Itxa/1232/2017 Of Pr. Commissioner Of Income-Tax(C)-1 v. Shreepati Computer Centre

17:23:12+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL NO. 1200 OF 2017WITHINCOME TAX APPEAL NO.1232 OF 2017 Pr. Commissioner of Income Tax-1 V/s. Shreepati Computer Centre Mr. Suresh Kumar for AppellantNone for Respondent P.C. : ….Appellant ….Respondent ---- ---- CORAM : K.R. SHRIRAM & AMIT B. BORKAR, JJ DATED : 13[th] OCTOBER 2021 1Respondent was a software exporter. A search and seizure actionunder Section 132(1) of the Income Tax Act 1961 (the said Act), wasundertaken on 23[rd] February 2005. A notice under Section 153A was issuedon 8[th] September 2005 to file return of income within 30 days from the dateof service of notice for AY 2001-2002 (Appeal No.1200 of 2017) and AY2002-2003 (Appeal No.1232 of 2017). Respondent filed return of incomeon 14[th] October 2005 declaring total income of Rs.2,22,06,560/- for AY2001-2002 (Appeal No.1200 of 2017) and declaring total income ofRs.4,50,89,370/- for AY 2002-2003 (Appeal No.1232 of 2017). A noticeunder Section 143(2) was issued on 2[nd] December 2005. 2It was respondent’s case as recorded in the impugned order of Income Tax Appellate Tribunal (ITAT) that it was formed in 1992-93 with object ofearning income through business of development of software runningtraining institute by appointing Shri C.L.Deshpande as Technical Director and initially, revenue was earned only by running training institute.Subsequently, one of the partners of assessee firm came into contact withone Shri S. M. Gupta, Director of M/s Lee & Nee Software (Export) Ltd. asthey were in the same field. Shri S.M. Gupta proposed the business ofdeveloping software for M/s Lee & Nee Software (Export) Ltd., which wasaccepted by assessee firm in consultation with technical Director, Shri C.L.Deshpande and the first contract was entered into on or about 28[th]December 1999 as a test case and was completed successfully.3On successful completion of the same, one large contract was receivedby respondent. The details of the contract are as under:- Out of the above four parties, M/s L T Soft & Services, M/s Raj Soft &Services and M/s M S Soft & Services, with effect from 28[th] February 2000,amalgamated with LNSEL vide order dated 18[th] September 2000 passed byHigh Court of Calcutta. Hence virtually all the four contracts were enteredwith LNSEL. 4On gaining even more confidence, respondent decided to apply for100% Export Oriented Unit (EOU) under Software Technology Park of India(STPI), Bhubaneswar Centre for the development of computer softwarewhich was done vide application dated 16[th] December 2000. The STPI granted permission on 1[st] January 2001. For the purpose, premises were alsotaken on lease. The contract of Lee and Nee Group was huge enough toengage assessee in export related work. As already stated above, assesseefirm had already appointed Shri C.L.Deshpande as technical director as noneof the partners were familiar with the Information Technology industry. 5The software development work pursuant to the above contractsduring A.Y. 2000-01 and 2001-02, was initially carried out in Bombay officeunder the supervision of Shri Deshpande. The said software developed weresold to LNSEL, which in turn, after making the value addition in thesoftware developed by respondent as well as in the software, developmentof which was outsourced to other parties, LNSEL exported the same to M/s.Aapkidukan.com Corporation, which was a US based company. Though,respondent did not directly export the said softwares, being a supportingmanufacturer, on receipt of disclaimer certificate from LNSEL, it was eligibleto claim deduction u/s 80 HHE on profits earned from the sale of the saidsoftware. 6The details of sales made to LNSEL and the details of deduction u/s 80HHE claimed were as under:- 6The details of sales made to LNSEL and the details of deduction u/s 80HHE claimed were as under:- developing company and engaged in export of softwares. Copy of itsfinancials were filed before the ITAT. LNSEL had been approved as SoftwareTechnology Park by Department of Electronics vide letter of permissiondated 30[th] April 1992. Since then, LNSEL was eligible for exemption u/s10B of the Act. LNSEL, on 27[th] January 2000, undertook a major projectbeing an order received from Aapkidukaan.com Corporation, which is a USbased company, for developing a portal of Aapkidukaan.com. The mainobject of the said portal was to grab US market for Indian goods andservices and thus to create the largest online shopping mall for Indian goodsin US Market an Indian company, Aapkidukaan.com Pvt. Ltd., wasestablished in 2001, which was engaged in the marketing of the said portalin India by procuring clients in India to have their virtual shops on theportal through its offices/associates in Kolkata, Pune, Bangalore,Bhubhaneshwar or its franchises. 