The ACIT, Circle-1(2),, Baroda v. M/s. Fortune Infotech Ltd., Baroda

ITA 1386/AHD/2008 | 2004-2005
Pronouncement Date: 15-07-2011 | Result: Dismissed

Appeal Details

RSA Number 138620514 RSA 2008
Assessee PAN AAACC7460R
Bench Ahmedabad
Appeal Number ITA 1386/AHD/2008
Duration Of Justice 3 year(s) 2 month(s) 24 day(s)
Appellant The ACIT, Circle-1(2),, Baroda
Respondent M/s. Fortune Infotech Ltd., Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 15-07-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted D
Tribunal Order Date 15-07-2011
Date Of Final Hearing 15-06-2011
Next Hearing Date 15-06-2011
Assessment Year 2004-2005
Appeal Filed On 21-04-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI BHAVNESH SAINI JM & SHRI A N PAHUJA AM ITA NO.1384/AHD/2008 (ASSESSMENT YEAR:-2004-05) FORTUNE INFOTECH LIMITED PLOT NO. 160/4 OLD CHHANI ROAD BARODA V/S ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-1(2) BARODA PAN: AAACC 7460 R [APPELLANT] [RESPONDENT] ITA NO.1386/AHD/2008 (ASSESSMENT YEAR:-2004-05) ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-1(2) BARODA V/S FORTUNE INFOTECH LIMITED PLOT NO. 160/4 OLD CHHANI ROAD BARODA [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI M G PATEL AR REVENUE BY:- SHRI B L YADAV DR O R D E R A N PAHUJA: THESE CROSS APPEALS AGAINST AN ORDER DATED 17-01- 2008 OF THE LD. CIT(APPEALS)-V BARODA FOR THE ASSE SSMENT YEAR 2004-05 RAISE THE FOLLOWING GROUNDS:- ITA NO.1384/AHD/08[ASSESSEE] [1] THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-V BARO DA HAS ERRED IN LAW AS WELL AS ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANCE OF RS.4 94 720/- BEING EXPENDITURE INCURRE D BY THE APPELLANT ON CERTIFICATION VIZ. BS 7799 AND ISO 9001 H OLDING THE SAME AS BEING IN NATURE OF CAPITAL EXPENDITURE. [2] THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-V BARODA HAS ERRED IN LAW AS WELL AS ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANCE OF RS.1 26 000/- MADE U/S 40A(2)(B) OF THE I.T. ACT 1961 IN RESPECT OF LEASE RENT PAID. [3] THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-V BARODA HAS ERRED IN LAW AS WELL AS ON FACTS OF THE CASE BY NOT ALLOWI NG DEDUCTION U/S 10B OF THE IT ACT 1961 IN RESPECT OF SUBSIDY AMOUNT OF RS.45 59 177/- HOLDING THE SAME AS NOT BEING BUSINE SS INCOME. 2 ITA NOS.1384 & 1386/AHD./08 2 [4] THE APPELLANT PRAYS FOR THE FOLLOWING:- (I) TO ALLOW OF RS.4 94 720/- IN RESPECT OF EXPENDITURE INCURRED BY THE APPELLANT ON CERTIFICATION VIZ. BS 7799 AND ISO 9001. (II) TO DELETE OF RS.1 26 000/- MADE U/S 40A(2)(B) OF THE IT ACT 1961. (III) TO ALLOW DEDUCTION U/S 10B OF THE IT ACT 196 1 IN RESPECT OF SUBSIDY AMOUNT OF RS.45 59 177/-. [4] YOUR APPELLANT RESERVES THE RIGHT TO ADD ALTER AMEND AND / OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL. ITA NO.1386/AHD/2008[REVENUE] [1(A)] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF TRAINING EXPENDITURE OF RS.20 94 291/- AND APPRENTICE WAGES OF RS.22 806/-. [1(B)] THE LD. CIT(A) FAILED TO APPRECIATE THAT THE SUBSEQUENT AGREEMENT MADE IN THE MONTH OF FEBRUARY 2003 BETWEE N THE ASSESSEE COMPANY AND FORTUNE INFOTECH USA. FURTHER IN TERMS OF ITS SUBMISSIONS DATED 24 TH AUGUST 2006 AS WELL AS 29 TH AUGUST 2006 IT WAS STATED BY THE ASSESSEE THAT THEY ARE NOT GOVERNED BY THE PROVISIONS OF APPRENTICES ACT 19 61. [2(A)] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.20 01 210/- OUT OF MANAGERIAL REMUNERATION UNDER SECTION 40A(2)(B) OF THE ACT. [2(B)] THE LD. CIT(A) FAILED TO APPRECIATE THAT THE ASSESSEE FAILED TO GENUINELY EXPLAIN THE SUBSTANTIAL INCREASE IN REMUN ERATION PAID TO DIRECTORS AT RS.34 22 638/- FOR THE YEAR UNDER ASSESSMENT AS AGAINST RS.10 40 882/- OF EARLIER ASSESSMENT YEAR NEITHER DURING THE ASSESSMENT PROCEEDINGS BEFORE THE AO NOR DURING THE APPELLATE PROCEEDINGS BEFORE THE L D. CIT(A). [3] THE APPELLANT CRAVES LEAVE TO ADD TO AMEND OR ALT ER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. 3 ITA NOS.1384 & 1386/AHD./08 3 2. ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL OF THE ASSESSEE FACTS IN BRIEF AS PER RELEVANT ORDERS ARE THAT TH E RETURN DECLARING INCOME OF RS.26 43 753/- FILED BY ASSESSEE-COMPANY ON 18-10- 2004 AFTER BEING PROCESSED U/S 143(1) OF THE INCOM E-TAX ACT 1961 [HEREINAFTER REFERRED TO AS THE ACT] WAS SELECTE D FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ON 30 -03-2005.THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF IT E NABLED SERVICES DEALING PARTICULARLY IN THE EXPORT OF ELE CTRONIC DATA CAPTURED THROUGH THE PROCESS OF MEDICAL TRANSCRIPTI ON AND INSURANCE CLAIMS RECEIVED THROUGH ITS FOREIGN PRINCIPAL NAME LY M/S FORTUNE INFOTECH LTD. USA [FIL USA FOR SHORT]. THE ASSE SSEE-COMPANY HAS TWO 100% EOUS- ONE LOCATED IN BARODA AND THE OT HER AT BANGALORE. