R.S.Padvekar, Member (J) -
(1.) THIS appeal is filed by the assessee challenging the impugned order of the Ld. CIT(A) -II, Pune dated 25 -10 -2013 for the A.Y. 2010 -11. The assessee has taken following grounds in the appeal:
1. The authorities below erred in facts and circumstances of the case and in law in denying the claim of the assessee u/s. 10A under the belief that plant and machinery used by STP unit is second hand when the Tax Invoice is in the name of STP unit itself. Just and proper relief be granted to the assessee in this respect.
(2.) THE authorities below erred in facts and circumstances of the case and in law in denying the claim of the assessee u/s. 10A under the belief that the business is already in existence and thus condition in section 10A 2(ii) has been violated. Just and proper relief be granted to the assessee in this respect.
2. The facts which revealed from the record are as under. The assessee firm is carrying out the business of information technology services -ERP Consulting. The assessee filed the return of income for the A.Y. 2010 -11 on 31 -08 -2010 declaring total income of Rs. 13,53,140/ -. The assessment of the assessee has been completed u/s. 143(3) of the Income -tax Act in which the Assessing Officer has rejected the claim of the assessee for deduction u/s. 10A of the Act to the extent of Rs. 1,02,52,181/ -. During the course of assessment proceedings the Assessing Officer has noticed that though the assessee firm had claimed to be in the business of software development, however, has not shown any asset in the balance sheet for the relevant year. An explanation in this regard was sought and after considering the submission given by the assessee firm, the Assessing Officer examined the eligibility of the assessee's claim of deduction u/s. 10A of the Act. The Assessing Officer observed that as per the provision of clause (iii) of Sub -sec. (2) of Sec. 10A, an STP in which machinery or plant previously used has been transferred of value exceeding 25% of the total value of the plant and machinery, such STP's are not eligible to claim deduction u/s. 10A. The Assessing Officer has further noted that the two laptops, printer etc. were purchased by the partner of the assessee firm on 03 -04 -2009 and the STP registration of the assessee firm was received on 07 -09 -2009. The Assessing Officer inferred that upto 07 -09 -2009 the ownership over the aforesaid items clearly remained with the partner of the assessee firm. The Assessing Officer further held that even if it is assumed that the partner transferred the laptops and printer to the assessee firm, the same could not be treated as new asset but a secondhand used asset thereby violating the essential condition for availing deduction u/s. 10A as laid out in clause (iii) of section 10A(2).
2.1 The Assessing Officer has further noted that as per clause (ii) of Sec. 10A(2), an STP unit which is formed by splitting up and reconstruction of an existing business is not eligible to claim deduction u/s. 10A and in the instant case it is claimed by the assessee firm that the two laptops and one printer were purchased by the partner, Shri Arvind Patel on behalf of the assessee firm and the payments made by the partner and not the firm. The Assessing Officer also observed that the said items were not shown as assets in the financial statements of the firm for the relevant year and also the possibility of having used any new assets by taking them on hire is also ruled out as no hire charges have been claimed by the assessee firm as is evident from the financial statement. The Assessing Officer thus inferred that the business of the assessee firm was already in existence when the aforesaid assets were used and when the STP was created the assets of the old business began to be used in the new business claimed to be of the STP. The Assessing Officer has emphasized on the fact that the business of software development could not be carried out without the requisite assets being laptop/computer, printer etc. and the fact that the said business was already in existence as receipts to the tune of Rs. 14,69,466/ - related to the period 01 -04 -2009 to 24 -07 -2009 i.e. prior to the registration of STP. The Assessing Officer finally held that condition of Sec. 10A(2)(ii) also gets violated and hence, the assessee -firm was held not to be eligible to claim deduction u/s. 10A and accordingly the claim of deduction amounting to Rs. 1,02,52,181/ - was disallowed.
