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2016 (8) TMI 506 - ITAT CHANDIGARH

2016 (8) TMI 506 - ITAT CHANDIGARH - TMI - Denial of deduction u/s 80IA - adoption of arbitrary figure of 5% of the income as business income - Held that:- The assessee has failed miserably to substantiate its claim that it manufacture software, profit from which is eligible for deduction u/s 80IA of the Act. Therefore we confirm the finding of the ld CIT(A) in confirming the disallowance of deduction of ₹ 14.46 lakhs as well as confirming the rejection of the book results applying the pro .....

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ant Maharishi, A. M. 1. This is an appeal filed by the assessee against the order of the ld CIT (A), Shimla dated 24.12.2012 for the Assessment year 2000-01 against the denial of deduction u/s 80IA of the Income Tax Act 1961 of the Act and adopting an arbitrary figure of 5% of the income as business income. 2. The brief facts of the case are that the assessee firm filed its return of income on 31.12.2000 declaring nil income after claiming deduction of ₹ 1446797/- u/ .....

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income assessed in excess of 5% is to be treated as undisclosed income of the Assessee and the Assessee does not fulfill many of the conditions for deduction u/s 80 IA of the act. Against this order u/s 263 the Assessee preferred an appeal before the coordinate bench who vide order dated 03.06.2008 modified the order of the ld CIT (A) and directed the AO for making proper enquiry for scrutinizing the claim of the Assessee u/s 80IA to consider the genuineness of the claim and fulfillment of othe .....

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om the sales of software is made, absence of any cost of purchase of software and on the competence of the employees of the assessee to develop the software. Subsequently, deduction u/s 80IA citing the incompetence of the staff/ employee of the assessee, for adequacy of the equipment of the equipments available in the form of computers etc, absence of complete details with respect to the development of the software, non availability of some of the employees for examination, absence of any expend .....

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ped the software and sold it and it has 14 employees in all whose details were provided at page 112 of the Paper Book. He further submitted that there is no discrepancy in accounting for electricity expenses which was explained to the AO vide letter dated 23.11.2009 and therefore he submitted that the ld AO has erred in rejecting the books of account. He further stated that the complete details of the sale of software are submitted which is available at Page 104 to 106 of the paper book. He furt .....

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and submitted that the ld AO has given detailed reasoning and further the ld CIT (A) has given sufficient reason for disallowing all the claim of the assessee. Therefore, he submitted that assessee is found to be not eligible for deduction. In view of this, he submitted that the order of AO may be upheld. 5. We have carefully considered the rival contentions. For the purpose of deduction u/s 80IA of the Act, the assessee should be engaged in the business of manufacturing or productio .....

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opment or its marketing. Both of them started the Assessee firm by employing other people. During the year, the firm has executed the sale of ₹ 18.96 lakhs and has earned net profit of ₹ 14.46 lakhs thereon. The total salary/ wages paid by the firm was ₹ 2.41 lakhs only and the next major amount of expenditure was depreciation of ₹ 51000/-. The balance sheet of the company also shows that the investment in plant and machinery was only ₹ 85000/-. The Assessee does no .....

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in computer from some private institute, he was having the longest experience of two years only, and he is designated as Sr. programmer drawing salary of only ₹ 32299 /- p.a. annum. In the details of the employees, the individual work/ contribution of staff was also could not be identified. On this fact, the financial results shown by the assessee that the assessee has earned a profit of ₹ 14.46 lakhs on turnover of ₹ 18.96 lakhs resulting into astronomical net profit ratio of .....

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fy even the pre- requisite conditions for deduction u/s 80IA of the Act. It was on the basis of these findings of fact that the Hon'ble ITAT observed in Para 16 & 17 of their order dated 03/06/2008 as follows: .............So however, the Commissioner of Income-Tax in his order u/s 263 has demonstrated as to how the Assessing Officer has failed to look into various facts as well as aspects which raised a strong suspicion about conditions for grant of deduction u/s 80IB being s .....

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about the machinery in the form of computer software owned by the assessee. Whether two computers owned by the assessee were sufficient for the manufacturing of computer software was a matter warranting scrutiny. The Assessing Officer has failed totally to enquire about this aspect of the matter. The Commissioner of Income Tax has also pointed out that the assessee had not even purchased UPS which are necessary for running of computers. The Assessing Officer has failed to make any enquiry about .....

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salary was claimed to have been paid to the employees raising a strong suspicion about their qualifications required for discharging the job of computer software engineers. On going through the order of the Assessing officer u/s 143(1) and the order of the Commissioner of Income Tax u/s 263, it becomes abundantly clear that the Assessing Officer has miserably failed to apply his mind to the material available on record and also failed to make requisite enquiry so as to verify the gen .....