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE AS SESSEE-COMPANY INCURRED EXPENDITURE OF RS.2 97 000/- AND RS.1 97 7 20/- FOR CERTIFICATION UNDER BS 7799 AND ISO 9001. SINCE THE SAID EXPENDITURE BROUGHT ENDURING BENEFIT TO THE ASSES SEE-COMPANY IN THE UP-GRADATION OF ITS STATUS IN THE MARKET PLACE THE AO CONCLUDED THAT THE ENTIRE EXPENDITURE OF RS.4 94 720/- WAS CAPI TAL IN NATURE AND ACCORDINGLY A SUM OF RS.4 94 720/- WAS INCLUDED IN THE T OTAL INCOME OF THE ASSESSEE. 3. ON APPEAL THE LEARNED CIT(A) UPHELD THE DISALLO WANCE IN THE FOLLOWING TERMS:- 4.1 THE LEARNED AR HAS STATED BEFORE ME THAT THE EXPE NDITURE INVOLVED IS A REVENUE EXPENDITURE AND IT IS NOT OF ONE TIME NATU RE. HE ARGUED THAT IT WILL HAVE TO BE INCURRED ON EVERY TIME ON RENEWAL THERE ON AND CANNOT BE HELD AS CAPITAL EXPENDITURE. 4.2 I HAVE CONSIDERED THE FACTS OF THE CASE AND THE ARGUM ENTS OF THE LEARNED AR. BS 7799 AND ISO 9001 CERTIFICATION WILL CE RTAINLY UPGRADE THE STATUS OF THE COMPANY. THE BENEFITS FROM THESE CERTIFICAT ES WILL BE AVAILABLE TO THE COMPANY FOR A LONG PERIOD OF TIME. TH EREFORE THE EXPENDITURE WILL LIE IN THE CAPITAL FIELD. THE ACTION OF THE AO IS AS PER LAW AND IS UPHELD. THUS THIS GROUND OF APPEAL IS DISMISSED. 4 ITA NOS.1384 & 1386/AHD./08 4 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED AR ON B EHALF OF THE ASSESSEE WHILE RELYING UPON THE DECISION OF THE ITA T JODHPUR BENCH IN THE CASE OF ACIT VS. TIRUPATI MICROTECH (P) LTD. (2007) 111 TTJ (JD) 149 / 112 ITD 328 AND THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. VS. ACIT (20 10) 2 ITR (TRIB.) 168 (DELHI) CONTENDED THAT EXPENDITURE WAS REVENUE IN NATURE. ON THE OTHER HAND THE LD. DR SUPPORTED THE FINDINGS O F THE LD. CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE AS ALSO THE AFORECITED DECISIONS. WHILE AD JUDICATING THE CLAIM IN THE CONTEXT OF CLAIM OF EXPENDITURE FOR OBTAINING ISO 9002 CERTIFICATION A CO-ORDINATE BENCH IN THEIR DECISI ON IN TIRUPATI MICROTECH (P) LTD. (SUPRA) WHILE REFERRING TO DECI SION HON'BLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. LTD. VS. CIT (198 0) 124 ITR 1 CONCLUDED THAT SINCE BY MAKING PAYMENTS FOR OBTAINING ISO 9002 CERTIFICA TION THE FIXED CAPITAL OF THE COMPANY DID NOT ENHANCE IN ANY MANNER; IT RATHER CREATED A POSITIVE IMAGE OF PRODUCTS OF THE ASSESSEE FOR THE SMOOTH CONDUCT OF THE B USINESS EXPENDITURE WAS REVENUE IN NATURE. FOLLOWING THIS DECISION ANOTHER BENCH IN CLIMATE SYSTEMS INDIA LTD.(SUPRA) ALLOWED THE CLAIM OF THE A SSESSEE ON ACCOUNT OF ISO CERTIFICATION CHARGES. IN THE LIGHT OF VIEW TAKEN IN THESE DECISIONS ESPECIALLY WHEN THE LD. DR DID NOT PLACE ANY MATERI AL BEFORE US SO AS TO ENABLE US TO TAKE A DIFFERENT VIEW IN THE MAT TER NOR BROUGHT TO OUR NOTICE ANY CONTRARY DECISION WE HAVE NO ALTERN ATIVE BUT TO ALLOW THE CLAIM OF THE ASSESSEE. THEREFORE GROUND NO.1 I N THE APPEAL OF THE ASSESSEE IS ALLOWED. 6. GROUND NO.2 IN THE APPEAL OF THE ASSESSEE RELAT ES TO DISALLOWANCE OF RS.1 26 000/-TOWARDS LEASE RENT U/S 40A(2)(A) OF THE ACT . THE AO NOTICED THAT THE ASSESSEE PAID LEASE RENT FOR THE USE OF THE PREMISES AT 160/4 OLD CHHANI ROAD VADODARA BELONGING TO M/S PACKING PRODUCTS PVT. LTD. AN ASSOCIATE COMPAN Y. THE RENT CHARGES PAID DURING THE YEAR AMOUNTED TO RS.1 80 00 0/- FROM 1-4- 5 ITA NOS.1384 & 1386/AHD./08 5 2003 TO 30-09-2003 AND RS.1 000/- PER MONTH FROM OC TOBER 2003 TO 31-3-2004. HOWEVER AN INTEREST FREE DEPOSIT AMOUNT OF RS.40 LACS WAS PLACED AT THE DISPOSAL OF THE LESSOR VIZ. M/S P ACKING PRODUCTS (PVT.) LTD. FROM OCTOBER 2003. THE AO OBSERVED THA T THE SAID DEPOSIT AMOUNT BEING INTEREST FREE THE ASSESSEE AP PEARED TO HAVE FORGONE INTEREST INCOME @ 15% PER ANNUM (BANK RATE) IN FAVOUR OF M/S PACKING PRODUCTS (PVT.) LTD. THEREFORE THE AO OBSERVED THAT ON ACCOUNT OF THE ABOVE TRANSACTION THE BENEFIT BY WA Y OF RENT AND USE OF INTEREST FREE DEPOSIT OF RS.40 LACS ENJOYED BY T HE LESSOR WAS RECEIVED BY THE LESSOR AT THE EXPENSE OF THE ASSESS EE COMPANY. TRANSLATED INTO FINANCIAL COST INCURRED IN THIS RES PECT BY THE ASSESSEE COMPANY THE MATRIX OF BENEFIT SO RECEIVED WAS WORKED OUT BY THE AO AS UNDER:- RENT PAYMENT COST RS. 1 80 000/- (@ RS.30 000/- PER MONTH FROM 1-4-2003 TO 30-9-2003) RENT PAYMENT COST RS. 6 000/- (@ RS.1 000/- PER MONTH FROM 1-102003 TO 31-3-04 INTEREST FORGONE IN RESPECT OF M/S PACKING PRODUCTS (P) LTD. RS.40 00 000X15=RS.3 00000/- FROM 1-10-03 TO 31-3-04) 100 X 2 TOTAL RS. 4 86 000/- 6.1 THE AO INFERRED THAT THE TOTAL COST BORNE BY T HE ASSESSEE- COMPANY TOWARDS HIRING OF PREMISES FOR ITS BUSINESS FROM ITS ASSOCIATE COMPANY WAS RS.4 86 000/- AS AGAINST RS.3 60 000/- PAID BY IT IN THE IMMEDIATELY PRECEDING YEAR. TO A QUERY BY THE AO SEEKING REASONS FOR BEARING HIGHER COST THAN THE C OST BORNE FOR USE OF THE PREMISES IN THE IMMEDIATELY PRECEDING PREVIO US YEAR AND ALSO EXPLANATION SUBSTANTIATING THE REASONABLENESS OF S UCH PAYMENT THE ASSESSEE IN THEIR SUBMISSIONS DATED 24TH AUGUST 2 006 AND 22ND SEPT. 2006 ADMITTED THAT THE TOTAL COST OF THE BUI LDING TOGETHER WITH THE LAND WAS ABOUT RS.24 LACS AND CONSIDERING 15% A S THE INTEREST 6 ITA NOS.1384 & 1386/AHD./08 6 ACCRUING THEREON A SUM OF RS.30 000/- PER MONTH WO ULD BE THE POSSIBLE INCOME BY WAY OF INTEREST ON THE SAID AMOU NT. DESPITE THIS ADMISSION IN RESPECT OF BEARING HIGHER COST TOWARDS HIRING THE SAID PREMISES AND NO OTHER MATERIAL HAVING BEEN PLACED BEFORE THE AO A SUM OF RS.1 26 000/- WAS INCLUDED IN THE TOTAL IN COME OF THE ASSESSEE HOLDING THAT SUCH SUM WAS PAID UNREASONABL Y IN EXCESS BY THE ASSESSEE IN RESPECT OF ITS RENT TO THE LESSOR AN ASSOCIATE COMPANY. 