The ACIT, B.K. Circle,, Palanpur v. Shri Sunilbhai s. Kakkad, Ahmedabad

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE SHRI MAHAVIR SINGH JM & SHRI A.N. PAHUJA A M I.T.A. NO.1771/AHD/2006 (ASSESSMENT YEAR 2003-04) ACIT B.K. CIRCLE VS SHRI SUNILBHAI S KAKAD PALANPUR PROP SHREE SAI INFOSYSTEM 26 GOYAL PLAZA AHMEDABAD [PAN : ACKPK8595Q] (APPELLANT) (RESPONDENT) REVENUE BY : SHRI C.K.MISHRA DR ASSESSEE BY : SHRI SN SOPARKAR AR O R D E R AN PAHUJA : THIS APPEAL BY THE REVENUE AGAINST AN ORDER DATED 25-04-2006 OF THE LD. CIT(A)-XV AHMEDABAD RAISES THE FOLLOWING GROUNDS: 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING THE AO TO CONSIDER THE INCENTIVE INCOME OF RS.4 15 749/ - AS INCOME OF SILVASA UNIT INSTEAD OF AHMEDABAD UNIT. 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN A LLOWING DEDUCTION U/S 80IB OF RS.72 52 571/-. 3. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN A LLOWING DEDUCTION OF RS.75 000/- BEING INCENTIVE PAID TO SH RI NISHANT DHOLAKIA. 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN ALLOWING DEPRECIATION OF RS.1 17 631/- ON SOFTWARE PURCHASE OF RS3 92 104/- AND ALSO ALLOWING DEDUCTION OF RS.6 40 000/- AS SOFTWARE CONSULTANCY CHARGES. 5. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN A LLOWING DEDUCTION OF RS.3 00 000 ON ACCOUNT OF SALE PROMOT ION EXPENSES. 6. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN ALLOWING DEDUCTION OF RS.70 000/- AS GIFT EXPENSES. 7. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN A LLOWING DEDUCTION OF RS.50 000/- BEING STAFF WELFARE EXPENS ES. ITA 1771/AHD/2006 2 8. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.1 47 100/- MADE BY THE AO OUT OF FOREIGN TRAVEL EXPENSES. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER. 10.. IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE SET-ASIDE AND THAT OF THE ASSESSING OFFICER BE REST ORED TO THE ABOVE EXTENT 2. ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL F ACTS IN BRIEF AS PER RELEVANT ORDERS ARE THAT THE RETURN DECLARING INCOME OF RS. 4 25 882/- FILED ON 30.11.2003 BY THE ASSESSEE ASSEMBLING COMPUTER SERVERS AND PR OVIDING SERVICE AFTER BEING PROCESSED ON 9.1.2004 U/S 143(1) OF THE INCOME-TAX ACT 1961[HEREINAFTER REFERRED TO AS THE ACT] WAS TAKEN UP FOR SCRUTIN Y WITH THE ISSUE OF NOTICE U/S 143(2) OF THE ACT ON 30.9.2004. DURING THE COURSE O F ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE CREDITED INCENTIVES OF RS. 3 29 780/- INCLUDING AN AMOUNT OF RS.49 537/ & RS. 66 212/- FROM MICROTECH. THE AO WAS OF THE OPINION THAT THESE IN CENTIVES PERTAINED TO THE AHMEDABAD OFFICE. TO A QUERY BY THE AO THE ASSESSE E EXPLAINED THAT INCENTIVE INCOME BOOKED IN SILVASSA UNIT IS DIRECTLY RELATED TO THE VOLUME OF PURCHASES EFFECTED DURING THE ENTIRE YEAR WHICH IS ABOUT 95 TIMES OF THE PURCHASES EFFECTED IN AHMEDABAD. THE AO HOWEVER OBSERVED T HAT THE ASSESSEE WAS IN THE PRACTICE OF RAISING MAINTENANCE BILL AT ITS AHM EDABAD OFFICE WHILE THE AMOUNT OF RS.49 537 WAS PAID FOR THE MAINTENANCE CHARGES B Y ACER INDIA AND SIMILARLY THE SUM OF RS.66 212 WAS RECEIVED FROM ACER INDIA. ACCORDINGLY THE INCENTIVES OF RS.49 537 AND RS.66 212 WERE TREATED AS INCOME O F AHMEDABAD UNIT . WITH REGARD TO THE INCENTIVES OF RS. 3 LACS FROM MICRO T ECH THE ASSESSEE EXPLAINED THAT THE INCENTIVES IN THE TRANSACTION OF OKAYA IND USTRIES PERTAINED TO SALES MADE IN THEAY 2002-03. THE INCENTIVES WERE TO BE RECEI VED ON THE PURCHASE OF TOTAL NUMBER OF COMPUTER EFFECTED DURING THE PREVIOUS YEA R. THE INCENTIVE INCOME BOOKED IN SILVASSA BOOKS OF ACCOUNTS IS DIRECTLY RE LATED TO THE VOLUME OF ITA 1771/AHD/2006 3 PURCHASE EFFECTED DURING THE ENTIRE YEAR THE ASSES SEE PLEADED. HOWEVER THE AO DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE ON THE GROUND THAT IF THE INCENTIVES WERE BASED ON THE PURCHASES THE ASSESSE E SHOULD HAVE MADE A PROVISION IN HIS BOOKS AND THAT MICROTECH HAD NOT MADE ANY PAYMENT. ACCORDINGLY THE AO TREATED AN AMOUNT OF RS. 4 15 7 49/- AS INCOME OF THE AHMEDABAD UNIT AND REDUCED THE INCOME OF SILVASSA U NIT TO THAT EXTENT. 2.1. ON APPEAL THE ASSESSEE WHILE REITERATING T HEIR SUBMISSIONS BEFORE THE AO CONTENDED THAT THE INCENTIVES ON TRANSACTION OF ACE R INDIA PRIVATE LIMITED PERTAINED TO THE SALES MADE IN THE AY 2002-03. THE SE INCENTIVES WERE TO BE RECEIVED ON PURCHASE OF TOTAL COMPUTER EFFECTED DU RING THE PREVIOUS YEAR AND HAD NOTHING TO DO WITH MAINTENANCE CHARGES AS POINT ED OUT BY THE AO. THE ASSESSEE POINTED OUT THAT THE TOTAL PURCHASES IN TH E AY 2002-03 IN THE BOOKS OF AHMEDABAD BRANCH WERE RS.1 51 720/- WHILE IN THE BO OKS OF SILVASSA BRANCH WERE RS.1 44 29 000/- AND THIS TREND CONTINUED IN T HE YEAR UNDER CONSIDERATION. THE INCENTIVE CHEQUE OF RS.3 00 000/- IS DEPOSITED IN BANK ACCOUNT PERTAINING TO SILVASSA UNIT AND AS SUCH IT SHOULD BE CONSIDERED A S INCOME OF THE SILVASSA UNIT.THE A.O. FAILED TO APPRECIATE THE FACT THAT TH E INCENTIVE AMOUNT OF RS.66 212/- IS DIRECTLY CREDITED IN INCENTIVE ACCOU NT AND DOES NOT REPRESENT ANY MAINTENANCE CHARGES BUT IS INCOME OF SILVASSA UNIT. THE ASSESSEE ALSO ENCLOSED A NUMBER OF DOCUMENTS IN SUPPORT. IN THE LIGHT OF THESE SUBMISSIONS THE LD. CIT(A) DELTED THE ADDITION IN THE FOLLOWING TERMS:: 2.