8LNSEL itself designed the main portal of Aapkidukaan.com anddecided to outsource designing of various modules and templates for thesaid software. For said purpose, orders were placed with various othersoftware developers apart from respondent. Once the work outsourced wascompleted and received by LNSEL through email, the various partsoutsourced to different developers were assembled and linked with the mainportal. To this extent, there was a value addition by LNSEL. On the saidvalue addition, exemption u/s 10B was claimed by LNSEL and same wasaccepted by the department in ITAT. 9Subsequently, assessee claimed deduction u/s 80HHE of the Act onsupply of above device to LNSEL as supporting manufacturer. 10The Assessing Officer disallowed and brought to tax the deduction ofclaim of Rs.7,67,33,946/- (Appeal No.1200 of 2017) and claim ofRs.10,33,88,045/- (Appeal No.1232 of 2017) under Section 80HHE(deduction of in respect of profits from export of computer software etc.)and software development charges of Rs.23,48,200/- (Appeal No.1200 of2017) and Rs.46,20,400/- (Appeal No.1232 of 2017). 11Following are the reasons for dis-allowance:- (a) Shri R.R.Chaturvedi, a Director of respondent, was not having anyknowledge about the development of software and respondent had noprevious expertise in development and export of softwares. The saidbusiness proposition had come to Shri R. R. Chaturvedi, through luck andnot through efforts or knowledge. (b) Shri R.R. Chaturvedi voluntarily declared Rs.7 crores in his statementdated 24[th] March 2005 which was subsequently retracted vide his affidavitdated 30[th] August 2005. According to the Assessing Officer, it was an afterthought as even payments were not made as contemplated in the agreemententered with LNSEL. (c) LNSEL is only engaged in trading of software and they are notmanufacturing any software. There was no mention in the return of incomeof LNSEL that it had given disclaimer certificate to respondent and thus ithas violated the provisions of Income Tax Act. LNSEL claimed exemption under Section 10B on the same profits on which respondent claimeddeduction under Section 80HHE. (d) Further if LNSEL has been granted permission by STPI vide letter dated30[th] April 1992, what is the fate of certificate of recognition of SoftwareExport House, w.e.f., 1[st] April 2002 vide letter dated 3[rd] April 2003 issued byJoint Director General of Foreign Trade, Kolkata. (e) The source code of the softwares developed could not be provided byrespondent as well as by Director of LNSEL, Shri S.M. Gupta. (f) With respect to the transmission of software developed toAapkidukan.com Corporation in the enquiry made by Foreign Tax Division,it did not come across any such transaction. Further the said company hadtwo bank accounts but the owners of Aapkidukan.com were not the ownersof these accounts. under Section 10B on the same profits on which respondent claimeddeduction under Section 80HHE. (d) Further if LNSEL has been granted permission by STPI vide letter dated30[th] April 1992, what is the fate of certificate of recognition of SoftwareExport House, w.e.f., 1[st] April 2002 vide letter dated 3[rd] April 2003 issued byJoint Director General of Foreign Trade, Kolkata. (e) The source code of the softwares developed could not be provided byrespondent as well as by Director of LNSEL, Shri S.M. Gupta. (f) With respect to the transmission of software developed toAapkidukan.com Corporation in the enquiry made by Foreign Tax Division,it did not come across any such transaction. Further the said company hadtwo bank accounts but the owners of Aapkidukan.com were not the ownersof these accounts. (g) Respondent never developed any software as during the course ofsearch, field enquiries made with the persons to whom respondent hadclaimed to have paid job work charges, denied having worked for them.Further letter received from STPI, Bhubaneshwar, also states that no activityhad been carried out. 12The assessment was completed on 28[th] December 2007. Beingaggrieved by the decision of the Assessing Officer, respondent filed anappeal before CIT(A) Mumbai. CIT(A) by an order dated 5[th] January 2009partly allowed the appeal filed by respondent. CIT(A) deleted the additionmade disallowing the deduction claimed under Section 80HHE on the ground that the conclusions drawn against respondent by the AssessingOfficer were mainly presumptions and surmises and not substantiated byany cogent evidence. 13Aggrieved by this order of CIT(A), appellant preferred an appealbefore ITAT. ITAT by its very well reasoned order dated 18[th] August 2016dismissed the appeal filed by appellant. Infact, respondent had alsopreferred an appeal to ITAT which also came to be dismissed. 