7. ON APPEAL THE LEARNED CIT(A) UPHELD THE ADDITIO N IN THE FOLLOWING TERMS:- 6.2 THE AR HAS SUBMITTED BEFORE ME THAT THE ACTION O F THE AO IS NOT JUSTIFIED. HE HAS ALSO STATED THAT THE NOTIONAL INTEREST OF 15% IS ALSO EXCESSIVE. 6.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND ARGUMEN TS OF THE AR AS WELL. I FIND THAT THE AO HAS CORRECTLY CALCULATED THE TOT AL COST ATTRIBUTABLE TO THE RENTING OF THE PROPERTY. IT IS EXCESSIVE WITH REFEREN CE TO THE MARKET RATE AS DISCUSSED BY THE AO IN PARA-9 OF HIS ASSESSMENT ORDER. IN VIEW OF THIS THE ACTION OF THE AO IS UPHELD AND THIS GROUND OF APPE AL IS DISMISSED. 8. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED AR ON B EHALF OF THE ASSESSEE MERELY REITERATED THEIR SUBMISSIONS BEFOR E THE LEARNED CIT(A). TO A QUERY BY THE BENCH THE LD. DR DID NOT SUBMIT ANY REASONS AS TO WHY DEPOSIT OF RS. 40 LACS WAS MADE W ITH THE LESSOR M/S PACKING PRODUCTS (P) LTD. AND WHY RENT WAS REDU CED TO RS. 1000 PM.. THE LEARNED DR ON THE OTHER HAND SUPPORTED T HE IMPUGNED ORDER OF THE LEARNED CIT(A). 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. INDISPUTABLY M/S PACKING PRODUCTS (P) LTD. THE LESSOR CO MPANY WITH WHOM INTEREST FREE DEPOSIT OF RS. 40 LACS WAS MADE FALLS WITHIN THE DEFINITION OF PERSON U/S 40A(2)(B) OF THE ACT. IN THE PRECEDING Y EAR THE ASSESSEE PAID RENT @ RS. 30 000 PM TO THE SAID LESSOR FOR USE OF THEIR PREM ISES AND THAT WAS 7 ITA NOS.1384 & 1386/AHD./08 7 CONSIDERED REASONABLE. IN THE YEAR UNDER CONSIDERATION THE ASSESSEE REDUCED THE RENT TO RS. 1 000 PM W.E.F OCTOBER 2003. WITHOUT ANY REASONS AND ALSO MADE AN INTEREST FREE DEPOSIT OF RS. 40 LACS WITH THE LESSOR. THE ASSESSEE ADMITTED BEFORE THE AO THAT NORMAL INTEREST RATE PREVAILING DURING THE YEAR WOULD BE @15% AND TO THAT EXTENT INTEREST WAS FOREGONE BY THE ASSESSEE ON THE SAID AMOUNT. DESPITE SPECIFIC REQUEST BY THE BENCH THE LD. AR DID NOT EXPLAIN THE PURPOSE OF SAID INTEREST FREE DEPOSIT WITH THE LESSOR OR REDUCING THE RENT TO RS. 1 000/- PM W.E.F OCTOBER 2003. A PLAIN READING OF TH E PROVISIONS OF SECTION 40A(2) OF THE ACT REVEALS THAT WHERE AN ASS ESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS REQUIRED TO BE MADE OR HAS BEEN MADE TO ANY PERSON REFERRED TO IN CLAUSE ( B ) OF SECTION 40A(2) OF THE ACT AND THE ASSESSING OFFICER IS OF T HE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVIN G REGARD TO ( A ) FAIR MARKET VALUE OF THE GOODS SERVICES OR FACILIT IES FOR WHICH THE PAYMENT IS MADE; OR ( B ) THE LEGITIMATE NEEDS OF T HE BUSINESS OF THE ASSESSEE; OR ( C ) THE BENEFITS DERIVED BY OR ACCRU ING TO THE ASSESSEE ON RECEIPT OF SUCH GOODS SERVICES OR FACI LITIES THEN THE ASSESSING OFFICER SHALL NOT ALLOW AS A DEDUCTION SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY THE ASSESSING OF FICER TO BE EXCESSIVE OR UNREASONABLE. THEREFORE IT BECOMES AP PARENT THAT THE ASSESSING OFFICER IS REQUIRED TO RECORD A FINDING A S TO WHETHER THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE IN RELATIO N TO ANY ONE OF THE THREE REQUIREMENTS PRESCRIBED WHICH ARE INDEPE NDENT AND ALTERNATIVE TO EACH OTHER. ALL THE THREE REQUIREMEN TS NEED NOT EXIST SIMULTANEOUSLY. IN A GIVEN CASE IF ANY ONE CONDITI ON IS SHOWN TO BE SATISFIED THE PROVISION CAN BE INVOKED AND APPLIED IF THE FACTS SO WARRANT. AS ALREADY NOTED HEREINBEFORE THE ASSESSI NG OFFICER HAS HELD A PART OF THE EXPENDITURE TO BE EXCESSIVE HAVI NG REGARD TO THE FAIR MARKET VALUE OF THE FACILITIES WHICH ADMITTED LY AMOUNTED TO RS. 30000/- PM AND FOR RECORDING SUCH A FINDING COGENT REASONS ARE ASSIGNED BY THE AO. THE LD. AR DID NOT EVEN WHISPER BEFORE US AS TO THE PURPOSE OR COMMERCIAL EXPEDIENCY OF THE AFORES AID INTEREST FREE DEPOSIT OF RS. 40 LACS NOR DISPUTED THE INTEREST @1 5% PA PREVAILING 8 ITA NOS.1384 & 1386/AHD./08 8 DURING THE YEAR AND NOR EVEN AS TO WHY RENT WAS RE DUCED TO RS. 1000/- PM DURING THE YEAR AND FURTHER DID NOT EXPLA IN EVEN THE COMMERCIAL EXPEDIENCY IN DOING SO. IN THE LIGHT OF THE AFORESAID POSITION IN LAW AND THE FINDINGS RECORDED BY THE CO MMISSIONER (APPEALS) AND THE ASSESSING OFFICER AND IN THE ABSE NCE OF ANY COGENT BASIS IT IS NOT POSSIBLE TO HOLD THAT THERE IS ANY LEGAL INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A) S O AS TO WARRANT INTERFERENCE. THEREFORE GROUND NO.2 IN THE APPEAL OF THE ASSESSEE IS DISMISSED. 