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE AUTHOR ISED REPRESENTATIVE CAREFULLY AND HAVE GONE THROUGH THE OBSERVATIONS OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. CONSIDERING THE VOLUME OF PURCHASES IN SILVASSA UNIT IT IS APPARENT THAT INCENTIVE IS RELATED TO SILVASSA UNIT AND IT HAS BEEN RECEIVED I N SILVASSA UNIT AND IT HAS NOTHING TO DO WITH MAINTENANCE CHARGES. IN VIEW OF THE ABOVE FACTS THE ASSESSING OFFICER IS DIRECTED TO C ONSIDER THE INCENTIVE AS INCOME OF SILVASSA UNIT AND NOT AS INC OME OF AHMEDABAD OFFICER. THIS GROUND OF THE APPELLANT IS ALLOWED. ITA 1771/AHD/2006 4 2.2. THE REVENUE IS NOW IN APPEAL BEFORE US AG AINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF TH E LD. CIT(A). 2.3. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. SINCE THE REVENUE HAVE NOT PLACED BEFORE US ANY MAT ERIAL CONTROVERTING THE AFORESAID FINDINGS OF FACTS RECORDED BY THE LD. CIT (A) THAT INCENTIVE IS RELATED TO SILVASSA UNIT AND IT HAS BEEN RECEIVED IN SILVASSA UNIT ONLY WE ARE NOT INCLINED TO INTERFERE. ACCORDINGLY GROUND NO.1 IS DISMISSED. 3. GROUND NO.2 PERTAINS TO DEDUCTION OF RS.72 52 57 1/- U/S 80IB OF THE ACT ON THE ELIGIBLE PROFITS OF SILVASA UNIT. THE AO WAS OF THE OPINION THAT THE ACTIVITY OF THE ASSESSEE IN ASSEMBLING THE COMPUTERS AND SERVER S DID NOT FALL WITHIN THE AMBIT OF OF MANUFACTURE OR PRODUCTION. THE AO NO TICED THAT THAT THE ASSESSEE DURING THE YEAR HAD OPENING STOCK OF 182 COMPUTER S YSTEMS (BASIC) AND HAD PURCHASED 105 COMPUTER SYSTEM (BASIC) OUT OF WHICH 272 COMPUTER SYSTEMS WERE SOLD TO BSNL AND SAI INFO SYSTEMS AHMEDABAD AFTER ADDING ITEMS SUCH AS MOUSE PAD OPERATING MANUAL PROTECTION COVER SE T AND SOFTWARE. FURTHER THE ASSESSEE HAD PLUGGED OUT THE KEY BOARD MONITOR IF REQUIRED AND MOUSE ON THE CABINET WHICH ALSO DID NOT AMOUNT TO MANUFACTURING AND THAT THE ASSESSEE HAD PURCHASED THE BASIC COMPUTER WHICH WAS ALREADY ASS EMBLED BY THE SELLER. SIMILARLY FOR THE SERVERS AFTER ADDING CERTAIN ITEM S THE SAME WERE SOLD TO SHREE SAI COMPUTECH P LTD AHMEDABAD WHICH IS NOT A MANU FACTURING ACTIVITY. AFTER ANALYZING THE PROCESS OF MANUFACTURING OF THE ASSES SEE SINCE THE INDUSTRIAL UNIT OF THE ASSESSEE WAS NOT FOUND TO BE BRINGING IN TO EXISTENCE A NEW PRODUCT WITH DISTINCT COMMERCIAL NAME NOR EMPLOYED MORE THAN TE N EMPLOYEES FOR THE FULL YEAR THE AO REJECTED THE CLAIM FOR DEDUCTION U/S 8 0IB OF THE ACT FOR THE YEAR UNDER CONSIDERATION EVEN WHEN IN THE AY 2001-02 A SIMILAR CLAIM HAD BEEN ALLOWED BY THE AO HIMSELF. 3.1. ON APPEAL WHILE EXPLAINING THE MANUFACTURING PROCESS THE ASSESSEE REITERATED THEIR SUBMISSIONS BEFORE THE AO AND RELI ED UPON A NUMBER OF ITA 1771/AHD/2006 5 DECISIONS. IN THE LIGHT OF THESE SUBMISSIONS THE L D. CIT(A) ALLOWED THE CLAIM IN THE FOLLOWING TERMS: 3.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE AUTHO RISED REPRESENTATIVE CAREFULLY AND HAVE ALSO CONSIDERED T HE OBSERVATIONS MADE BY THE ASSESSING OFFICER IN THE A SSESSMENT ORDER. FROM A PERUSAL OF THE ASSESSMENT IT IS OBS ERVED THAT THE ASSESSING OFFICER HAS NOT ALLOWED DEDUCTION U/S 80- IB OF THE ACT ON THE GROUND THAT ACTIVITY OF THE APPELLANT IS NOT MA NUFACTURING ACTIVITY. IT IS OBSERVED THAT IN EARLIER YEAR I.E. A.Y. 2001-02 THE ASSESSING OFFICER HAS ALLOWED DEDUCTION U/S 80-IB O F THE ACT CONSIDERING THE FACT THAT THE APPELLANT HAS CARRIED ON MANUFACTURING ACTIVITY AND THERE HAS BEEN NO CHANGE IN THE MANUFA CTURING PROCESS AND THE ARTICLES PRODUCED ARE SAME AS IN EA RLIER YEAR. BY ASSEMBLING VARIOUS COMPONENTS BY CARRYING ON QUALI TY CONTROL THROUGH TESTING EQUIPMENTS THE APPELLANT HAS MANUF ACTURED COMPUTERS AND SERVERS WHICH ARE ENTIRELY NEW AND DI STINCT PRODUCTS DIFFERENT FROM THE VARIOUS COMPONENTS UTILIZED. TH E SECOND GROUND ON WHICH THE ASSESSING OFFICER HAS NOT ALLOWED DEDU CTION IN 80-IB IS THAT THE APPELLANT HAS CARRIED ON THE PROCESS WI THOUT THE AID OF POWER AND THE REQUIRED CONDITION OF EMPLOYMENT OF 2 0 WORKERS IS NOT SATISFIED BY THE APPELLANT. EVEN IN EARLIER YE AR IT HAS BEEN THE SAME SITUATION MANUFACTURING WORK WAS CARRIED OUT WITH THE AID OF POWER AND MORE THAN 10 WORKERS WERE THERE. THE APP ELLANT HAS EXPLAINED THE PROCESS OF MANUFACTURING IN DETAIL. AS EXPLAINED BY THE AUTHORISED REPRESENTATIVE THE VARIOUS STEPS OF MANUFACTURING PROCESS CAN ONLY BE CARRIED OUT WITH THE SAID AID O F POWER. AS CITED BY THE AUTHORISED REPRESENTATIVE HONBLE ALLAHABAD IN THE CASE OF CIT VS U.P. STATE AGRO INDUSTRIAL CORPORATION LTD R EPORTED IN 188 ITR 372 (ALL) HAS HELD THAT ASSEMBLING OF VARIOUS P ARTS OF TRACTOR AMOUNTS TO MANUFACTURE. THE SAME NUMBER OF WORKERS RENDERED THEIR SERVICES IN EARLIER YEAR. THE APPELLANT IS A LSO SUBJECT TO EXCISE DUTY WHICH SHOWS THAT THE ACTIVITY CARRIED O N BY THE APPELLANT IS MANUFACTURING. WHAT IS REQUIRED AS PE R THE PROVISIONS OF SECTION 80IB OF THE I.T. ACT IS THAT THE AVERAGE NUMBER OF EMPLOYEES