14The substantial questions of law proposed in both appeals areidentical except that the amounts vary. The same read as under: INCOME TAX APPEAL NO.1200 OF 2017 “(i) Whether on facts and circumstances of the case and in law theHon’ble ITAT was correct in confirming order of CIT(A) allowingdeduction u/s 80HHE of Rs.7,67,33,946/- without considering thefacts brought on records which clearly established that the assesseedid not conduct any software development and the assessee failed toestablish the genuineness of the software development charges sopaid as evidence from the replies to the summons issued to thepersons to whom the assessee purportedly paid software developmentcharge and the assessee even failed to produce the source code of thepurported software developed and exported ? (ii) Whether on facts and circumstances of the case and in law theHon’ble ITAT was correct in confirming order of CIT(A) allowingdeduction u/s 80HHE of Rs.7,67,33,946/- without considering thefacts brought on records which clearly establishes that person, i.e.,Apkidukaan.com in USA for whom the purported software wasdeveloped was not active in the business as confirmed by USArevenue authorities in response to reference made? (iii) Whether on facts and circumstances of the case and in law theHon’ble ITAT was correct in confirming order of CIT(A) allowingdeduction u/s 80HHE of Rs,7,67,33,946/- without considering thefacts revealed during the course of search and assessment proceedingsthat M/s Lee & Nee Software Exports P Ltd was not even entitledto issue disclaimer certificate for supporting manufacturer to the assessee and thereby the assessee was not entitled to deduction u/s80HHE ? (iv) Whether on the facts and circumstances of the case and in law,the Hon’ble ITAT was correct arriving at conclusion that the claim ofthe assessee u/s 890HHE was genuine in spite of contrary factbrought on record to prove the claim of the assessee as false ? (iii) Whether on facts and circumstances of the case and in law theHon’ble ITAT was correct in confirming order of CIT(A) allowingdeduction u/s 80HHE of Rs,7,67,33,946/- without considering thefacts revealed during the course of search and assessment proceedingsthat M/s Lee & Nee Software Exports P Ltd was not even entitledto issue disclaimer certificate for supporting manufacturer to the assessee and thereby the assessee was not entitled to deduction u/s80HHE ? (iv) Whether on the facts and circumstances of the case and in law,the Hon’ble ITAT was correct arriving at conclusion that the claim ofthe assessee u/s 890HHE was genuine in spite of contrary factbrought on record to prove the claim of the assessee as false ? (v) Whether on facts and circumstances of the case and in law theHon’ble ITAT was correct in confirming order of CIT(A) allowingadditions on account of software development charges ofRS.23,48,200/- without considering the fact that the assessee firmnever developed any software as the persons to whom assesseeclaimed who have paid job work charges denied having worked forthe assessee?” INCOME TAX APPEAL NO.1232 OF 2017 “(i) Whether on facts and circumstances of the case and in law theHon’ble ITAT was correct in confirming order of CIT(A) allowingdeduction u/s 80HHE of Rs.10,33,88,045/- without considering thefacts brought on records which clearly established that the assesseedid not conduct any software development and the assessee failed toestablish the genuineness of the software development charges sopaid as evidence from the replies to the summons issued to thepersons to whom the assessee purportedly paid software developmentcharge and the assessee even failed to produce the source code of thepurported software developed and exported ? (ii) Whether on facts and circumstances of the case and in law theHon’ble ITAT was correct in confirming order of CIT(A) allowingdeduction u/s 80HHE of Rs.10,33,88,045/- without considering thefacts brought on records which clearly establishes that person, i.e.,Apkidukaan.com in USA for whom the purported software wasdeveloped was not active in the business as confirmed by USArevenue authorities in response to reference made? (iii) Whether on facts and circumstances of the case and in law theHon’ble ITAT was correct in confirming order of CIT(A) allowingdeduction u/s 80HHE of Rs.10,33,88,045/- without considering thefacts revealed during the course of search and assessment proceedingsthat M/s Lee & Nee Software Exports P Ltd was not even entitled toissue disclaimer certificate for supporting manufacturer to theassessee and thereby the assessee was not entitled to deduction u/s80HHE ? (iv) Whether on the facts and circumstances of the case and in law,the Hon’ble ITAT was correct arriving at conclusion that the claim ofthe assessee u/s 890HHE was genuine in spite of contrary factbrought on record to prove the claim of the assessee as false ? (v) Whether on facts and circumstances of the case and in law the Hon’ble ITAT was correct in confirming order of CIT(A) allowingadditions on account of software development charges ofRS.46,20,400/- without considering the fact that the assessee firmnever developed any software as the persons to whom assesseeclaimed who have paid job work charges denied having worked forthe assessee?” (iv) Whether on the facts and circumstances of the case and in law,the Hon’ble ITAT was correct arriving at conclusion that the claim ofthe assessee u/s 890HHE was genuine in spite of contrary factbrought on record to prove the claim of the assessee as false ? (v) Whether on facts