10. GROUND NO.3 IN THE APPEAL OF THE ASSESSEE RELA TES TO DEDUCTION OF RS.45 59 177/- ON ACCOUNT OF SUBSIDY U/S 10B OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS T HE AO NOTICED THAT THE ASSESSEE RECEIVED A SUM OF RS.72 81 719/- FROM THE GOVERNMENT OF GUJARAT UNDER THE INFORMATION TECHNOL OGY (IT) INDUSTRY INCENTIVE SCHEME 1999 TO 2004. THIS SCHEM E ENVISAGED FILLIP TO THE IT INDUSTRY AND ITS DEVELOPMENT IN TH E STATE OF GUJARAT CREATING LARGE SCALE EMPLOYMENT OPPORTUNITIES AND P ROVIDED FOR CAPITAL INCENTIVE SUBSIDY @ 25% OF ELIGIBLE TOTAL C APITAL INVESTMENT OR RS.25 LACS WHICHEVER IS LESS SPECIAL INCENTIVES DEPENDING UPON THE INVESTMENT MADE IN THE UNIT TURNOVER INCENTIVE @ 5% OF ELIGIBLE TURNOVER OF THE ASSESSEE LIMITED TO ITS OVERALL CEI LING OF RS.50 LACS PER ANNUM AND CONNECTIVITY INCENTIVE SUBSIDY OF 50% OF THE LEASE RENTAL PAID FOR ITS DATA LINE. THE AO OBSERVED FROM THE DETAILS FILED THAT THE ASSESSEE COMPANY RECEIVED 'CONNECTIVITY I NCENTIVE' AND TURNOVER INCENTIVE. SINCE THE SAID CONNECTIVITY INC ENTIVE OR TURNOVER INCENTIVE RECEIVED FROM THE STATE GOVERNMENT HAD NO THING TO DO WITH THE PROFITS DERIVED FROM THE EXPORTS OF DIGITAL DAT A TRANSMISSION THE AO CONCLUDED THAT THE INCENTIVE OF RS.72 81 719/- W OULD NOT QUALIFY AS PROFITS DERIVED FROM THE EXPORT OF COMPUTER SOFT WARE BUSINESS OF THE ASSESSEE RELYING INTER ALIA ON THE DECISIONS IN CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO VS CIT 130 ITR 84(SC) CIT VS . STERLING FOODS 237 ITR 579 (SC) ORISSA STATE WAREHOUSING CORPORAT ION VS CIT 237 9 ITA NOS.1384 & 1386/AHD./08 9 ITR 589 (SC) HINDUSTAN LEVERS LTD VS CIT 239 ITR 297 (SC) AND PANDIAN CHEMICALS LTD. VS. CIT 262 ITR 278 (SC). 11. ON APPEAL THE LEARNED CIT(A) ADJUDICATED THE I SSUE AS UNDER:- 8.2 THE LEARNED AR HAS SUBMITTED THAT CONNECTIVITY INCEN TIVE AND TURN OVER INCENTIVE ARE PART OF BUSINESS PROFIT AND THE SAME HA VE BEEN RIGHTLY INCLUDED IN THE BUSINESS INCOME. HE POINTED OUT THAT UN LIKE SECTION 80HHC OF THE ACT THE PROFIT OF THE BUSINESS IS NOT DEFINED IN SECTION 10B OF THE ACT. THEREFORE HE ARGUED THAT THE INCENTIVE SUBSIDY BEIN G BUSINESS INCOME SHOULD BE INCLUDED IN THE PROFIT OF THE BUSINESS T O BE COMPUTED UNDER SECTION 28 OF THE ACT. ALTERNATIVELY HE HAS ARGUED THAT CONNECTIVITY INCENTIVE OF RS.27 22 542/- IS RECEIVED AS COMPENSATION FOR LEASE LINE RENTAL PAID BY THE APPELLANT. THIS SUBSIDY GOES TO RED UCE COST OF LEASE RENT DEBITED TO PROFIT AND LOSS ACCOUNT AND ENHANCED THE PROF IT OF THE UNDERTAKING BY THAT AMOUNT. THEREFORE THIS HAS TO BE CO NSIDERED FOR DEDUCTION UNDER SECTION 10B OF THE ACT. HE HAS RELIED ON THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF INDIA GELATINE & C HEMICAL LTD. 275 ITR 284 (GUJ) ON THIS ISSUE. THE HONOURABLE GUJARAT HIGH C OURT IN THIS DECISION HAS HELD THAT DUTY DRAW BACK IS INTENDED TO REDUCE THE COST OF PRODUCTION AND HENCE IS AN INTEGRAL PART OF PRICING OF THE GOODS. THEREFORE PART OF THE COST OF PRODUCTION OF THE INDUSTRIAL UNDERTAKING WHICH RE LATES TO DUTY DRAW BACK HAS TO BE TREATED AS INCOME DERIVED FROM THE INDUSTRI AL UNDERTAKING . 8.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND TH E ARGUMENTS OF THE AR. AFTER EXAMINING THE SCHEME OF INCENTIVES I FIND THAT THE TURN OVER INCENTIVE IS AN INDEPENDENT INCENTIVE GIVEN TO THE APPELLANT FOR ENCOURAGING BUSINESS IN INFORMATION TECHNOLOGY. IT CANN OT BE SAID TO BE CONNECTED WITH THE EXPORT OF COMPUTER SOFTWARE. AS PER T HE RATIO OF STERLING FOODS LTD. VS. CIT 237 ITR 579 (SC) THIS CANNOT BE TAK EN AS PART OF PROFIT OF THE BUSINESS. THE ACTION OF THE AO WITH RELATION TO THIS SUBSIDY IS UPHELD. HOWEVER THE SAME CANNOT BE SAID REGARDING CON NECTIVITY INCENTIVE OF RS.27 22 542/-. AS POINTED OUT BY THE AO CONNECTIVITY INCENTIVE IS 50% OF THE DATA TRANSMISSION CHARGES OF THE DA TA LINE USED BY THE APPELLANT. THIS DEFINITELY GOES TO REDUCE THE COST OF THE APPELLANT. THE APPELLANT COULD AS WELL SHOW THE DATA LINE CHARGES NET OF THIS INCENTIVE. THEREFORE TO THIS EXTENT THE PROFIT OF THE BUSINESS WI LL BE INCREASED AND THE APPELLANT WILL BE ELIGIBLE TO GET EXEMPTION UNDE R SECTION 10B ON THIS AMOUNT AS THE PROFIT OF THE BUSINESS WILL BE PROPORTIO NATELY INCREASED. THE CONNECTIVITY INCENTIVE IS INEXTRICABLY LINKED WITH THE BUSINESS O F THE EXPORT CARRIED ON BY THE APPELLANT. THE EXPENDITURE ON DATA L INE IS THE MAIN EXPENDITURE IN THE MEDICAL TRANSMISSION BUSINESS. THE COST OF THE DATA LINE BEING SUBSIDIZED BY THE GOVERNMENT WILL DIRECTLY REDUCE THE COST OF THE EXPORTS. THIS WILL IN TURN INCREASE THE EXPORT PROFIT. TH E AO IS DIRECTED TO TAKE RS.27 22 542/- BEING CONNECTIVITY INCENTIVE AS PROFI TS DERIVED FROM THE BUSINESS OF EXPORTS OF THE APPELLANT COMPANY AND TO I NCLUDE THE SAME IN THE BUSINESS INCOME ELIGIBLE FOR DEDUCTION UNDER SECTI ON 10B OF THE 10 ITA NOS.1384 & 1386/AHD./08 10 I.T.ACT 1961. THE REST OF THE DISALLOWANCE MADE BY THE AO IS UPHELD. THUS THIS GROUND OF APPEAL IS PARTLY ALLOWED. 12. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A) IN UPHOLDING DISALLO WANCE TO THE EXTENT OF RS.45 59 177/-. THE LEARNED AR ON BEHALF OF THE ASSESSEE WHILE REITERATING THEIR SUBMISSIONS BEFORE THE LEAR NED CIT(A) CONTENDED THAT INCENTIVE BEING ON TURNOVER IS NOTHI NG BUT BUSINESS PROFITS OF THE INDUSTRIAL UNDERTAKING AND IS INEXTR ICABLY LINKED AND FORM PART OF THE EXPORT INCOME IN AS MUCH AS THE SAME IS BASE D ON EXPORT TURNOVER. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE FI NDINGS OF THE AO AND THE LD. CIT(A). 13. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. THE ISSUE BEFORE US IS AS TO WHETHER TURN OVER INCENTIVE GRANTED BY THE STATE GOVERNMENT IS PART OF BUSINESS PROFITS OF THE INDUSTRIAL UNDERTAKING IN TERMS OF PROVISIONS OF SEC. 10B OF THE ACT . SEC. 10B MAKES SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABLISHED 100 PER CENT EOUS. SUB- S. (1) PROVIDES THAT A DEDUCTION OF SUCH PROFITS AN D GAINS AS ARE DERIVED BY A 100 PER CENT EOU FROM THE EXPORT OF AR TICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN YEARS BEGI NNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WH ICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICL ES OR THINGS OR COMPUTER SOFTWARE AS THE CASE MAY BE SHALL BE ALL OWED FROM THE TOTAL INCOME OF THE ASSESSEE. SUB-S. (4) PROVIDES T HAT FOR THE PURPOSES OF SUB-S. (1) THE PROFITS DERIVED FROM EX PORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHI CH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING THE SAM E PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINES S CARRIED ON BY THE UNDERTAKING. THE EXPLN. 2 BELOW THE SECTION DEFINES CERTAIN EXPRESSIONS OCCURRING IN THE SECTION. CLAUSE (III) DEFINES WHAT EXPORT TURNOVER MEANS FOR THE PURPOSE OF THE SECTION. IT MEANS THE CONSIDERATION IN RESPECT OF THE EXPORT BY THE UNDER TAKING OF ARTICLES 11 ITA NOS.1384 & 1386/AHD./08 11 OR THINGS OR COMPUTER SOFTWARE RECEIVED OR BROUGHT INTO INDIA IN CONVERTIBLE FOREIGN EXCHANGE BUT DOES NOT INCLUDE (A) FREIGHT TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTS IDE INDIA OR (B) EXPENSES IF ANY INCURRED IN FOREIGN EXCHANGE IN PR OVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. THE EXPLANATION D OES NOT DEFINE WHAT TOTAL TURNOVER MEANS IN THE FORMULA PRESCRIBED BY SUB-S. (4). THE DEDUCTION IS MADE AVAILABLE ON EXPORT OF SOFTWA RE TURNOVER THE PROCEEDS WHEREOF ARE RECEIVED IN FOREIGN EXCHANGE. IT IS NOT AVAILABLE ON OTHER EXPORT TURNOVER THE RECEIPTS WH EREOF ARE IN INDIAN CURRENCY OR IN CURRENCY WHICH IS NOT A CONVERTIBLE FOREIGN EXCHANGE. THE OBJECT THEREFORE APPEARS TO BE TO ENCOURAGE M ORE INFLOW OF CONVERTIBLE EXCHANGE AND NOT MERELY EXPORT OF GOODS . MAKING IT AVAILABLE WITH REFERENCE TO THE REALIZATION IN CONV ERTIBLE EXCHANGE IS SUGGESTIVE OF THE FACT THAT IT WAS WITH A VIEW TO E NCOURAGE FOREIGN EXCHANGE INFLOW. UNDER THE PROVISIONS OF SECTION 10 B TO AVAIL THE DEDUCTION UNDER THIS SECTION THE UNDERTAKING HAS TO BRING INTO INDIA SALE PROCEEDS IN CONVERTIBLE FOREIGN EXCHANGE WHIC H SHALL BE PHYSICALLY BROUGHT TO INDIA. REPATRIATION OF THESE RECEIPTS IS THE MAIN CONTENTION IN AVAILING OF SECTION 10B. THE SA LE PROCEEDS MUST BE RECEIVABLE IN CONVERTIBLE FOREIGN EXCHANGE. THER EFORE THE AVOWED OBJECT IS TO ENCOURAGE INFLOW OF CONVERTIBLE FOREIGN EXCHANGE. IF THAT OBJECT IS KEPT IN MIND AMOUNT RE CEIVED BY AN ASSESSEE IN THE FORM OF TURNOVER SUBSIDY FROM THE S TATE GOVERNMENT CANNOT BE CONSIDERED TO BE RECEIVED IN THE FORM OF CONVERTIBLE FOREIGN EXCHANGE. THE SALE PROCEEDS RECEIVED IN CON VERTIBLE FOREIGN EXCHANGE MEANS THE ACTUAL RECEIPT AND NOT DEEMED RECEIPT. 13.1. THE WORD 'DERIVED' HAS BEEN CONSTRUED AS FAR BACK IN 1948 BY THE PRIVY COUNCIL IN CIT V. RAJA BAHADUR KAMAKHAYA NARAYAN SINGH [1948] 16 ITR 325 WHEN IT SAID : 12 ITA NOS.1384 & 1386/AHD./08 12 'THE WORD DERIVED IS NOT A TERM OF ART. ITS USE I N THE DEFINITION INDEED DEMANDS AN ENQUIRY INTO THE GENEALOGY OF THE PRODUCT. BUT THE ENQUIRY SHOULD STOP AS SOON AS THE EFFECTIVE SO URCE IS DISCOVERED..' (P. 328) 13.2 THIS DEFINITION WAS APPROVED AND REITERATED IN 1955 BY A CONSTITUTION BENCH IN THIS COURT IN THE DECISION OF MRS. BACHA F. GUZDAR V. CIT [1955] 27 ITR 1. IT IS CLEAR THEREFO RE THAT THE WORD DERIVED FROM IN SECTION 10B THE ACT MUST BE UNDER STOOD AS SOMETHING WHICH HAS DIRECT OR IMMEDIATE NEXUS WITH THE ASSESSEES INDUSTRIAL UNDERTAKING. THE WORDS DERIVED FROM HA VE NOT BEEN DEFINED FOR THE PURPOSE OF SECTION 10B LIKE SECTION 80HHC AND THEREFORE ITS MEANING HAS TO BE CONSIDERED IN THE R ESTRICTED SENSE AS INTERPRETED BY THE HONBLE SUPREME COURT IN VARIOUS