SHOULD BE WORKED OUT WHICH SHOULD NOT BE LESS THAN TEN AND IT WOULD SUFFICE IF ON AN AVERAGE THERE ARE T EN WORKERS EMPLOYED IN THE UNDERTAKING EVEN THOUGH THE NUMBER OF WORKERS EMPLOYED DURING SOME PART OF THE PREVIOUS YEAR IS L ESS THAN TEN. THIS IS SUPPORTED BY JUDICIAL RATIO LAID DOWN IN TH E DECISIONS CITED BY THE AUTHORISED REPRESENTATIVE IN THE SUBMISSION HER EIN ABOVE. EVEN OTHERWISE AS HELD BY DELHI HIGH COURT IN THE C ASE OF CIT VS. TALUJA ENTERPRISES (P) LTD REPORTED IN 250 ITR 675 (DEL) EVEN EMPLOYMENT DURING SUBSTANTIAL PERIOD OR SUBSTANTIAL PRODUCTION WOULD BE SUFFICIENT. FURTHER IN THE CASE OF CIT VS . GUJARAT VS. SATELLITE ENGINEERING LTD REPORTED IN 113 ITR 208 ( GUJ) IT WAS HELD ITA 1771/AHD/2006 6 THAT AN UNDERTAKING IF FULFILS CONDITIONS IN SUBSEQ UENT YEARS THOUGH IT DOES NOT FULFIL THE CONDITION FOR RELIEF U/S 80J IN FIRST YEAR AFTER COMMENCEMENT OF PRODUCTION IT WOULD BE ENTITLED TO RELIEF IN SUBSEQUENT YEARS U/S 80J OF THE I.T. ACT. IN THE I NSTANT CASE THE APPELLANT HAS BEEN ALLOWED DEDUCTION U/S 80IB IN EA RLIER YEARS AS HE HAS SATISFIED THE CONDITIONS FOR ELIGIBILITY U/S 80IB. THEREFORE FOLLOWING THE RATIO OF THE ABOVE CASE THE APPELLANT SHOULD BE ALLOWED DEDUCTION U/S 80IB AS THERE IS NO CHANGE IN THE PROCESS PRODUCT AND NUMBER OF WORKERS EMPLOYED. FURTHER TH E APPELLANT HAS MADE PRIOR PERIOD ADJUSTMENT FOR SALARY OF EMPL OYEES WORKED AT SILVASSA UNIT BUT ACCOUNTED IN AHMEDABAD OFFICE. THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT TH ESE WORKERS HAVE WORKED AT SILVASSA UNIT. IF THE FACT THAT THESE WO RKERS HAVE WORKED AT SILVASSA UNIT IS ACCEPTED AS IT HAS NOT BEEN DIS PUTED BY THE ASSESSING OFFICER THEN THE NUMBER OF WORKERS WORKI NG IN SILVASSA UNIT THROUGHOUT THE YEAR WILL BE MORE THAN TEN. IN MY VIEW THE PRIOR PERIOD ADJUSTMENT IS A GENUINE ADJUSTMENT WHICH SHO ULD BE ACCEPTED AND ACCORDINGLY THE PROFIT OF SILVASSA UNI T SHOULD BE TAKEN AS RS.72 52 571/-. IN VIEW OF THE ABOVE FACTS AS THE APPELLANT HAS CA RRIED ON MANUFACTURING ACTIVITY WITH THE AID OF POWER AND HA S EMPLOYED MINIMUM 10 WORKERS THE APPELLANT IS ELIGIBLE FOR D EDUCTION U/S 80IB OF THE ACT. ACCORDINGLY THE ASSESSING OFFICER IS DIRECTED TO ALLOW DEDUCTION U/S 80-IB OF THE ACT. 3.2. THE REVENUE IS NOW IN APPEAL BEFORE US A GAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR WHILE CARRYING US THRO UGH THE IMPUGNED ORDERS RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF THE LD. CIT(A) IN THE LIGHT OF DECI SION OF THE HONBLE APEX COURT IN THE CASE OF ITO VS. ARIHANT TILES AND MARBLES P LT D. 320 ITR 79(SC).. 3.3 WE HAVE HEARD BOTH THE PARTIES AND G ONE THROUGH THE FACTS OF THE CASE. UNDISPUTEDLY CLAIM FOR DEDUCTION U/S 80IB HAS BEE N ALLOWED IN THE . A.Y. 2001-02 ON THE GROUND THAT THE ASSESSEE HAS CARRI ED ON MANUFACTURING ACTIVITY WHILE THERE HAS BEEN NO CHANGE IN THE MANUFACTURING PROCESS OR THE ARTICLES PRODUCED IN THE YEAR UNDER CONSIDERATION . THE LD. CIT(A) CONCLUDED IN THE IMPUGNED ORDER THAT ASSEMBLING VARIOUS COMPONENTS B Y CARRYING ON QUALITY CONTROL THROUGH TESTING EQUIPMENTS THE ASSESSEE M ANUFACTURED COMPUTERS AND SERVERS WHICH ARE ENTIRELY NEW AND DISTINCT PRODUC TS DIFFERENT FROM THE VARIOUS ITA 1771/AHD/2006 7 COMPONENTS UTILIZED. THE SAME NUMBER OF WORKERS RE NDERED THEIR SERVICES IN EARLIER YEAR WHILE THE ASSESSEE IS ALSO SUBJECT TO EXCISE DUTY WHICH SHOWS THAT THE ACTIVITY CARRIED ON BY THE ASSESSEE IS MANUFACT URING. THE LD. CIT(A) FURTHER OPINED IN THE LIGHT OF VARIOUS JUDICIAL PRECEDENTS THAT THE AVERAGE NUMBER OF EMPLOYEES SHOULD NOT BE LESS THAN TEN AND IT WOULD SUFFICE IF ON AN AVERAGE THERE ARE AT LEAST TEN WORKERS EMPLOYED IN THE UNDE RTAKING EVEN THOUGH THE NUMBER OF WORKERS EMPLOYED DURING SOME PART OF THE PREVIOUS YEAR IS LESS THAN TEN. THE REVENUE HAVE NOT PLACED BEFORE US ANY MA TERIAL CONTROVERTING THE AFORESAID FINDINGS OF THE LD. CIT(A) 3.31 IN A RECENT DECISION IN THE CASE OF ARIHANT TILES AND MARBLES P LTD.(SUPRA) HONBLE APEX COURT WHILE ADJUDICATING AN ISSUE AS T O WHETHER CONVERSION OF MARBLE BLOCKS BY SAWING IN TO SLABS AND TILES AND POLISHING AMOUNTS TO MANUFACTURE OR PRODUCTION WITHIN THE MEANING OF P ROVISIONS OF SEC. 80IA OF THE ACT CONCLUDED AS UNDER: IN THE CASE OF COMMISSIONER OF INCOME TAX VS.SESA G OA LTD. REPORTED IN 271 ITR 331 (SC) THE MEANING OF THE WORD 'PRODU CTION' CAME UP FOR CONSIDERATION. THE QUESTION WHICH CAME BEFORE THIS COURT WAS WHETHER THE ITAT WAS JUSTIFIED IN HOLDING T HAT THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 32A OF THE INCO ME TAX ACT 1961 IN RESPECT OF MACHINERY USED IN MINING ACTIVITY IGNORI NG THE FACT THAT THE ASSESSEE WAS ENGAGED IN EXTRACTION AND PROCESSING O F IRON ORE NOT AMOUNTING TO MANUFACTURE OR PRODUCTION OF ANY ARTIC LE OR THING.THE HIGH COURT IN THAT CASE WHILE DISMISSING THE APPEAL PRE FERRED BY THE REVENUE HELD THAT EXTRACTION A ND PROCESSING OF IRON ORE DID NOT AMOUNT TO 'MANUFACTURE'. HOWEVER IT CAME TO TH E CONCLUSION THAT EXTRACTION OF IRON ORE AND THE VARIOU S PROCESSES WOULD INVOLVE 'PRODUCTION' WITHIN THE MEANI