014 and its Explanation to Section 14(A) of the Act?” Accordingly, the memo is disposed of. 3. The following substantial questions of law have been raised for consideration in the appeal:- “1. "Whether on the facts and in the circumstances of the case, the Tribunal's order is perverse in nature inallowing relief to the assesse on account of royalty income while computing deduction under section 10A/10AA by holding that royalty income from licensing of software productions should be considered as profits of business of eligible units for the purposes of deduction under section 10A/10AA of the Act ignoring that conditions for granting 10A/10AA relief was not satisfied by assesse and the income was not derived from export activity of assesse. 2. "Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in failing to appreciate that assessing authority denied 10A/10AA claim in respect of royalty income as same is not derived from export business of the 'Undertaking' and as such conditions set out in said sections were not satisfied in facts of present case"? 3. "Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in failing to appreciate that since intellectual property rights are not owned by any of the specific units claiming exemption under section 10A/10AA and as scuh royalty income could not be said to be profit 'derived' from the said specific units/undertaking' of the assesse-company"? 2. "Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in failing to appreciate that assessing authority denied 10A/10AA claim in respect of royalty income as same is not derived from export business of the 'Undertaking' and as such conditions set out in said sections were not satisfied in facts of present case"? 3. "Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in failing to appreciate that since intellectual property rights are not owned by any of the specific units claiming exemption under section 10A/10AA and as scuh royalty income could not be said to be profit 'derived' from the said specific units/undertaking' of the assesse-company"? 4. Whether on the facts and in the circumstances of the case, the Tribunal has right in law in holding that no disallowance is can be made under Section 14A read with the Rule 8(D) of the Act, ignoring CBDT Circular No.5 of 2014 and its Explanation to Section 14(A) of the Act?” 4. The learned Senior counsel for the respondent would submit that, the first three substantial questions of law which have been raised by the appellants are covered by the judgment in the case of THE PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER V/S. SASKEN TECHNOLOGIES LID., inITA NO.55/2021 dated 03.09.2021, wherein in the Co-ordinate Bench of this Court in paragraphs Nos.2, 3 and 4 has observed as under: “2. At the outset, the learned counsel for the assessee placing reliance on the judgment of the co- ordinate bench of this Court passed in the case of very same assessee in ITA No.264/2017 dated 05.11.2018 would contend that the very identical substantial questions of law raised by the revenue were considered and answered by this Court. This Court, recording that the substantial questions of law raised being covered by the judgment of this Court in the case of Commissioner of Income-tax, Central Circle vs. Motorola India Electronics (P) Ltd., reported in (2014) 46 taxmann.com 167 (Karnataka) was pleased to dismiss the appeal. Hence, the substantial questions of law raised herein, being identical, the appeal deserves to be dismissed answering the substantial questions of law raised, against the revenue and in favour of the assessee. 3. Learned counsel for the revenue made an endeavor to distinguish the judgments of the co- ordinate bench decision in the very same assessee's case referred to supra, referring to the following judgments:- 1)Commissioner of Income-tax VS. Meghalaya Steels Ltd., [(2016) 67 taxmann.com 158 (SC)); 2) Commissioner of Income-tax vs. Sasken Communication Technologies Ltd., [(2014) 50 taxmann.com 134 (Karnataka)); 3) Commissioner of Income-tax 11S. Yokogawa India Ltd., [(2017) 77 taxmann.com 41 (SC)); 4) Commissioner of Income-tax, Central Circle vs. Motorola India Electronics (P.) - 6 - NC: 2024:KHC:49429-DB Ltd., ((2014) 46 taxmann.com 167 (Karnataka)); 5) Commissioner of income-tax VII, New Delhi US. Punjab Stainless Steel Industries [(2014) 46 taxmann.com 68 (SC)]; 6) Commissioner of Income-tax vs. Hewlett Packard Global Soft Ltd., [(2017) 87 taxmann.com 182 (Karnataka) (FB)]; 7) Commissioner of Income tax, Central - III vs. HCL Technologies Ltd., [(2018) 93 taxmann.com 33 (SC)); 8) M/s. Tata Elxsi Limited vs. The Assistant Commissioner of Income Tax, Bangalore (ILR 2015 KAR 1739). 