JUDGMENTS INCLUDING CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD . V. CIT [1978] 113 ITR 84. THEREFORE ONLY THOSE PROFITS AND GAINS ARE TO BE EXEMPTED UNDER SECTION 10B WHICH HAVE DIRECT AND PR OXIMATE RELATIONSHIP WITH THE ACTIVITIES REFERABLE TO EXPOR T ORIENTED UNIT. IN THE INSTANT CASE THE LD. CIT(A) AFTER EXAMINING TH E SCHEME OF INCENTIVES CONCLUDED THAT THE TURN OVER INCENTIVE IS AN INDEPENDENT INCENTIVE GIVEN TO THE ASSESSEE FOR ENCOURAGING BUS INESS IN INFORMATION TECHNOLOGY AND IS IN NO WAY CONNECTED WITH THE EXPORT OF COMPUTER SOFTWARE. ON PERUSAL OF THE RELEVANT SC HEME WE FIND THAT TURNOVER INCENTIVE IS GRANTED IN ORDER TO MOT IVATE HIGHER PRODUCTIVITY. IT HAS NOTHING TO DO WITH EXPORT ACTI VITIES OF THE INDUSTRIAL UNDERTAKING. SINCE THE LD. AR HAS NOT PL ACED BEFORE US ANY MATERIAL EVIDENCING THAT THE SAID SUBSIDY WAS INDE ED DERIVED BY THE HUNDRED PERCENT EXPORT ORIENTED INDUSTRIAL UNDERTAK ING FROM THE EXPORT OF ANY COMPUTER SOFTWARE OR ELECTRONIC DATA WE ARE NOT INCLINED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). THEREFORE GROUND NO.3 IN THE APPEAL OF THE ASSESSE IS DISMISS ED. 14. COMING NOW TO GROUND NOS.1(A) AND 1(B) IN THE A PPEAL OF THE REVENUE THE AO NOTICED THAT THE ASSESSEE CLAIMED E XPENSES OF 13 ITA NOS.1384 & 1386/AHD./08 13 RS.20 94 291/- FOR TRAINING THE PERSONNEL FOR THEI R PROFICIENCY SO THAT MAXIMUM EFFICIENCY COULD BE ENSURED AND ERROR FREE ELECTRONIC DATA COULD BE TRANSMITTED TO THEIR PRINCIPALS IN US A. IT WAS STATED BY THE ASSESSEE THAT BEFORE THE PERSONNEL COULD BE ABS ORBED AS REGULAR EMPLOYEES THEY WERE CLASSIFIED UNDER THE NOMENCLAT URE OF TRAINEES ELIGIBLE FOR STIPEND PAYMENT FOR THEIR SUBSISTENCE DURING THE PERIOD OF TRAINING. TO A QUERY BY THE AO THE ASSESSEE REP LIED THAT THAT MOST OF SUCH PERSONS ON ACQUIRING NECESSARY PROFICIENCY WERE TAKEN UP AS REGULAR EMPLOYEES OF THE COMPANY. IT WAS NOT POSSIBLE FOR THE COM PANY TO TAKE THEM AS REGULAR EMPLOYEES FROM THE BEGINNING SINCE IT WAS NOT CE RTAIN WHETHER THEY WOULD BE SUITABLE FOR THE EMPLOYMENT. SINCE PROPER RECORDS WERE KEPT FOR SUCH PERSONS UNDER TRAINING WITH THEIR NAMES ADDRESSES AND OTHER DE TAILS AND BANK ACCOUNTS WERE OPENED IN THEIR NAMES IN WHICH SALARY PAID TO THE M DURING THE PERIOD OF TRAINING WAS CREDITED THE ASSESSEE REQUESTED TO ALLOW THE SAME AS BUSINESS EXPENDITURE. HOWEVER THE AO DID NOT ACCEPT THE SUBMI SSIONS OF THE ASSESSEE ON THE GROUND THAT THE BUSINESS OF MEDICAL TRANSCRIPTION AN D PROCESSING OF INSURANCE CLAIMS CARRIED ON BY THE ASSESSEE HAVING BEEN EXCLUSIVELY P ROCURED FROM FORTUNE INFOTECH USA IN TERMS OF AN AGREEMENT DATED 15/8/200 1 THE COST OF INITIAL TRAINING OF THE EMPLOYEES HAD TO BE BORNE BY FORTUNE INFOTECH USA. HOWEVER IF ANY SUCH TRAINED EMPLOYEE QUIT THE ORGANIZATION THEN THE COST OF TRAINING OF THE SUBSTITUTE EMPLOYEES IN HIS OR HER PLACE WOULD HAVE TO BE MET BY FORTUNE INFOTECH INDIA LTD.. SINCE THE SUBSEQUENT AGREEMENT E XECUTED ON 1 ST FEB. 2003 WAS SILENT ON THE ISSUE OF TRAINING EXPENSES TO BE BORNE BY FORTUNE INFOTECH USA WHILE THERE WAS NO CHANGE IN THE TARIFF AGREED TO BE PAID BY FIL (USA) WHICH WAS AT THE RATE OF US DOLLARS 0.07 PER LINE TYPED THE A O DISALLOWED THE CLAIM FOR DEDUCTION OF RS.20 94 291/-. 14.1 AS REGARD EXPENSES FOR IMPARTING OF PRACTICAL T RAINING UNDER THE PROGRAMME OF APPRENTICESHIP TRAINING THE AO OBSERVED THAT THESE EXPENSES WILL NOT BE COVERED WITHIN THE MEANING OF SECTION 37(1 ) OF THE ACT AS NO STATUTORY OBLIGATION WAS CAST ON THE EMPLOYER UNDER THESE TRAININ G SCHEMES. IN TERMS OF ITS SUBMISSIONS DATED 24TH AUG. 2006 AS WELL AS 29TH AUG. 20 06 IT WAS STATED BY THE ASSESSEE THAT THESE WERE NOT GOVERNED BY THE PROVISIONS OF APPRENTICES ACT 14 ITA NOS.1384 & 1386/AHD./08 14 1961. THE AO ACCORDINGLY CONCLUDED THAT THE ASSESSEE CO MPANY WAS NOT OBLIGED TO MAKE THE PAYMENTS OF STIPEND TO ITS TRAINEE EMPLOYEES WHO WERE NOT EVEN REGISTERED AS EMPLOYEES OF THE COMPANY TILL THEIR ABSORPTION AFTER COMPLETION OF NECESSARY TRAINING. ACCORDINGLY RELYING UPON CBDT CIRCULAR NO. 192 DATED 10-3-1976 (F. NO. 204/39/75-IT(A2) THE AO D ISALLOWED THE AMOUNT OF RS. 22 806/- ALSO 15. ON APPEAL THE LEARNED CIT(A) DELETED BOTH THE DISALLOWANCES IN THE FOLLOWING TERMS:- 5.1 THE AR HAS SUBMITTED THAT IT IS A COMMON FEATURE O F BPO COMPANIES EXECUTING MEDICAL TRANSCRIPTION WORK IN INDIA TO TRAIN THEIR PERSONNEL. THE APPELLANT COMPANY HAS TRAINED ITS PERSON S. IT HAS GIVEN NAMES ADDRESSES AND BANK A/C DETAILS IN SUPPORT OF THE SALARY PAID TO THEM. IT IS IMPOSSIBLE TO UNDERTAKE MEDICAL TRA NSMISSION WORK WITH UNTRAINED PERSONNEL. IN VIEW OF THIS HE ARGUED THAT THE EXPENDITURE IS ENTIRELY ALLOWABLE UNDER SECTION 37 OF TH E I.T. ACT 1961. 