NG OF SECTION 32A(2)(B) (III) OF THE INCOME TAX ACT 1961 AND CONSEQUENTLY THE ASSESSEE WAS ENTITLED TO THE BENEFIT OF INVESTMENT ALLOWANCE UNDER SECTION 32A OF THE INCOME TAX ACT. IN THAT MAT TER IT WAS ARGUED ON BEHALF OF THE REVENUE THAT EXTRACTION AND PROCESSIN G OF IRON ORE DIDNOT PRODUCE ANY NEW PRODUCT WHEREAS IT WAS ARGUED ON BE HALF OF THE ASSESSEE THAT IT DID PRODUCE A DISTINCT NEW PRODUCT . THE VIEW EXPRESSED BY THE HIGH COURT THAT THE ACTIVITY IN QUESTION CON STITUTED 'PRODUCTION' HAS BEEN AFFIRMED BY THIS COURT IN SESA GOA'S CASE SAYI NG THAT THE HIGH COURT'S OPINION WAS UNIMPEACHABLE. IT WAS HELD BY THIS COURT THAT THE WORD 'PRODUCTION' IS WIDER IN AMBIT AND IT HAS A WI DER CONNOTATION THAN THE WORD 'MANUFACTURE'. IT WAS HELD THAT WHILE EVERY MA NUFACTURE CAN ITA 1771/AHD/2006 8 CONSTITUTE PRODUCTION EVERY PRODUCTION DID NOT AMOUNT TO MANUFACTURE. IN THE CASE OF COMMISSIONER OF INCOME TAX VS.N.C. B UDHARAJA & CO. REPORTED IN 204 ITR 412 (SC) THE QUESTION WHICH AR OSE FOR DETERMINATION BEFORE THIS COURT WAS WHETHER CONSTRUCTION OF A DAM TO STORE WATER (RESERVOIR) CAN BE CHARA CTERISED AS AMOUNTING TO MANUFACTURING OR PRODUCING AN ARTI CLE. IT WAS HELD THAT THE WORD 'MANUFACTURE' AND THE WORD 'PRODUCTION' HA VE RECEIVED EXTENSIVE JUDICIAL ATTENTION BOTH UNDER THE INCOME TAX AS WELL AS UNDER THE CENTRAL EXCISE AND THE SALES T AX LAWS. THE TEST FOR DETERMINING WHETHER R'MANUFACTURE' CAN B E SAID TO HAVE TAKEN PLACE IS WHETHER THE COMMODITY WHICH IS SUBJECTED TO A PROCESS CAN NO LONGER BE REGARDED AS THE ORIGINAL COMMODITY BUT IS RECOGNISED IN TRADE AS A NEW AND DISTINCT COMMODITY .THE WORD 'PRODUCTION' WHEN USED IN JUXTAPOSITION WITH THE W ORD 'MANUFACTURE' TAKES IN BRINGING INTO EXISTENCE NEW GOODS BY A PRO CESS WHICH MAY OR MAY NOT AMOUNT TO MANUFACTURE. THE WORD 'PRODUCTI ON' TAKES IN ALL THE BYPRODUCTS INTERMEDIATE PRODUCTS AND RESIDUAL PROD UCTS WHICH EMERGE IN THE COURSE OF MANUFACTURE OF GOODS. BEFORE CONCLUDING WE WOULD LIKE TO MAKE ONE OBSERVATION. IF THE CONTENTION OF THE DEPARTMENT IS TO BE ACCEPT ED NAMELY THAT THE ACTIVITY UNDERTAKEN BY THE RESPONDENTS HEREIN IS NO T A MANUFACTURE THEN IT WOULD HAVE SERIOUS REVENUE CONSEQUENCES. AS S TATED ABOVE EACH OF THE RESPONDENTS IS PAYING EXCISE DUTY SOME OF T HE RESPONDENTS ARE JOB WORKERS AND THE AC TIVITY UNDERTAKEN BY THEM HAS BEEN RECOGNISED BY VARIOUS GOVERNMENT AUTHORIT IES AS MANUFACTURE. TO SAY THAT THE ACTIVITY WILL NOT AMOUNT TO MANUFAC TURE OR PRODUCTION UNDER SECTION 80IA WILL HAVE DISASTROUS CONSEQUENCES PAR TICULARLY IN VIEW OF THE FACT THAT THE ASSESSEES IN ALL THE CASES WOULD PLEA D THAT THEY WERE NOT LIABLE TOPAY EXCISE DUTY SALES TAX ETC. BECAUSE TH E ACTIVITY DID NOT CONSTITUTE MANUFACTURE. KEEPING IN MIND THE ABOV EFACTORS WE ARE OF THE VIEW THAT IN THE PRESENT CASES THE ACTIVITY UNDERTAKEN BY EACH OF THE RESPONDENTS CONSTITUTES MANUFACTURE OR PRODUCTION AND THEREFORE THEY WOULD BE ENTITLED TO THE BENEFIT OF SECTION 80IA OF THE INCOME TAX ACT 1961. 3.32 IN THE INSTANT CASE ALSO THE ASSESSEE HAS BE EN PAYING EXCISE DUTY AS IN WAS THE CASE IN THE AFORECITED DECISION. AS POINTED OUT BY THE LD. CIT(A) WHILE ASSEMBLING VARIOUS COMPONENTS BY CARRYING ON QUALI TY CONTROL THROUGH TESTING EQUIPMENTS THE ASSESSEE MANUFACTURED COMPUTERS AND SERVERS WHICH ARE ENTIRELY NEW AND DISTINCT PRODUCTS DIFFERENT FROM T HE VARIOUS COMPONENTS UTILIZED. ITA 1771/AHD/2006 9 THESE FINDINGS HAVE NOT BEEN DISPUTED BEFORE US NOR THE REVENUE HAVE PLACED BEFORE US ANY MATERIAL SO AS TO ENABLE US TO TAKE A DIFFERENT VIEW IN THE MATTER. 3.33 . EVEN OTHERWISE AS ALREADY STATED THE CLA IM FOR DEDUCTION HAS BEEN ALLOWED BY THE AO IN THE AY 2001-02 .IT IS WELL-SET TLED IN TERMS OF PRINCIPLE OF CONSISTENCY THAT THE VIEW ADOPTED BY THE ASSESSING OFFICER IN A PARTICULAR YEAR SHOULD NOT BE DEVIATED FROM IN THE SUBSEQUENT YEARS UNLESS THERE IS SOME CHANGE IN THE LEGAL OR FACTUAL SCENARIO JUSTIFYING DEPARTURE THEREFROM. IN THE CASE OF CIT V. A.R.J. SECURITY PRINTERS [2003] 264 ITR 276 (DELHI) WHEN THE DEPARTMENT WANTED TO NEGATIVE THE ASSESSEE'S CLAIM WHICH WAS ACCEPTED IN THE PAST THE HON'BLE HIGH COURT HELD THAT; 'HAVING ACC EPTED IN THREE ASSESSMENT YEARS THAT THE ASSESSEE'S BUSINESS ACTIVITY OF PRIN TING LOTTERY TICKETS FALL WITHIN THE AMBIT OF SECTION 80-I THE REVENUE CANNOT BE ALLOWE D TO TURN AROUND AND CONTEND THAT THE DEDUCTION UNDER THE SAID SECTION IS NOT AL LOWABLE IN RESPECT OF THE ASSESSMENT YEARS IN QUESTION'. THE SLP FILED BY THE REVENUE AGAINST THIS JUDGMENT STANDS DISMISSED IN [2004] 266 ITR 4 (ST.) . 