4. It is not in dispute that the judgment of this Court in ITA No.264/2017 dated 05.11.2018 has been carried by the revenue in appeal before the Hon'ble Apex Court in SLP No.21055/2019 which is pending consideration. In view of the aforesaid, we are not inclined to either differ from the judgment of the co- ordinate bench or venture to sit in judgment over the said decision to adjudicate upon the issues fully covered and decided, referring to the judgments now cited by the revenue. Accordingly, answering the substantial questions of law raised herein, against the revenue and in favour of the assessee, we dismiss the appeal.” 8) M/s. Tata Elxsi Limited vs. The Assistant Commissioner of Income Tax, Bangalore (ILR 2015 KAR 1739). 4. It is not in dispute that the judgment of this Court in ITA No.264/2017 dated 05.11.2018 has been carried by the revenue in appeal before the Hon'ble Apex Court in SLP No.21055/2019 which is pending consideration. In view of the aforesaid, we are not inclined to either differ from the judgment of the co- ordinate bench or venture to sit in judgment over the said decision to adjudicate upon the issues fully covered and decided, referring to the judgments now cited by the revenue. Accordingly, answering the substantial questions of law raised herein, against the revenue and in favour of the assessee, we dismiss the appeal.” 5. Additionally, Mr.Suryanarayana states, in the judgment referred to above, the Co-ordinate Bench of this Court has in paragraph No.2 referred to the Judgment in the case of THE COMMISSIONER OF INCOME TAX, CENTRAL - 7 - CIRCLE VS. MOTOROLA INDIA ELECTRONICS (P) LTD., reported in (2014) 46 TAXMANN.COM, 167 (KARNATAKA)which has been approved by a Full Bench in the case of THE COMMISSIONER OF INCOME TAX VS HEWLETT PACKARD GLOBAL SOFT LTD., (2017) 87 TAXMANN.COM 182 (KARNATAKA.) (FB). 6. He also states that, SLP against the identical issue in respect of the same assessee with regard to Assessment Year 2010-11 has been dismissed. He also state ITA No.55/2021 which relates to the Assessment Year 2009-10, has also been dismissed by this Court. 7. In view of the aforesaid position, which is not disputed by Mr.Sanmathi.E, the first three substantial questions of law framed are without any merit. 8. Mr.Suryanarayana, would also state, in so far as the substantial question of law framed today as question No.4 is concerned, the same is also covered in favour of the assessee by the judgment of the High Court of Delhi in the case of CARGO MOTORS (P.) LTD., VS. DEPUTY COMMISSIONER OF INCOME-TAX reported in (2022) 145 TAXMANN.COM 641 (DELHI), wherein the conclusion arrived at by the Delhi High Court in Paragraph No.22, is as under: 22. The respondent's reliance on the CBDT Circular No.5/2014 is also untenable in law, inasmuch as, another Division Bench of this Court in Pr.Commissioner of Income Tax-04 Vs. IL & FSEnergy Development Company Ltd., 2017 (8) TMI 732 has held as under:- 13. In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the AY in question but where potential exists for exempt income being earned in later AYs. 14. In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1st April 1962, it was clarified that "expenses incurred can be allowed only to the extent they are relatable to the earned income of taxable income". The object behind Section 14Awas to provide that "no deduction shall be made in respect of any expenditure incurred by the Assessee in relation to income which does not form part of the total income under the Income Tax Act". 15. What is taxable under Section 5 of the Act is the "total income" which is neither notional nor speculative. It has to be 'real income'. The subsequent amendment to Section14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the AY in question from investments made, not in that AY, but earlier AYs. 16. Rule 8D (1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or 15. What is taxable under Section 5 of the Act is the "total income" which is neither notional nor speculative. It has to be 'real income'. The subsequent amendment to Section14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the AY in question from investments made, not in that AY, but earlier AYs. 16. Rule 8D (1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2)." 17. The words "in relation to income which does not form part of the total income under the Act for such previous year" in the above Rule 8 D (1) indicates a correlation between the exempt income earned in the AY and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the AY in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14Aread with Rule 8D would not arise. 