The assessee challenged the action of the Assessing Officer before the Ld. CIT(A) but did not find favour. The Ld. CIT(A) confirmed the order of the Assessing Officer on the issue of deduction u/s. 10A and dismissed the appeal filed by the assessee. The reasons given by the Ld. CIT(A) are as under:
"3.4. I have considered the submission made by the appellant and perused material on record. The appellant is a firm engaged in the business of information & technology services i.e. ERP consultancy. The software development fees were accounted for at Rs. 1,26,02,998/ - and the net profit declared thereon was of Rs. 1,11,47,522/ - and the claim u/s. 10A was at Rs. 1,02,52,181/ -. The appellant -firm had made a claim of deduction u/s. 10A and the audit report in form 56F was also filed by the appellant. The appellant -firm has submitted that the assessment year under appeal is the first year of operation of its STP unit. The A.O. however, has observed that despite the claim made by the appellant to be engaged in software development including maintenance, support, customization of ERP system, the appellant -firm had not shown any asset in the balance -sheet. The A.O. held that the provisions of section 10A(2)(ii) and (iii) have not been complied. The A.O. also found that the appellant -firm had receipts to the tune of Rs. 14,69,466/ - relating to the period 1.4.2009 to 24.7.2009, which were clearly prior to the registration of the STP. Moreover, the required assets of the firm such as the laptops and the printer were purchased by the partner of the firm who subsequently is stated to have transferred the said assets to the firm. The said assets were claimed to have been purchased by the partner of the appellant -firm on 03.04.2009 however, the firm received the registration on 7.9.2009 and hence the said assets remained with the partner and the subsequent transfer of the assets cannot be treated as a new asset as per the provisions of section 10A(2)(iii). Further, the absence of the assets in the financial statements and the subsequent explanation of the appellant in this regard do not appear to be an acceptable explanation. On an analysis of the entire fact and circumstances of the case, I tend to agree with the contention of the Assessing Officer that the business of software development was already in existence wherein the said assets wore being used and which is stated to have been subsequently transferred.
3.5. Section 10A confers total tax liability in respect of any profits & gains derived by an assessee from a new established industrial undertaking, established in any free trade zone or in any electronic hardware technology park or in any software technology park. An industrial undertaking can enjoy the benefits of the section only if the conditions as prescribed in the section are fulfilled, which also includes clause (ii) and (iii) of sub -section (2) of section 10A. Firstly, that it is not formed by the splitting up or reconstruction of a business already in existence and secondly, that it is not formed by the transfer of a new business machinery or plant previously used for any purpose. Thus the condition is that the undertaking must not have been formed by transfer to the new business of machinery or plat previously used for any purpose. The onus lay upon the appellant to establish and demonstrate that the said machinery or plant is not or was not previously used for any purpose before being installed or being put to use by the new unit in which the eligibility is claimed and deduction sought for. The appellant -firm has not been able to bring any such material on record to show that the aforesaid condition as stipulated under clauses (ii) & (iii):of section 10A(2) have been fulfilled. The facts of the case law relied upon by the appellant -firm in the case of CIT Vs. Expert Outsource (P) Ltd. : (2011) 59 DTR 86 (Kar), related to a case of conversion of an existing unit into an STPI unit; whereas the present case is of a new undertaking altogether. Further, in that case relied upon there was no export of computer software prior to the registration rather it commenced 'only after the unit was registered whereas in the present case the material on record indicates the commencement of the business prior to its registration on 07.09.2009. Thus the appellant's claim that the STP scheme is an independent code and the same does not recognize the conditions envisaged by section 10A(2) is also not correct as the said scheme prescribes the conditions and criteria and the manner of carrying out the business and does not define the manner in which the tax exemption would be granted. The legislature has prescribed section 10A for the purpose which details the conditions which are required to be fulfilled before the claim of deduction is made. It is a cardinal rule of interpretation that when the statute prescribes that a particular act is to be done in a particular manner, it should be done in the manner prescribed and not in any other way. Thus the contention raised by the appellant in this regard is not tenable. The appellant has failed to substantiate the relation of the two essential conditions laid out in clauses (ii) and (iii) of sub -section (2) of section 10A and hence the Assessing Officer has rightly held that the appellant is not entitled to claim deduction u/s. 10A and disallowed the claim."
Now, the assessee is in appeal before us.
(3.) WE have heard the rival submissions of the parties and perused the record. The Ld. Counsel submits that the assessee is in the business of ERP Consulting. The assessee accounted the software development fees to the extent of Rs. 1,26,02,998/ - and declared the net profit on the same at Rs. 1,11,47,522/ -. He submits that the interpretation made by the Assessing Officer of Sec. 10A(2)(ii) & (iii) of the Income -tax Act is totally erroneous. He submits that A.Y. 2010 -11 was the first year of operation as STP unit. He argues that the main reason of the Assessing Officer for rejecting the claim of the assessee is that the assessee has not shown any asset in the balance sheet. He argues that he explained to the Assessing Officer that the assessee firm has purchased two laptops and a printer from M/s. Knowasys Technologies P. Ltd. and the evidence in support of the same was also furnished. The payment was made by the partner through his bank account. The assessee has used said laptops for its software development programme of ERP system.;