3.33. THE PRINCIPLE OF CONSISTENCY HAS BEEN FOLLOWE D BY IN SEVERAL CASES INCLUDING IN ARIHANT BUILDERS DEVELOPERS & INVESTOR S (P.) LTD V. ITAT [2005] 277 ITR 239 (MP) ASSTT. CIT V. GENDALAL HAZARILAL & CO. [2003 ] 263 ITR 679 (MP) CIT V. NEO POLY PACK (P.) LTD [2000] 245 ITR 492 (DELHI) 4. DHANSIRAM AGARWALLA V. CIT [1996] 217 ITR 4 (GAUHATI). CIT V. SHIV SAGAR ESTATE [2002] 257 ITR 59 (SC) UNION OF INDIA V. SATISH PANNALAL SHAH [2001] 249 ITR 221 (SC).IN THE CASE OF CWT V. M.K. GUPTA [1990] 185 ITR 393 (DELHI) THE TRIBUNAL APPLIED THE SAME VALUE OF PROPERTY WHICH WAS CONSID ERED IN THE CASE OF OTHER CO- OWNERS. THE HON'BLE HIGH COURT DECLINED TO INTERFER E WITH THE TRIBUNAL'S VIEW BY DISMISSING THE REVENUE'S APPEAL. IN VIEW OF THE FOR EGOING LEGAL POSITION EMANATING FROM THE JUDICIAL PRONOUNCEMENTS IT IS C LEAR THAT THE PRINCIPLE OF CONSISTENCY DOES NOT EMPOWER THE ASSESSING OFFICER TO DEVIATE FROM THE STAND TAKEN BY HIM IN THE PREVIOUS YEAR UNLESS FACTUAL OR LEGAL POSITION JUSTIFIES DEPARTURE IN THE INSTANT YEAR. IN OUR CONSIDERED OP INION THE AO WAS NOT JUSTIFIED ITA 1771/AHD/2006 10 IN REFUSING DEDUCTION UNDER SECTION 80-IB IN THE YE AR UNDER CONSIDERATION WITHOUT DISTURBING THE CLAIM IN THE INITIAL ASSESSMENT YEAR . 3 .34 HONBLE JURISDICTIONAL HIGH COURT IN THE C ONTEXT OF PROVISIONS OF SEC. 80J OF THE ACT HELD IN THE CASE OF SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES VS. CIT 123 ITR 669(GUJ) THAT THE TRIBUNAL WAS PERFECTL Y JUSTIFIED IN TAKING THE VIEW THAT IF THE RELIEF OF TAX HOLIDAY WAS GRANTED TO TH E ASSESSEE-COMPANY FOR THE ASSESSMENT YEAR 1968-69 THE ASSESSEE WAS ENTITLED TO CONTINUANCE OF THAT RELIEF FOR THE SUBSEQUENT FOUR YEARS AND THE ITO WOULD NOT BE JUSTIFIED IN REFUSING TO CONTINUE THE ALLOWANCE FOR THE ASSESSMENT YEAR UNDE R REFERENCE I.E. 1969-70 WITHOUT DISTURBING THE RELIEF FOR THE INITIAL YEAR. SIMILAR VIEW WAS TAKEN IN CIT VS. BHILLAI ENGINEERING CORPORATION PVT. LTD. 133 ITR 6 87(MP) 3.35 IN VIEW OF THE FOREGOING ESPECIALLY WHE N DEDUCTION U/S 80 IB OF THE ACT HAS BEEN ALLOWED IN THE AY 2001-02 WE ARE NOT I NCLINED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A) ACCORDINGLY GROUND NO.2 IN THE APPEAL IS DISMISSED. 4. GROUND NO.3 IN THE APPEAL PERTAINS TO DEDUCTION OF INCENTIVE OF RS.75 000 PAID TO SHRI NISHANT DHOLAKIA. THE AO NOTICED THAT THAT THE ASSESSEE DEBITED A SUM OF RS.84 292 ON ACCOUNT OF INCENTIVE IN AHMEDAB AD OFFICE. TO A QUERY BY THE AO THE ASSESSEE EXPLAINED THAT THE AMOUNT OF R S.75 000 PAID TO SHRI NISHANT DHOLAKIA BY CHEQUE NO.013074 DATED 23-07-20 02 DRAWN ON CENTRAL BANK OF INDIA WAS IN THE NATURE OF COMMISSION PAI D TO HIM ON SUCCESSFUL EXECUTION OF A PURCHASE ORDER. HOWEVER THE AO CO NCLUDED THAT SINCE THE ASSESSEE IS CARRYING ON BUSINESS WITH BSNL AND SUPP LY IS BASED ON TENDER SYSTEM WHILE THE RECORDS INDICATED THAT NO SERVICES WERE RENDERED BY NISHANT DHOLAKIA THE PAYMENT TO SHRI NISHANT DHOLAKIA WAS NOT GENUINE. ACCORDINGLY THE AO DISALLOWED THE CLAIM. 4.1 ON APPEAL THE REITERATED THEIR SUBMISSIONS BEFORE THE AO. THE LD. CIT(A) DELETED THE ADDITION HOLDING AS UNDER: ITA 1771/AHD/2006 11 5.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE AUTHOR ISED REPRESENTATIVE CAREFULLY AND HAVE ALSO CONSIDERED T HE OBSERVATIONS MADE BY THE ASSESSING OFFICER IN THE A SSESSMENT ORDER. THE APPELLANT HAS OBTAINED AN ORDER OF RS. 93 LAKHS FROM BSNL. FOR SUCCESSFUL PROCURING OF THE SAID ORDER THE APPELLANT HAS PAID COMMISSION TO MR. NISHANT DHOLAKIA FOR HIS EFFORTS. THE EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF BU SINESS AND PAYMENT HAS BEEN MADE BY CHEQUE FOR SERVICES RENDER ED. HENCE THERE IS NO JUSTIFICATION FOR DISALLOWANCE OF INCEN TIVE EXPENSES OF RS.75 000/-. ACCORDINGLY THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS DELETED. 4.2 . THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF TH E LD. CIT(A). 4.3. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. SINCE THE REVENUE HAVE NOT PLACED BEFORE US ANY MAT ERIAL CONTROVERTING THE AFORESAID FINDINGS OF FACTS RECORDED BY THE LD. CIT (A) THAT THE COMMISSION HAS BEEN TO MR. NISHANT DHOLAKIA FOR HIS EFFORTS IN S ECURING AN ORDER OF RS. 93 LACS FROM BSNL AND THAT THE EXPENDITURE HAS BEN INCURRE D FOR SERVICES RENDERED THERE IS NO BASIS FOR TAKING A DIFFERENT VIEW IN TH E MATTER. ACCORDINGLY GROUND NO.3 IS DISMISSED. 5. GROUND 4 PERTAINS TO DEPRECIATION OF RS. 1 17 63 1 ON SOFTWARE PURCHASE OF RS. 3 92 104 AND DEDUCTION OF RS.6 40 000 AS SOFTWA RE CONSULTANCY CHARGES. THE AO NOTICED DURING THE COURSE OF ASSESSMENT PRO CEEDINGS THAT THE ASSESSEE MADE PAYMENT OF RS.10 32 104.75 TO SHRI VI JAY MANDALA ON VARIOUS DATES IN CASH AS WELL AS BY CHEQUE FOR WHICH TWO JOURNAL ENTRIES OF RS.6 40 000 BEING SOFTWARE CONSULTANCY CHARGES AND RS.3 92 104 BEING COMPUTER SOFTWARE WERE MADE. THE ACCOUNTS WERE SQUARED UP BY TREATIN G RS.6 40 000 AS REVENUE EXPENDITURE AND RS.3 92 104 AS CAPITAL EXPENDITURE AND DEPRECIATION CLAIMED THEREON WHICH CAME TO RS. 1 17 631. THE AO FOUND O N VERIFICATION THAT COMPUTER SOFTWARE WAS PURCHASED ON 13-10-2002 AND WAS NOT PU T TO USE. AS REGARDS EXPENDITURE OF RS.6 40 000 THE AO OBSERVED THAT THERE WAS NOTHING TO SUGGEST ITA 1771/AHD/2006 12 THAT THESE PAYMENTS WERE FOR BUSINESS PURPOSES. A CCORDINGLY THE AO PROPOSED TO DISALLOW THE EXPENDITURE OF RS.6 40 000 AND THE DEPRECIATION CLAIMED ON THE EXPENDITURE TREATED AS CAPITAL EXPENDITURE. TO A Q UERY BY THE AO THE ASSESSEE EXPLAINED THAT THAT HE HAD PURCHASED SOFTWARE FOR M ODULE-WISE ERP FOR PRODUCTION