18. The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered. 19. In the considered view of the Court, this will be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in Commissioner of Income Tax v. Walfort Share andStock Brokers Pvt. Ltd[2010] 326 ITR 1 (SC), the mandate of Section 14Aof the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration. 20. In M/s. Redington (India) Ltd. v. The Additional -Commissioner of Income Tax, Company Range V,Chennai (order dated 23rd December, 2016 of the High Court of Madras in TCA No. 520 of 2016), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income." It was further explained that, "The computation of total income in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe thus would be carrying the artifice too far. xxx xxx xxx xxx“ 9. The submission of Mr. Suryanarayana is that, the High Court of Delhi has relied upon an earlier judgment of a - 11 - Co-ordinate Bench, in the case of the PRINCIPAL CIT VS IL AND FS ENERGY DEVELOPMENT CO. LTD., TAXMANN.COM (2017) 84 TAXMANN.COM. xxx xxx xxx xxx“ 9. The submission of Mr. Suryanarayana is that, the High Court of Delhi has relied upon an earlier judgment of a - 11 - Co-ordinate Bench, in the case of the PRINCIPAL CIT VS IL AND FS ENERGY DEVELOPMENT CO. LTD., TAXMANN.COM (2017) 84 TAXMANN.COM. 10. Mr.Suryanarayana has also relied upon the judgment of Co-ordinate bench of this Court in ITA No.133/2015, The Commissioner of Income Tax and Anr., Vs. M/s. Quest Global Engineering Services Pvt. Ltd., wherein an identical issue was decided against the revenue and in favour of the assessee. In paragraph No.14, the Co-ordinate Bench of this Court has stated as under: “14. Now we may advert to the second substantial question of law. It is pertinent to note that for Assessment Year 2009-10 the assessee has not earned dividend income. The aforesaid fact has not been disputed by the revenue. It is also relevant to mention that Circular No.5/2014 dated 11.02.2014 is not applicable in the instant case as the instant case pertains to Assessment Year 2009-10. The aforesaid Circular has no retrospective operation. It is noteworthy that aforesaid Circular was not even relied by the parties. This court in COMMISSIONER OF INCOME TAX VS.KINGFISHER INVESTMENT INDIA LTD. vide judgment dated 29.09.2020 inter alia held that disallowance under Section 14A read with Rule 8D has to be made even when taxpayer in a particular year has not earned any exempt income. This court relied on the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra which was reproduced in Paragraph 5 of the decision and reliance was also placed on Circular dated 11.02.2014 issued by Central Board of Direct Taxes (CBDT). However, the aforesaid decision was subsequently considered by this court in judgment dated 16.01.2021 passed in I.T.A.No.271/2017 (PRINCIPAL COMMISSIONER OF INCOME TAX VS. NOVEL SOFTWARE DEVELOPMENT) in which it was held that decision of this court in KINGFISHER FINVEST LTD. was distinguishable as the basis of the aforesaid decision of this court was the decision of the Supreme Court in MAXOPP INVESTMENTS LTD. supra and it was held that the aforesaid decision does not deal with applicability of Section 14A of the Act. However, eventually this court agreed with the view taken by High Court of Madras in CIT VS. CHETTINAD LOGISTICS P LTD., (2017) 80 TAXMANN.COM 221 (MAD.) AND KEM INVEST LTD. VS. CIT, (2015) 16 TAXMANN.COM 118 (DELHI) and held hat since no exempt income has accrued to the assessee therefore, the provisions of Section 14A of the Act do not apply to the fact situation of the case. Therefore, it has become necessary for us to clarify the view taken in the two decisions viz., KINGFISHER FINVEST INDIA LTD. AND M/S NOVEL SOFTWARE INDIA (P) LTD. supra. At this stage, we may refer to Paragraph 40 of the decision of the Supreme Court in MAXOPP supra, the relevant extract of which reads as under: It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to the deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even that the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes upon order to earn profits. In the result, the appeals filed by the revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.” 11. Mr. Sanmathi .E, learned counsel would not contest the aforesaid factual aspect, as highlighted by Mr.Suryanarayana. 12. If that be so, the substantial question of law No.4 is also without merit and the same is decided against the revenue and in favour of the assessee. Hence, this appeal is dismissed on all the questions of law. 13. No costs. Sd/- (V KAMESWAR RAO) JUDGE Sd/- (S RACHAIAH) JUDGE SMC List No.: 1 Sl No.: 13