5.2 I HAVE CONSIDERED THE FACTS OF THE CASE AND THE ARGUME NTS OF THE AR. THERE IS NO DOUBT ABOUT THE GENUINENESS OF THE EXPENDITURE. THE PAYMENTS HAVE BEEN MADE TO PERSONS WHO HAVE BECOME EMPLOYEES OF THE APPELLANT. THE PAYMENTS ARE THROUGH CHEQUE. THE EXPENDITURE IS CERTAINLY FOR THE PURPOSES OF THE BUSINESS. T HESE ARE REGULAR EXPENSES ON TRAINING OF EMPLOYEES. THE APPELLA NT WAS REQUIRED TO INCUR SUCH EXPENDITURE FOR THE PURPOSE OF BUSINESS. OTHERWISE THE APPELLANT CANNOT EFFICIENTLY EXECUTE THE WORK UNDERTAKEN FROM THE US COMPANY. THE BUSINESS OF MEDICAL TRANSCRIPTION CANNOT BE UNDERTAKEN BY UNTRAINED PERSONNEL . TRAINING APPRENTICES BEFORE PERMANENT EMPLOYMENT IS AN ACCEPTED BUSINESS PRACTICE. THE EARLIER AGREEMENT THAT THE INITIAL TRAI NING COST IS TO BE BORN BY THE US COMPANY HAS BEEN ALREADY REVISED IN FEBRU ARY 2003. AT THE MATERIAL TIME THAT IS DURING THE PREVIOUS YEAR THE TRAINING COST HAS TO BE BORNE BY THE APPELLANT COMPANY ONLY. IN VIEW OF THIS THE ADDITION MADE BY THE AO ON THIS ACCOUNT CANNOT BE SUSTAINE D. THE DISALLOWANCE OF RS.20 94 291/- AND APPRENTICE WAGES OF R S.22 806/- ARE DELETED AND THE APPEAL OF THE APPELLANT IS ALLOW ED. 16. THE REVENUE IS IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED DR SUPP ORTED THE ORDER 15 ITA NOS.1384 & 1386/AHD./08 15 OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASS ESSEE SUPPORTED THE FINDINGS OF THE LEARNED CIT(A). 17. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. INDISPUTABLY AND AS POINTED OUT BY THE LD . CIT(A) T HERE IS NO DOUBT ABOUT THE GENUINENESS OF THE EXPENDITURE. BEFORE 1 ST FEBRUARY 2003 IN TERMS OF AN AGREEMENT DATED 15/8/ 2001 THE COST OF INITIAL TRAINING OF THE EMPLOYEES WAS BORNE BY F ORTUNE INFOTECH USA. THEREAFTER THE SAID AGREEMENT HAS BEEN REVISE D IN FEBRUARY 2003 AND AS POINTED OUT BY THE LD. CIT(A) DURING TH E PREVIOUS YEAR THE TRAINING COST HAS TO BE BORNE BY THE ASSESSEE C OMPANY ONLY. THE BUSINESS OF MEDICAL TRANSCRIPTION CANNOT BE UNDERTA KEN BY UNTRAINED PERSONNEL AND SUCH TRAINING BEFORE REGULAR EMPLOYME NT IS AN ACCEPTED BUSINESS PRACTICE. THE EXPENDITURE HAVING BEEN INCURRED ON TRAINING OF PERSONNEL OF THE ASSESSEE COMPANY AN D ITS GENUINENESS BEING NOT IN DOUBT APPARENTLY SUCH CLA IM IS ADMISSIBLE. IN THESE CIRCUMSTANCES ESPECIALLY WHEN THE REVENUE DID NOT PLACE ANY MATERIAL BEFORE US SO AS TO ENABLE US TO TAKE A DIFFERENT VIEW IN THE MATTER WE ARE NOT INCLINED TO INTERFERE WITH T HE FINDINGS OF THE LD. CIT(A). THEREFORE GROUND NOS.1(A) & (B) IN THE APP EAL OF THE REVENUE ARE DISMISSED. 18. GROUND NO.2 IN THE APPEAL OF THE REVENUE RELATE S TO DISALLOWANCE OF RS.20 01 210/- OUT OF MANAGERIAL RE MUNERATION U/S 40A(2)(A) OF THE ACT. ON PERUSAL OF THE PARTICULARS IN RESPECT OF DIRECTORS REMUNERATION THE AO NOTICED THAT THE ASS ESSEE COMPANY INCURRED AN INCREASED COST OWING TO HIGHER REMUNERA TION OF RS.34 22 638/- PAID TO THE DIRECTORS FOR THE YEAR U NDER ASSESSMENT AS AGAINST RS 10 40 882/- IN THE IMMEDIATELY PRECED ING YEAR. THE COMPARATIVE REMUNERATION PAID FOR FY 2002-2003 AND 2003-2004 WERE AS UNDER: - 16 ITA NOS.1384 & 1386/AHD./08 16 NAME OF THE DIRECTOR FY 2002-03 FY 2003-04 I. SHRI K.K. PATEL 461122 1269504 II. NITIN SHAH 452910 1047112 III. ASIT SHROFF 126850 1106022 IN THE CASE OF ASIT SHROFF THE SALARY OF RS.126850 /- REPRESENTED THE REMUNERATION FOR THE LAST QUARTER OF THE FINANCIAL YEAR 2002-2003 ON ACCOUNT OF HIS JOINING EMPLOYMENT WITH THE ASSESSEE COMPANY DURING THE SAID PERIOD I.E @ RS.42283/- PM . THE AO WAS OF THE OPINION THAT THE FOLLOWING AMOUNT OF REMUNERATION W AS REASONABLE: 1) SHRI K.K PATEL 461122 2) NITIN SHAH 452910 3) ASIT SHROFF 507396 ----------- 14 21428 SINCE THE PROFITS OF BUSINESS FOR THE YEAR UNDER AS SESSMENT SUFFERED A SET BACK AS COMPARED TO THE PROFITS OF BUSINESS I N THE IMMEDIATELY PRECEDING PREVIOUS YEAR WHILE DIVIDEND PAY OUT FOR BOTH THE YEARS REMAINED THE SAME AND THERE WAS NO EXPONENTIAL INCR EASE IN THE SALARY OF THE EMPLOYEES AND THE FIELD STAFF EVEN W HEN THE ASSESSEE PROCURED BUSINESS FROM FIL(USA) IN ENTIRETY THE AO WAS OF THE OPINION THAT THERE WAS NO JUSTIFICATION FOR PAYMENT OF ENHANCED REMUNERATION TO THE DIRECTORS IN THE YEAR UNDER CON SIDERATION. TO A QUERY BY THE AO THE ASSESSEE'S REPRESENTATIVES EX PLAINED THAT REMUNERATION WAS COMMENSURATE WITH THE EFFORTS PUT IN BY THE DIRECTORS WHO WERE ALL TECHNICALLY QUALIFIED TO HAN DLE THE INTRICATE AND SENSITIVE DATA PROCESSING OPERATIONS UNDERTAKEN BY THE ASSESSEE COMPANY. SINCE THE ASSESSEE DID NOT SUBSTA NTIATE THE BASIS FOR ENHANCING THE REMUNERATION THE AO DISALL OWED A SUM OF RS.20 01 210/- IN TERMS OF PROVISIONS OF SECTION 40 A(2)(A) READ WITH SEC. 40A(2)(B) OF THE ACT. 17 ITA NOS.1384 & 1386/AHD./08 17 19. ON APPEAL THE LEARNED CIT(A) DELETED THE DISAL LOWANCE IN THE FOLLOWING TERMS:- 7.1 THE LEARNED AR ARGUED THAT THE APPELLANT COMPAN Y HAS PAID REMUNERATION TO THE DIRECTORS AS PER THE PROVISIONS OF SE CTION 309(3) OF THE COMPANY'S ACT. IT IS WITHIN THE PERMISSIBLE LIMIT OF 10% OF THE NET PROFIT. HE RELIED ON THE DECISION OF SAYAJI IRON & ENGINEERING CO . VS. CIT 253 ITR 749 (GUJ) WHEREIN IT HAS BEEN HELD THAT ONCE SUCH REM UNERATION WAS FIXED AS PROVIDED AS PROVIDED IN SECTION 309 IT WAS A BUSINESS EXP ENDITURE AND NO PART OF EXPENDITURE COULD BE DISALLOWED. 