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r u/s 263............... 7.1 Accordingly by the Hon'ble ITAT restored the matter to the file of the assessing officer for making proper scrutiny of the claim of the assessee u/s 80IB. Thus as per the directions of the Hon'ble ITAT, the assessing officer was required to do the following: (a) To conduct proper enquiries whether the conditions required for grant of deduction u/s 80IA were fulfilled by the assessee. (b) To conduct enquiries whether the assess .....

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sment. 7.3 As regards the enquiries made regarding the (a) above, the A.O. has discussed them at length in the assessment order. It is noted that a detailed questionnaire was issued to the appellant by the A.O. on 21.07.2009 seeking information on various issues which inter-alia included the issues pertaining to conditions required to be fulfilled by the appellant to claim deduction u/s 801A. These included the details regarding the workers employed, the details regarding the consump .....

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nly. The A.O. has not conducted any enquiries in respect of the said purchases, but, prima-facie, even the purchase price claimed for the given computers is grossly understated, given the fact that in the year 1999-2000 the computers were quite expensive. The purchase price of ₹ 17,300/- only for a computer system way back in 1999-2000 is apparently understated, as the good computers are not available for this price even today despite the Information Technology and Electronic boom.

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nder consideration. (d) A perusal of the employees details submitted by the appellant during the course of assessment proceedings reveals that the following employees were shown to have worked throughout the year. Suman, Vibha, Rajeev, Kusum, Nami Chand, Rakesh, Rajat Kumar, Ms Jyoti worked for 5 months from April to August, Nidhi worked for 8 months from April to November, Sunny worked fo,r the months of April, June to December, Ashutosh worked for 5 months from April to A .....

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e complete was not made available by the assesses even during course of original assessment proceedings, as a result of which the letter issued to her by the A.O. u/s 133(6) of the Act was received back undelivered. (f) Similarly in the case of Ms. Vibha, who was claimed to be a computer operator, but in whose regard no details regarding qualification were submitted, the letter issued u/s 133(6) by the A.O. during the course of original assessment proceedings was received back undeliv .....

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951 .05 Aug 951 .05 Sept. 1965 Oct. 1711.50 Nov. 2161.50 Dec. 2282.35 Thus-the appellant has shown him employed from 01.03.1999 as against 01.04.1999 claimed by Sh.Sunny, and has booked his salary at a much lesser amount than ₹ 3000/- per month as claimed by Sh.Sunny. (h) A letter was also received on 24.03.2003 from Ms Jyoti which stated as follows "....... in reference to your letter No. ITO/PWN/MISC/ .....

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s the appellant's claim that it had discharged its onus during the course of original assessment proceedings by presenting all the employees with the exception of two employees, the same is not found to be factually correct. A perusal of the relevant assessment records reveals that the statements of only the following employees were recorded on 25.03.2003 by the A.O. during the course of original , assessment proceedings:- (i) Sh.Satish Kumar who stated to be employed with the ass .....

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e 1999 and claimed to be a programmer. (j) No other employees were produced by the assessee firm even during the course of original assessment proceedings. Thus virtually only one employee, namely Sh. Rajeev, made a statement to the effect thai be was an_employee of assessee during the year 1999-2000. (k) During the course of subsequent assessment proceedings, the appellant again expressed its inability to produce any of the so-called employees, and did not even provide the .....

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. No documentary evidence was submitted by the assessesse in support of the educational qualification of even Ms. Suman and Ms. Jyoti who were claimed to be a Graduate and a Commerce Graduate respectively. It is not understood as to how Ms. Suman, a simple graduate, has been claimed to be a "programmer." Similarly, Ms. Jyoti, a has been shown to be a "system analyst. The appellant's claim in this regard stands exposed submission of Ms Jyoti, as mentioned in 'h' above, .....

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ablish that 10 or more workers were actually employed by it throughout the year in the "manufacturing process". The appellant did not even have enough machinery to justify the deployment of 10 or 11 persons. The claim of the appellant regarding the employment of the staff is apparently exaggerated and without any basis. As per the conditions laid down in clause (v) of sub-section (2} of section 80IA, in a case where the industriaf undertaking manufactures or produces, articles and thin .....

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ployment of 10 or more workers even as a whole for the entire functioning of the total unit. 7.5 It is also important to note that the development of computer software is a highly specialized task which requires software engineers and persons with a high degree of knowledge of computers and software designing. No details of qualification were submitted by the appellant in respect of the persons claimed to have been employed by it for the so-called development of computer software. Th .....