PLANNING AND INVENTORY CONTROL( PPIC) FO R KEEPING THE PRODUCTION PROCESS AND THE INVENTORY CONTROL PROCESS AT SILVAS SA ONLINE FROM AHMEDABAD. MANY TRIAL ERPS WERE TESTED ALONG WITH THE ONE PURC HASED FROM SHRI VIJAY M MANDORA. NONE OF THESE WERE FOUND TO BE LONG LASTI NG AND REQUIRED MORE THAN 80% CUSTOMIZATION. IT WAS POINTED OUT THAT THE INTE RNET/WAN CONNECTIVITY LINK BETWEEN SILVASSA AS A RESULT OF WHICH REPEATED ERPS ON VARIOUS PLATFORMS WERE REQUIRED TO BE TRIED AND TESTED FOR AT LEAST 2 YEAR S UNTIL A STABLE AND FULLY FUNCTIONAL E4RP WAS RECEIVED . THE MODULE BECAME REDUNDANT WITH THE CHANGE IN TECHNOLOGY FOR UPLOADING / DOWNLOADING / INTERNE T CONNECTIVITY I.E. DIAL-UP CONNECTION TO LEASE LINE ETC. AS A RESULT SINCE I T WAS NOT CONSTRUING BENEFIT OVER A PERIOD OF NOT MORE THAN ONE YEAR IT WAS TAKEN AS A REVENUE ITEM. IN THE NEXT YEAR IT GOT SCRAPPED AND AGAIN AFTER WHICH TWO MOR E SOFTWARES WERE TRIED FOR ANOTHER TWO YEARS. ULTIMATELY IN THE CURRENT YEAR THE ASSESSEE WAS STILL IN PROCESS FOR FINDING A PROPER ERP FOR RUNNING OF THE FUNCTIONALITIES OF PRODUCTION PLANNING AND INVENTORY CONTROL. THE ASSESSEE HAD A LSO PURCHASED MODULE FOR HUMAN RESOURCES TO MANAGE HR ACTIVITIES. SINCE IT WAS FOUND TO BE IN A STABLE CONDITION WITH ONLY 25% CUSTOMIZATION IT WAS DECID ED TO PUT IT TO USE AND HENCE THE SAME WAS CAPITALIZED IN THE SAME YEAR. AT PRES ENT THE ASSESSEE WAS STILL USING THE HR ERP PURCHASED FROM SHRI VIJAY M MANDOR A. HOWEVER THE AO DID NOT ACCEPT THE AFORESAID CONTENTIONS OF THE ASSESS EE ON THE GROUND THAT THE ASSESSEE COULD NOT USE THE SOFTWARE NAMELY ERP FOR PRODUCTION PLANNING AND INVENTORY CONTROL (PPIC) DUE TO TECHNICAL DEFECT. THOUGH THE ASSESSEE EXPENDED RS.3 92 104.75 FOR ERP SOFTWARE AND RS.6 4 0 000/- FOR PPIC SOFTWARE THESE WERE NOT PUT TO USE. ACCORDINGLY THE AO DIS ALLOWED SOFTWARE CONSULTANCY CHARGES OF RS.6 40 000/- BESIDES DISALLOWANCE OF DE PRECIATION ON SOFTWARE CAPITALIZED BY THE ASSESSEE. ITA 1771/AHD/2006 13 5.1 ON APPEAL THE ASSESSEE REITERATED HIS SUBMI SSIONS BEFORE THE AO. THE LD. CIT(A) AFTER CONSIDERING THESE SUBMISSIONS DELETED THE DISALLOWANCE IN THE FOLLOWING TERMS: 4.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE AUTHO RISED REPRESENTATIVE CAREFULLY AND HAVE ALSO CONSIDERED T HE OBSERVATIONS MADE BY THE ASSESSING OFFICER IN THE A SSESSMENT ORDER. THE APPELLANT HAD PURCHASED SOFTWARE FOR PR ODUCTION PLANNING AND INVENTORY CONTROL BUT IT WAS NOT FOUND TO BE LONG LASTING. FURTHER DUE TO CHANGE IN TECHNOLOGY THE SOFTWARE BECOMES REDUNDANT AFTER ONE YEAR HENCE THE APPELLA NT HAS RIGHTLY CLAIMED THE COST OF SOFTWARE AS REVENUE EXPENDITURE . THE SOFTWARE MODULE TO MANAGE HUMAN RESOURCES WAS HAVING A LONG LASTING EFFECT OF MORE THAN TWO YEARS. SO THE APPELLANT HA S CAPITALIZED THE SAME AND HAS CLAIMED DEPRECIATION ON THAT. THE APP ELLANT HAS FILED EVIDENCES TO SHOW THAT SOFTWARE MODULE ON HUM AN RESOURCES HAS BEEN USED FOR KEEPING SERVICE RECORDS OF EMPLOY EES. THEREFORE THE CLAIMS MADE BY THE APPELLANT ARE FOU ND TO BE JUSTIFIED. HENCE THE DISALLOWANCE MADE BY THE ASS ESSING OFFICE ARE DELETED. 5.2 . THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF TH E LD. CIT(A). 5.3. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. SINCE THE REVENUE HAVE NOT PLACED BEFORE US ANY MAT ERIAL CONTROVERTING THE AFORESAID FINDINGS OF FACTS RECORDED BY THE LD. CIT (A) THAT I) THE SOFTWARE PURCHASED FOR PRODUCTION PLANNING AND INVENTORY CON TROL WAS NOT FOUND TO BE LONG LASTING DUE TO CHANGE IN TECHNOLOGY AND THE ASSES SEE HAS RIGHTLY CLAIMED THE COST OF SOFTWARE AS REVENUE EXPENDITURE AND II). T HE SOFTWARE MODULE TO MANAGE HUMAN RESOURCES WAS HAVING A LONG LASTING EFFECT OF MORE THAN TWO YEARS AND HAS BEEN USED FOR KEEPING SERVICE RECORDS OF EMPLOY EES WE DO NOT SEE ANY INFIRMITY IN THE AFORESAID FACTUAL FINDINGS RECORDE D BY THE LD. CIT(A). IN FACT SOFTWARE BECOMES OBSOLETE WITH TECHNOLOGICAL INNOVA TION AND ADVANCEMENT WITHIN A SHORT SPAN OF TIME. AS OBSERVED IN A NUMBE R OF DECISIONS AND BY THE ITAT DELHI BENCH IN THE CASE OF AMWAY INDIA ENTERP RISES V DCIT (2008) 301 ITR (AT) 1 (DELHI) THE PERIOD OF ADVANTAGE IN THE CONTEXT OF COMPUTER SOFTWARE ITA 1771/AHD/2006 14 SHOULD NOT BE VIEWED FROM THE POINT OF VIEW OF DIFF ERENT ASSETS OR ADVANTAGE LIKE TENANCY OR USE OF KNOW-HOW BECAUSE SOFTWARE IS A BU SINESS TOOL ENABLING A BUSINESSMANS ABILITY TO RUN HIS BUSINESS. THE NATU RE OF THE ADVANTAGE WHICH THE ASSESSEE DERIVES HAS TO BE SEEN IN A COMMERCIAL SEN SE. SOFTWARE NORMALLY FUNCTIONS AS A TOOL ENABLING BUSINESS TO BE CARRIED ON MORE EFFICIENTLY. THE SCOPE POWER LONGEVITY OF SUCH A TOOL AND ITS CENT RALITY TO THE FUNCTIONS OF THE BUSINESS WILL ALL BEAR ON ITS TREATMENT. WE ARE OF THE OPINION THAT IN THE FACTS AND CIRCUM STANCES OF THE INSTANT CASE AND IN VIEW OF THE FAST CHANGING SCENARIO IN THE COMPUT ER WORLD WHEN COMPUTER SOFTWARE BECOMES REDUNDANT YEAR AFTER YEAR DUE TO A DVANCEMENT IN TECHNOLOGY THE LD. CIT(A) WAS JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF EXPENDITURE OF RS. 6 40 000/- .AS REGARDS CLAIM OF DEPRECIATION UNDISPUTEDLY SOFTWARE WAS PURCHASED IN THE MIDDLE OF THE ACCOUNT ING YEAR I.E. ON 05-10-2002 WHILE THE LD. CIT(A) CONCLUDED THAT THE ASSESSEE H AD FILED EVIDENCE BEFORE HIM TO SHOW THAT SOFTWARE MODULE ON HUMAN RESOURCES HAD BEEN USED FOR KEEPING SERVICE RECORDS OF EMPLOYEES. IN THIS VIEW OF THE MATTER WE DO NOT SEE ANY MERIT IN THE GROUND RAISED BY THE REVENUE. THEREFORE W E UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE AND DISMISS GROUND NO. 4 . 