7.2 I HAVE CONSIDERED THE FACTS AND ARGUMENTS OF THE LEAR NED AR. THE COMPANY HAS PAID THE REMUNERATIONS ACCORDING TO RULES AN D REGULATIONS OF COMPANY'S ACT. THE DIRECTORS ARE ASSESSED TO TAX AND THE ENTI RE INCOME FROM THE SALARY AND REMUNERATION IS OFFERED TO TAX. THE COMPANY HAS NO DIRECT TAX ADVANTAGE AS THE ENTIRE INCOME EVEN AFTER TH E ADDITION IS EXEMPT FROM TAX UNDER SECTION 10B.THE ARGUMENT OF THE A O THAT THE REMUNERATION IS EXCESSIVE IS ALSO NOT TENABLE. THE DIRECTORS ARE FULL TIME EMPLOYEES LOOKING AFTER THE WORK OF THE APPELLANT COMPAN Y. THE DIRECTORS HAVE BEEN PAID IN THE RANGE OF 10 TO 12 LAKHS ANNUALLY WHICH IS A REASONABLE PACKAGE IN THE PREVALENT MARKET SCENARIO OF IT INDUSTRY. CONSIDERING ALL THESE FACTS THE DISALLOWANCE MADE BY THE AO IS DELETED. 20 THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED DR SUPP ORTED THE ORDER OF THE AO WHILE CONTENDING THAT THE REMUNERATION WA S INCREASED WITHOUT ANY CORRESPONDING IN BUSINESS OF THE COMPAN Y. THE LEARNED AR ON BEHALF OF THE ASSESSEE SUPPORTED THE ORDER OF THE LEARNED CIT(A) AND SUBMITTED REMUNERATION TO DIRECTORS HAD B EEN PAID WITHIN THE LIMIT OF 10% LAID DOWN IN SUB. SECTION 3 OF SECTION 309 OF T HE COMPANIES ACT 1956 INTER ALIA THE LD. AR RELIED UPON DECISIONS IN SAYAJI IRON & ENGINEERING CO. V. CIT 253 ITR 749(GUJ);ABBAS WAZIR (P) LTD V. CIT (2003) 1 33 TAXMAN 702 (ALL);CIT V. SHRIRAM PISTON & RING LTD. (1990) 181 ITR 230 (DEL) AND VOLTAMP TRANSFORMER PVT. LTD. V. CIT- GUJ 129 ITR 185 (GUJ). 21. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE AS ALSO THE AFORECITED DECISIONS RELIED UP ON BY THE LD. AR INDISPUTABLY THE SALARY PAID TO THE DIRECTORS OF T HE COMPANY IS WITHIN THE LIMITS PRESCRIBED UNDER THE COMPANIES AC T 1956. IN 18 ITA NOS.1384 & 1386/AHD./08 18 SAYAJI IRON & ENGINEERING CO.(SUPRA) IT WAS HELD T HAT ONCE THE EXPENDITURE IN QUESTION IS IN TERMS AS PROVIDED IN SECTIONS 309 AND 198 OF THE COMPANIES ACT 1956 THERE CANNOT BE ANY 'NON-BUSINESS' PURPOSE IN SO FAR AS THE ASSESSEE-COMPANY IS CONCER NED. IN THE CASE ABBAS WAZIR (P) LTD V. CIT 133 TAXMAN 702(ALL) HONBLE HIGH COURT WHILE ADJUDICATING A SIMILAR ISSUE HELD THAT IT IS NOT FOR THE INCOME-TAX AUTHORITIES TO DETERMINE WHAT WOULD BE COM MERCIALLY EXPEDIENT AND THAT IS THE FUNCTION OF THE COMPANY OR THE FIRM. THE INCOME-TAX AUTHORITY CANNOT ORDINARILY INTERFERE WITH SUCH MATTERS. IT WAS OBSERVED THAT IT IS NOT FOR THE ITO TO DECIDE WHAT WOULD BE THE CORRECT SALARY OF THE DIRECTOR S OR OTHER OFFICERS OF THE COMPANY UNLESS ON THE FACT OF IT THE SALARY FIXED IS SO EXORBITANT AND ABSURD THAT IT CAN CLEARLY BE SAID TO BE FICTITIOUS AND AIMED AT TA X EVASION. SIMILAR VIEWS WERE EXPRESSED BY THE HONBLE JURISDICTIONAL HIGH COURT IN V OLTAMP TRANSFORMER (P) LTD.(SUPRA). IN CIT V. SHRIRAM PISTON & RING LTD. 18 1 ITR 230 (DEL) THE HONBLE DELHI HIGH COURT HELD THE COMPANY LAW BOARD HAVING APPROVED THE REMUNERATION IT COULD NOT BE SAID THA T THE EXPENDITURE INCURRED WAS EXCESSIVE OR UNREASONABLE. IN THE INSTANT CASE THE IN COME OF THE ASSESSEE IS EXEMPT UNDER SECTION 10B OF THE ACT AND THE LD. CIT (A) CONCLUDED THAT THE DIRECTORS BEING FULL TIME EMPLOYEES LOOKING AFTER THE W ORK OF THE ASSESSEE COMPANY REMUNERATION PAID IN THE RANGE OF 10 TO 12 LAKHS ANNUALLY WAS A REASONABLE PACKAGE IN THE PREVALENT MARKET SCENARIO OF I T INDUSTRY. THE REVENUE HAVE NOT PLACED ANY MATERIAL BEFORE US IN ORDER TO CONTROVERT THE AFORESAID FINDINGS OF THE LD. CIT(A) NOR BROUGHT TO OUR NOTICE ANY CONTRARY DECISION SO AS TO ENABLE US TO TAKE A DIFFERENT VIEW IN THE MATTER. IN THE ABSENCE OF ANY BASIS WE ARE NOT INCLINED TO INTERFERE . THEREFORE GROUND NO S.2(A) & (B) IN THE APPEAL ARE DISMISSED. 22. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN TERMS OF RESIDUARY GROUND NO.3 IN THE APPEAL OF THE REVENUE AND GROUND NO.5 IN THE APPEAL OF THE ASSESSEE WHILE GROUND NO.4 IN THE APPEAL OF THE ASSESSEE BEING MERE PRAYER ALL THESE GROUNDS ARE D ISMISSED. 23. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US. 19 ITA NOS.1384 & 1386/AHD./08 19 24. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED WHILE THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 15 -07-2011 SD/- SD/- ( BHAVNESH SAINI ) JUDICIAL MEMBER ( A N PAHUJA ) ACCOUNTANT MEMBER DATED : 15 -07-2011 COPY OF THE ORDER FORWARDED TO: 1. FORTUNE INFOTECH LIMITED PLOT NO. 160/4 OLD CH HANI ROAD BARODA 2. ASST. COMMISSIONER OF INCOME-TAX CIRCLE-1(2) BA RODA 3. CIT CONCERNED 4. CIT(A)-V BARODA 5. DR ITAT AHMEDABAD BENCH-D AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABAD