The Commissioner Of Income Tax, Chennai-Iii v. M/S.pentasoft Technologies Ltd.,Chennai-24

In the High Court of Judicature at Madras Dated : 16.8.2019 Coram : The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal No.1015 of 2009 The Commissioner of Income Tax, Chennai-III …Appellant Vs M/s.Pentasoft Technologies Ltd.,Chennai-24. ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 07.1.2009 made in ITA.No.2252/Mds/2007on the file of the Income Tax Appellate Tribunal, Chennai 'B'Bench for the assessment year 2000-01, against the order of theCommissioner of Income Tax (Appeals)-VI, Chennai, dated25/05/2007 made in ITA No.335/2004-05 and against the assessmentorder of the Deputy Commissioner of Income Tax, Central CircleIII (4) Chennai dated 31/03/2003 under section 143(3) of the ITAct for the Assessment year 2000-01. For Appellant : Mrs.R.Hemalatha, SSC For Respondent : Ms.Sree Lakshmi Valli forMr.N.Muthukumar Judgment was delivered by T.S.Sivagnanam,J We have heard Mrs.R.Hemalatha, learned Senior StandingCounsel appearing for the appellant – Revenue and Ms.SreeLakshmi Valli, learned counsel appearing for the respondent –assessee. 2. This appeal, filed by the Revenue under Section 260A ofthe Income Tax Act, 1961 (for short, the Act) is directedagainst the order dated 07.1.2009 made in ITA.No.2252/Mds/2007on the file of the Income Tax Appellate Tribunal, Chennai 'B'Bench (for brevity, the Tribunal) for the assessment year 2000-01. https://hcservices.ecourts.gov.in/hcservices/ 3. The appeal was admitted on 09.11.2009 on the followingreframed substantial questions of law : “i. Whether, on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law inholding that foreign exchange gains shouldform part of the profits for the purpose ofdeduction under Section 10A? ii. Whether, on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law inholding that the income from trainingactivity, sale of hardware and software and39.33% of ‘miscellaneous income’ are partand parcel of income for exemption underSection 10A, citing the Third Proviso toSection 10A, as per which, the domesticturnover including the said income did notexceed 25% of the total turnover, withoutnoticing that the Proviso was not applicableto the assessment year 2000-01 and appliedonly for the assessment year 2001-02? And iii. Whether, on the facts and in thecircumstances of the case, the AppellateTribunal was right in confirming the orderof the Commissioner of Income Tax (Appeals)by merely observing that there was no meritin the ground raised by the Revenue on theissue of deletion of depreciation ofRs.7,06,47,733?” 4. So far as the first substantial question of law isconcerned, it is the submission of Ms.Sree Lakshmi Valli,learned counsel appearing on behalf of the assessee that it iscovered in favour of the assessee and against the Revenue in theassessee’s own case in TCA.No.599 of 2010 dated 13.7.2010 forthe assessment year 2001-02, wherein a Division Bench of thisCourt held that gain due to fluctuation in foreign exchange rateis directly related to the export sales of the assessee andcannot be treated as other than part of profit from export. 5. Per contra, Mrs.R.Hemalatha, learned Senior StandingCounsel for the Revenue would contend that the said decisioncannot be applied to the facts of the present case, which is forthe assessment year 2000-01, as the Tribunal as well as theCommissioner of Income Tax (Appeals)-VI, Chennai-34 [for brief,the CIT(A)] failed to examine the nexus for the expensesincurred for export turnover. 6. We have carefully gone through the order passed by theCIT(A) as well as that of the Tribunal and we find that nowherethe Revenue raised such a contention either before the CIT(A) or https://hcservices.ecourts.gov.in/hcservices/ 5. Per contra, Mrs.R.Hemalatha, learned Senior StandingCounsel for the Revenue would contend that the said decisioncannot be applied to the facts of the present case, which is forthe assessment year 2000-01, as the Tribunal as well as theCommissioner of Income Tax (Appeals)-VI, Chennai-34 [for brief,the CIT(A)] failed to examine the nexus for the expensesincurred for export turnover. 6. We have carefully gone through the order passed by theCIT(A) as well as that of the Tribunal and we find that nowherethe Revenue raised such a contention either before the CIT(A) or https://hcservices.ecourts.gov.in/hcservices/ before the Tribunal. 7. Ms.Sree Lakshmi Valli, learned counsel for the respondent– assessee has produced before us a copy of the Fifth AnnualReport 1999-2000 and pointed out that the earnings in foreigncurrency were only from software development services andproducts other than exports and that there was no other sourceof earnings. 8. In the light of the fact that the Revenue did not canvassthis issue either before the CIT(A) or before the Tribunal, theyare precluded from doing so in the present proceedings. Hence,by applying the law laid down in the assessee’s own case inTCA.No.599 of 2010 dated 13.7.2010, the first substantialquestion of law is answered against the Revenue and in favour ofthe assessee. 9. It is the submission of Mrs.R.Hemalatha, learned SeniorStanding Counsel for the Revenue that the CIT(A) and theTribunal erroneously applied the Third Proviso to Section 10A ofthe Act, which came into effect substituting Section 10A as itoriginally stood, by the Finance Act, 2000 with effect from01.4.2001 and would be applicable only from the assessment year2001-02 whereas the present appeal relates to the assessmentyear 2000-01. Therefore, it is submitted that the Tribunalcommitted an error in deciding the issue in favour of theassessee. 10. Ms.Sree Lakshmi Valli, learned counsel for the assesseesubmits that prior to substitution of the Third Proviso toSection 10A by the Finance Act, 2000 with effect from 01.4.2001,the assessee had the benefit of the substantive provision namelySection 10A(2)(ia) of the Act, which reads as follows : “Special Provision in respect of newlyestablished industrial undertakings in freetrade zones :……It has begun or begins to manufactureor produce articles or things during theprevious year relevant to the assessmentyear—…….in relation to an undertaking whichbegins to manufacture or produce any articleor thing on or after the 1st day of April,1995, its exports of such articles or thingsare not less than seventy-five per cent ofthe total sales thereof during the previousyear.” 