6. GROUND NO. 5 RELATES TO SALES PROMOTION EXPENSE S OF RS.3 LAKHS ALLOWED BY THE CIT(A). THE AO NOTICED THAT SALES PROMOTI ON EXPENSES OF RS. 6 14 705/- WERE PAID MOSTLY TO THE EMPLOYEES WHO WERE ON VISI T TO THE SITES WHERE SALES WERE MADE. THE AO OBSERVED THAT THE ASSESSEES MAI N BUSINESS BEING WITH BSNL AND OTHER GOVERNMENT /SEMI GOVERNMENT ORGANIZA TIONS THE BUSINESS WAS MOSTLY BOOKED ON TENDERS AND AFTER THE TENDER WAS A CCEPTED THERE WAS NO NEED FOR ANY BUSINESS PROMOTION. THE PAYMENT HAD BEEN M ADE TO THE EMPLOYEES OF THE ASSESSEE WHO VISITED THE SITES. SINCE THE EMPL OYEES WERE ALSO ALLOWED LODGING AND BOARDING EXPENSES TRAVELLING EXPENSES AND OTHER MISCELLANEOUS EXPENSES ACCORDING TO THE AO THERE WAS NO NEED TO INCUR FURTHER EXPENDITURE WHILE IN THE VOUCHERS NO DETAILS HAD BEEN MENTIONED . ACCORDINGLY THE AO DISALLOWED AN AMOUNT OF RS.3 LACS OUT OF RS.6 14 7 05/- CLAIMED UNDER THE HEAD ITA 1771/AHD/2006 15 SALES PROMOTION EXPENSES. 6.1. ON APPEAL THE ASSESSEE CONTENDED THAT THE SA LES PROMOTION EXPENSES CONSTITUTED ONLY 0.53% OF THE TOTAL SALES AND WERE REASONABLE . IT WAS POINTED OUT THAT THE AO IGNORED THE FACT THAT THIS KIND OF EXP ENDITURE IS INCURRED FOR GIVING BETTER SERVICE TRAINING AND KNOWLEDGE TO THE CUSTO MERS AT SITES AFTER SALES APART FROM EXPENSES LIKE TEA SNACKS SMALL GIFTS TO THE STAFF OF THE CUSTOMERS. SINCE THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS THE AO WAS NOT JUSTIFIED IN DISALLOWING PART OF TH E EXPENDITURE IT WAS CONTENDED. IN THE LIGHT OF THESE SUBMISSIONS THE LD. CIT(A) O BSERVED THAT SALES PROMOTION EXPENSES WERE ESSENTIAL IN THE MODERN DAYS OF COMPE TITION. AFTER PROCUREMENT OF ORDER THE ASSESSEE HAS TO MAKE REPEATED PRESENT ATIONS BEFORE THE CLIENT TO MAKE HIM AWARE OF LATEST DEVELOPMENTS IN TECHNOLOGY . THE QUANTUM OF EXPENDITURE BEING REASONABLE THERE IS NO JUSTIFICA TION FOR DISALLOWANCE OF RS.3 LACS OUT OF SALES PROMOTION EXPENSES THE LD. CIT(A ) CONCLUDED. 6.2 . THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF TH E LD. CIT(A). 6.3. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE ESPECIALLY WHEN EXPENDITURE ON SALES PROMOTION WAS MERELY 0.53% OF THE TOTAL SALES AND THERE IS NO MATERIAL BEFORE US TO TAKE A DIFFERENT VIEW IN THE MATTER WE UPHOLD THE FINDINGS OF THE LD. CIT(A). THEREFORE GROUND NO.5 IN THE APPEAL IS DISMISSED. 7. GROUND NO. 6 PERTAINS RELATES TO EXPENDITURE O F RS.70 000 ON GIFTS. THE AO NOTICED THAT THE ASSESSEE HAS CLAIMED GIFT EXPE NSES AMOUNTING TO RS.78 280 OUT OF WHICH GIFT OF RS.70 000 WAS PAID IN CASH TO ONE SHRI ARUN NAIR. THE ASSESSEE EXPLAINED THAT TOTAL NUMBER OF EMPLOYE ES WERE MORE THAN 100 AND THE GIFTS WERE GIVEN TO EMPLOYEES FOR EXCELLENT PER FORMANCE AND SUCH GIFTS ARE IN ITA 1771/AHD/2006 16 THE NATURE OF STAFF WELFARE. IT WAS SUBMITTED BY TH E ASSESSEE THAT A PRIZE OF ONE LAPTOP WAS GIVEN FOR TREASURE HUNT GAMES HELD FOR T HE EMPLOYEES AND THEIR FAMILY MEMBERS ACROSS INDIA AT THE ANNUAL GET TOGETHER. H OWEVER THE AO FOUND THAT IN THE VOUCHER OF GIFT IT HAS BEEN MENTIONED THAT CASH HAD BEEN PAID TO SHRI ARUN NAIR FOR SECURING ORDER OF BSNL. ACCORDINGLY THE AO DISALLOWED THE CLAIM ON THE GROUND THAT IT WAS NOT A GENUINE EXPENDITURE. 7.1 ON APPEAL THE ASSESSEE WHILE REITERATING HIS SUBMISSIONS BEFORE THE AO EXPLAINED THAT THE NATURE OF GIFT EXPENSES IS COMMO N BUSINESS PRACTICE WHEREBY THE GIFTS ARE GIVEN TO EMPLOYEES FOR EXCELLENT PERF ORMANCE ON A SPECIAL OCCASION. CONSIDERING THE TURNOVER OF THE COMPANY THE MAGNIT UDE OF ITS OPERATION AND THE TOTAL NUMBER OF EMPLOYEES BEING MORE THAN 100 SUCH GIFTS ARE IN THE NATURE OF STAFF WELFARE EXPENSES TO BUILD THE BONDING AND TRU ST AMONG THE TEAM MEMBERS. THE EMPLOYEES FAMILY MEMBERS WHO WON THE TREASURE HUNT WERE STATIONED AT BSNL SURENDRANAGAR IT WAS POINTED OUT. IN THE LIG HT OF THESE SUBMISSIONS OF THE ASSESSEE THE LD. CIT(A) ALLOWED THE CLAIM ON THE G ROUND THAT THAT THE GIFTS HAVE BEEN GIVEN TO EMPLOYEES FOR THEIR EXCELLENT PERFORM ANCE AND THE PRIZE OF ONE LAP TOP WAS GIVEN TO AN EMPLOYEE WHO WON THE COMPETITI ON IN TREASURE HUNT. THE EXPENSES HAVE BEEN INCURRED AS A MEASURE OF STAFF W ELFARE AND IT IS A BUSINESS EXPENDITURE. THE LD. CIT(A) CONCLUDED. 7.2 . THE REVENUE IS NOW IN APPEAL BEFORE US A GAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF TH E LD. CIT(A). 7.3. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. WE FIND ON PERUSAL OF THE IMPUGNED ORDER THAT THE L D. CIT(A) HAS NOT RECORDED HIS SPECIFIC FINDINGS ON THE FACT FOUND BY THE AO THAT IN THE VOUCHER OF GIFT IT WAS MENTIONED THAT CASH HAD BEEN PAID TO SHRI ARUN NAIR FOR SECURING ORDER OF BSNL. EVEN THE ASSESSEE IN HIS WRITTEN SUBMISSIONS BEFORE THE LD. CIT(A) DID NOT EXPLAIN AS TO WHY CASH WAS PAID TO SHRI ARUN NAIR . BEFORE US THE LD. AR ON ITA 1771/AHD/2006 17 BEHALF OF THE ASSESSEE DID NOT THROW ANY LIGHT OF T HIS ASPECT. IN THESE CIRCUMSTANCES WE HAVE NO ALTERNATIVE BUT TO VACATE THE FINDINGS OF THE LD. CIT(A) AND RESTORE THE MATTER TO HIS FILE WITH THE DIRECTI ONS TO READJUDICATE THE MATTER IN THE LIGHT OF AFORESAID FACTS POINTED OUT BY THE AO AND AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES. WITH THESE DIRECTI ONS GROUND NO. 6 IS DISPOSED OF. 8. GROUND NO. 7 RELATES TO DISALLOWANCE OF RS. 50 000 OUT OF STAFF WELFARE EXPENSES. THE AO NOTICED THAT OUT OF EXPENDITURE OF RS.2 90 801/- INCURRED ON STAFF WELFARE EXPENSES OF RS.75 000/- WERE DEBITED BY THE ASSESSEE TOWARDS SWEETS FOR STAFF AND PAYMENT OF RS.25 000/- WAS MAD E TO MEHTA CHAVANA & SWEET MART BESIDES RS.25 510/- S PAID TO SILVER O/C . AFTER HAVING EXPLANATION OF THE ASSESSEE THE AO DISALLOWED AN ESTIMATED SUM OF RS.50 000. 8.1 ON APPEAL THE LD. CIT(A) DELETED THE DISA LLOWANCE ON THE GROUND THAT THE EXPENSES HAD BEEN INCURRED ON VISIT TO FACTORY SITE S WEEKLY MEETINGS OF THE VARIOUS DEPARTMENTS ON TEA AND SNACKS DURING MEETI NGS LATE NIGHT WORK AND IN SEMINARS ON PRODUCTS. 8.2 . THE REVENUE IS NOW IN APPEAL BEFORE US A GAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF TH E LD. CIT(A). 8.3. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE ESPECIALLY WHEN EXPENDITURE ON STAFF WELFARE WAS MERELY 0.24% OF TH E TOTAL TURNOVER AND THERE IS NO MATERIAL BEFORE US TO TAKE A DIFFERENT VIEW IN THE MATTER WE UPHOLD THE FINDINGS OF THE LD. CIT(A). THEREFORE GROUND NO.7 IN THE APPEAL IS DISMISSED. 9. GROUND NO. 8 RELATES TO DISALLOWANCE OF RS.1 47 000 OUT OF FOREIGN TRAVEL EXPENSES. THE AO NOTICED THAT THE ASSESSEE HAD CL AIMED FOREIGN TRAVEL ITA 1771/AHD/2006 18 EXPENDITURE OF RS.1 47 000 TOWARDS VISIT TO MAURITI US. TO A QUERY BY THE AO THE ASSESSEE EXPLAINED THAT THE MAURITIUS BEING THE HUB OF INFORMATION TECHNOLOGY INDUSTRY FOR SOFTWARE AND HARDWARE THE ASSESSEE VI SITED MAURITIUS IN ORDER TO EXPLORE OPPORTUNITIES FOR NEW BUSINESS. MOREOVER T HE GOVERNMENT OF MAURITIUS PROVIDED VARIOUS TAX INCENTIVES FOR ATTRACTING FORE IGN INVESTMENT. THE INTERACTION BETWEEN THE CEOS AND THE MANAGEMENT GROUP PF VARIOU S COUNTRIES YIELDED DEALS IN THE SUBSEQUENT YEARS. HOWEVER SINCE THE ASSESSEE DID NOT FILE ANY EVIDENCE TO SHOW THAT THE ASSESSEE HAD MEETINGS O R UNDERTAKEN DISCUSSIONS FOR PROMOTION OF BUSINESS NOR COULD PROVE THAT THE OBJECT OF TOUR WAS DOMINANTLY COMMERCIAL THE AO DISALLOWED THE AFORESAID EXPENDI TURE. 9.1 ON APPEAL THE ASSESSEE WHILE REITERATI NG HIS SUBMISSIONS BEFORE THE AO CONTENDED THAT RECENTLY THEY HAD RECEIVED AN EX PRESSION OF INTEREST FROM MAHANAGAR TELEPHONE(MAURITIUS ) LIMITED FOR US DOL LARS 2 00 000. AND ENCLOSED A COPY OF THE RELEVANT EXTRACTS..IT WAS POINTED OUT THAT THE ASSESSE WAS CMD OF SAI INFOSYESTEM(INDIA) PVT. LTD. WHICH WAS INCORPO RATED UNDER CHAPTER IX OF THE COMPANIES ACT 1956 WITH THE TAKEOVER OF THE ASSSESS EES BUSINESS. THE ASSESSEE ADDED THAT ACTUAL EXPENDITURE WAS RS. 99 5 00 THE AMOUNT OF R.47 500 HAVING BEEN REFUNDED BY M/S CHARMS INDUSTRIES LTD. ORGANIZERS OF THE TOUR. IN THE LIGHT OF THESE SUBMISSIONS THE LD. CIT(A) DEL ETED THE DISALLOWANCE HOLDING THAT THE TOUR WAS FOR THE PURPOSES OF BUSINESS THE ASSESSEE HAVING RECEIVED ORDERS FROM MAHANAGAR TELEPHONE LTD (MAURITIUS) IN THE SUBSEQUENT YEAR. 9.2 . THE REVENUE IS NOW IN APPEAL BEFORE US A GAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF TH E LD. CIT(A). 9.3. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. IN THE LIGHT OF UNDISPUTED FINDINGS OF THE LD. CIT( A) THAT THE FOREIGN TOUR WAS FOR THE PURPOSE OF BUSINESS WHILE THERE IS NO MATERIA L BEFORE US TO TAKE A DIFFERENT VIEW IN THE MATTER WE UPHOLD THE FINDINGS OF THE L D. CIT(A) THAT THE TOUR WAS FOR ITA 1771/AHD/2006 19 THE PURPOSE OF BUSINESS. HOWEVER IN VIEW OF ADMISS ION OF THE ASSESSEE IN THE WRITTEN SUBMISSIONS FILED BEFORE THE LD. CIT(A) THA T ACTUAL EXPENDITURE WAS ONLY RS. 99 500/- AND THE AMOUNT OF RS.47 500/- HAD BEEN REFUNDED THE DISALLOWANCE OF RS. 1 47 500/- IS REQUIRED TO BE REDUCED BY RS. 99 500/- ONLY. THE AO SHALL VERIFY THIS ASPECT AND RECOMPUTE THE RELIEF ACCORDINGLY WHILE GIVING EFFECT TO THIS ORDER. WITH THESE DIRECTIONS GROUND NO.7 IN THE APPEAL IS DISPOSED OF. 10. GROUND NOS. 9 & 10 IN THE APPEAL BEING GENERAL IN NATURE DO NOT REQUIRE ANY SEPARATE ADJUDICATION AND ARE THEREFORE DISMISSED. 11. IN THE RESULT APPEAL IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES.. ORDER PRONOUNCED ON THIS 2 2ND DAY OF JANUARY 2010. SD/- SD/- (MAHAVIR SINGH) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD DATED: 22ND JANUARY 2010 PK/- COPY TO: 1. THE ASSESSEE 2. ACIT BK CIRCLE PALANPUR. 3. CIT(A)-XV AHMEDABAD 4. CIT CONCERNED 5. DR C BENCH BY ORDER DEPUTY REGISTRAR ITAT AHMEDABAD ITA 1771/AHD/2006 20