and circumstances of the case and in law the Hon’ble ITAT was correct in confirming order of CIT(A) allowingadditions on account of software development charges ofRS.46,20,400/- without considering the fact that the assessee firmnever developed any software as the persons to whom assesseeclaimed who have paid job work charges denied having worked forthe assessee?” In our view, the questions as framed itself are more questions of factand cannot be called substantial questions of law. Our view is also fortifiedby the findings in the order of ITAT. Each of the reasons for disallowancementioned by the Assessing Officer have been elaborately dealt with by ITAT.15As regards the reason that Shri R.R.Chaturvedi was not having anyknowledge about the development of software and the business propositionhad come to Shri R.R.Chaturvedi through luck and not through the efforts ofknowledge, ITAT has concluded and we agree with ITAT, that a person cancarry on business without having any previous knowledge with respect tosaid business because he could take assistance of some other person, who isan expert in that field. In this case, Shri R.R.Chaturvedi had with him oneShri C.L.Deshmukh, who was technically qualified and who undertook theresponsibility to get developed the software. 16As regards the Assessing Officer’s objection that Shri R.R.Chaturvedivoluntarily declared Rs.7 crores in his statement dated 24[th] March 2005,which was subsequently retracted vide his affidavit dated 30[th] August 2005,was only an after thought, ITAT has factually observed that there wasnothing wrong in the retraction of the statement because ShriR.R.Chaturvedi later realised that the claim that was made by respondentwas very much in accordance with law. ITAT also has correctly upheld the view of the CIT (A) that no addition could be made on the basis of suchstatement unless and until it is corroborated with evidence. 17It has also been observed factually by ITAT that the software for whichsupply was made by respondent has actually been transmitted and exportedand the export value declared has been found in order and accepted bydesignated official of department of electronics of Government of India.LNSEL has also claimed deduction under Section 10B of the Act on the valueaddition and LNSEL issued disclaimer certificate in Form 10CCAG torespondent with respect to respondent’s share in the software export. It isalso noted that CIT (A) had corresponded with the Assessing Officer ofLNSEL, who has informed CIT(A) that there was no dispute pending withregard to the claim of deduction under Section 10B of the Act by LNSEL andno recourse was taken to the provisions of Section 147 of the Act for AY2000-2001 to 2002-2003. ITAT has come to the factual finding that on thebasis of material on record the claim of respondent under Section 80HHE ofthe Act was in order. ITAT has also come to the factual finding that thesource code of softwares developed have been provided by respondent tothe Assessing Officer. ITAT, therefore, concluded that when the export madeby LNSEL has been accepted to be genuine by the Assessing Officer inLNSEL’s case, the objection of the Assessing Officer in the present case thatthe exporters Apkidukan.com, the ultimate purchasers of the softwares doesnot appear to be genuine, cannot be accepted. 18Moreover, the Assessing Officer had relied upon statements of 5persons who had denied having developed any software for respondent.ITAT rightly concluded that respondent should have been given anopportunity to cross-examine those 5 persons, which was not granted. ITAThas also observed that there were others, whose affidavits were filed byrespondent confirming that they worked for respondent and those affidavitshave not been considered by the Assessing Officer. One more point, onwhich ITAT has made an observation on fact is that the Assessing Officer hasalso overlooked the fact that TDS for the payments made were dulyrecorded in the books of accounts and relevant vouchers found during thesearch only corroborate the genuineness of such payments and that TDSduly deducted was paid to the Government account. ITAT held that nothinghas been brought on record by the Assessing Officer to suggest that all suchfacts borne from the books of account were bogus or incorrect as the booksof account have not been rejected. 19Therefore, considering all these points and many other, which for thesake of brevity we have not reproduced from the order of ITAT, suffice to say,we approve those findings, we find that no substantial questions of law ariseand the entire dispute revolves around question of facts. 20In our view, the ITAT has not committed any perversity or appliedincorrect principles to the given facts and when the facts and circumstancesare properly analysed and correct test is applied to decide the issue at hand, then, we do not think that questions as pressed raises any substantialquestions of law. 21The appeals are devoid of merit and are dismissed with no order as tocosts. (AMIT B. BORKAR, J) (K.R. SHRIRAM, J.)