11. We have perused the order passed by the Tribunaland we find that there is inconsistency in the order in thesense that the Tribunal, in paragraph 4 of the order, consideredthe issue relating to net income from training activity, whichwas held to be part and parcel of the assessee’s income entitled https://hcservices.ecourts.gov.in/hcservices/ to exemption under Section 10A of the Act. The Tribunal, aftertaking note of its decision in the assessee’s group companies’case in ITA.Nos.338/Mds/2001 and 594/Mds/2002 dated 17.2.2006,remanded the matter back to the file of the Assessing Officerfor deciding the issue afresh after examining the true nature ofthe training activities and character of income earned by theassessee out of such activity. 11. We have perused the order passed by the Tribunaland we find that there is inconsistency in the order in thesense that the Tribunal, in paragraph 4 of the order, consideredthe issue relating to net income from training activity, whichwas held to be part and parcel of the assessee’s income entitled https://hcservices.ecourts.gov.in/hcservices/ to exemption under Section 10A of the Act. The Tribunal, aftertaking note of its decision in the assessee’s group companies’case in ITA.Nos.338/Mds/2001 and 594/Mds/2002 dated 17.2.2006,remanded the matter back to the file of the Assessing Officerfor deciding the issue afresh after examining the true nature ofthe training activities and character of income earned by theassessee out of such activity. 12. Having held so, the Tribunal, in paragraph 10 ofthe impugned order, dismissed the Revenue’s appeal and upheldthe order passed by the CIT(A) with regard to the miscellaneousincome namely 39.33%, which was, according to the assessee,derived from its own training centres. The Tribunal could havefollowed its earlier order in the assessee’s group companies’case and remanded the issue and could not have rejected theRevenue’s appeal and affirmed the finding with regard to themiscellaneous income. Therefore paragraph 10 of the impugnedorder passed by the Tribunal requires to be set aside. 13. The learned counsel for the respondent – assessee pointsout that the Central Board of Direct Taxes issued a circular inCircular No.717 dated 14.8.1995, which gives explanatory noteson the provisions of the Finance Act, 1995. It is pointed out inparagraphs 21.3 and 21.4 of the said Circular with regard to thebenefits provided to units in free trade zones. Hence, it issubmitted that de hors the findings of the CIT(A) with regard tothe Third Proviso to Section 10A of the Act, the assessee hasgot a strong case based on the substantive provision such asSection 10A of the Act prior to its substitution by the FinanceAct, 2000 with effect from 01.4.2001. 14. In the light of the fact that the matter has beenremanded to the Assessing Officer for verification and for afresh consideration, we give liberty to the assessee to raisethis contention before the Assessing Officer during the courseof hearing on such remand. Therefore, the second substantialquestion of law is answered accordingly. 15. With regard to the third substantial question of law,Mrs.R.Hemalatha, learned Senior Standing Counsel would contendthat the Tribunal, in paragraph 9 of the order, did not renderany finding as to why the Revenue’s appeal does not meritconsideration and that it had rejected the Revenue’s appealvirtually by a single line order. The Tribunal stated that ongoing through the detailed order passed by the CIT(A) on thepoint relating to the deletion of disallowance of depreciationamounting to Rs.70,64,71,733/-, it found that there was no meritin the grounds raised by the Revenue. 16. It may be true that the order passed by the Tribunaldoes not contain elaborate reasons. But, the Tribunal affirmedthe order passed by the CIT(A). Therefore, we are required tosee as to whether the order passed by the CIT(A) containssufficient reasons, which prompted the Tribunal to confirm thesame. The discussion starts from paragraph 4.6 of the order passed by the CIT(A) dated 25.5.2007 and the crux of thediscussions is contained in paragraph 4.6.3. On a reading, it isevidently clear that the CIT(A) has done a thorough andelaborate exercise and arrived at a finding. This view was foundproper by the Tribunal and therefore, the Revenue’s appeal wasdismissed. 17. In any event, we do not find any substantial questionof law arising for consideration on the said ground. Therefore,the third substantial question of law requires to be decidedagainst the Revenue and is accordingly decided against theRevenue. passed by the CIT(A) dated 25.5.2007 and the crux of thediscussions is contained in paragraph 4.6.3. On a reading, it isevidently clear that the CIT(A) has done a thorough andelaborate exercise and arrived at a finding. This view was foundproper by the Tribunal and therefore, the Revenue’s appeal wasdismissed. 17. In any event, we do not find any substantial questionof law arising for consideration on the said ground. Therefore,the third substantial question of law requires to be decidedagainst the Revenue and is accordingly decided against theRevenue. 18. In the result, the above tax case appeal is disposedof. Substantial questions of law 1 and 3 are answered againstthe Revenue. So far as the second substantial question of law isconcerned, the same is left open, as we have affirmed the orderof the Tribunal remanding the matter to the Assessing Officerfor a fresh consideration. As observed by us earlier, we leaveit open to the assessee to canvass all the points before theAssessing Officer on such remand. No costs. Sd/-Assistant Registrar(CS-III) //True copy// RS To 2. The Commissioner of Income Tax Appeal VI, Chennai 3. The Deputy Commissioner of Income Tax, Central Curcke UUU (4), Chennai. GP(CO)GMY(19/09/2019)