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o how the head-hunting was done by the assessee. It is also pertinent to note that even the partners of the appellant firm had no knowledge of computers, what to talk of software development. Thus the given facts lead, to the obvious conclusion that the appellant had failed to establish that it had actually engaged 10 or more workers during the year under consideration. Hence the basic condition as per section 80IA (2)(v) of the Act does not stand satisfied in the appellant's case. The said .....

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they were employed by it during the year under consideration and did the work as has been stated by the assessee for salaries as reported by it. The assessee has failed to discharge the onus cast upon it." 7.6 In view of the discussion above, it is held that the appellant is not eligible for deduction u/s 80IA in respect of the income earned by it as it has failed to satisfy the basic condition, pre-requisite for claim of deduction u/s 80IA. 7.7 Without prejudice to a .....

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as a guiding material for the use of the so-called software developed by the assessee. It is common knowledge that every software which is commercially sold in the market does carry some operating manual. Similarly, not even a single chair was purchased by the assessee during the year under consideration although it claimed to have employed 10 or 11 workers. What to talk of the customized tables and chairs which are needed to work on computers, the assessee did not buy even a single piece of fur .....

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rds the installation of various operating softwares which were mandatory for the development of new computer software. Like-wise, no expenditure has been incurred towards marketing despite the claim of sales of ₹ 19 lacs in the very first year. A perusal of the so-called Project Report repeatedly emphasized by the appellant also mentions under the head "Project Marketing" that "the company will depute market managers to appoint distributors, dealers and approach through its .....

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assessee under all essential heads, like wages, electricity, furniture and fixtures, machinery, operating software programs, marketing, printing, postage and travelling, packing etc., it is obvious that no manufacturing activity had actually been carried out by the appellant during the year under consideration. The appellant has also obviously projected its A.O. is directed to rectify the mistake and calculate income @ 5:/c of the declared turnover. The income shown in excess of the said 5% of t .....

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ions laid down in the given section, it is also considered necessary to respond to the appellant's argument that the Ld. A.O. has treated the activities of the assessee as the duplication of the software and the same should be treated as eligible for deduction u/s 80IA of the Act in view of the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Oracle Software India Ltd. (2010) 320 ITR 546. 7.10 A perusal of the judgment relied upon by the appellant reveals the follo .....

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heir judgment is confined strictly to the process impugned in the present case (i.e. the case of Oracle Software India Ltd.) (d) It was also made clear by the Hon'ble Court in Para 10 that "Complex technical nuances are required to be kept in mind while deciding issues of the present nature. The term "manufacture" implies a change, but every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and manip .....

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master media, fully operational computer, CD blaster machine (a commercial device used for replication from master media), blank/unrecorded CD also known as recordable media and printing soffware/lables. The master media is subjected to a validation and checking process by software engineers by installing and rechecking the integrity of the master media with the help of the software installed in the fully operational computer. After such validation and checking of the master media, the same is i .....

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ionary, Fifth Edition, p.553] According to the same dictionary, burning is a process involved in writing of a data electronically into a programmable read only memory (PROM) chip by using a special programming device known as a PROM programmer, PROM blower, or PROM blaster [see pp. 64,77 of Microsoft Computer Dictionary, Fifth Edition]" (g) Para 12 has been concluded by the Hon'ble Court clearly stating as follows: 12. "..... we are of the view that the market .....

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processing of goods which was eligible for deduction. Accordingly the Honb'le Court observed in para 7 of the order that ".... One has to interpret the meaning of the expression "manufacture or processing of goods"." On the contrary, the deduction u/s 80IA in the instant case is to be examined as per the amended provisions of section 80IA, when the "processing of goods" stood excluded from its ambit. 7.12 Without prejudice to above, the Hon'ble Ap .....

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rocess carried out by Oracle Software India Ltd. having complex technical nuances and involving sophisticated machinery that led the Hon'ble Court to hold that the processing of goods carried out by M/s. Oracle Software was eligible for deduction u/s 80IA (1) r/w section 80IA(12)(b) r/ws. 33B of the Act. 7.13 The appellant, by contrast, has not been able to explain even the basic process adopted by it even for the duplication of the software purchased by it. The machinery availab .....

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t was captured by the appellant for its unknown output also lies in the realm of unknown. In nutshell, there is absolutely no transparency in the facts of the appellant's case which could make a convincing case for,deduction u/s 80IA of the Act. It is settled law that Chapter VI-A is a code by itself, which provides for special deductions. These special deductions are incentives provided for setting up industrial undertakings in backward areas, and accordingly these deductions cannot be allo .....

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