ACIT, CHENNAI v. M/s. Pentamedia Graphics Ltd., CHENNAI

IN THE INCOME-TAX APPELLATE TRIBUNAL CHENNAI C BENCH CHENNAI. BEFORE SHRI.U.B.S. BEDI J.M. & SHRI. ABRAHAM P. GEORGE A.M. I.T.A. NOS.2053 2054 AND 2065/MDS/2010 ASSESSMENT YEARS: 1997-98 1999-2000 AND 2002-03 THE ASSISTANT COMMISSIONER OF INCOME TAX COMPANY CIRCLE V(2) CHENNAI 600 034. VS. M/S. PENTAMEDIA GRAPHICS LTD. NO.1 FIRST MAIN ROAD UNITED INDIA COLONY CHENNAI 600 024. [PAN:AAACP1647B] (APPELLANT) (RESPONDENT) REVENUE BY : SHRI TAPAS KUMAR DUTTA ASSESSEE BY : MS. G. VARDINI & J. SREE VIDYA ORDER PER U.B.S. BEDI J.M . THESE THREE APPEALS OF T HE DEPARTMENT ARE DIRECTED AGAINST THE CONSOLIDATED ORDER PASSED BY THE LD. CIT(A) V CHENNAI DATED 15.09.2010 RELEVANT TO THE ASSESSMENT YEARS 1997-98 AND 1999-2000 AND SEPARATE ORDER DATED 09.09.2010 FOR THE ASSESSMENT YEAR 2002-03. 2. THESE APPEALS WERE HEARD TOGETHER AND PERTAINS TO SAME ASSESSEE THEREFORE BEING DISPOSED OFF BY THIS SINGL E ORDER FOR THE SAKE OF CONVENIENCE. 3. AS REGARDS THE APPEAL FOR THE AS SESSMENT YEARS 1997-98 AND 1999-2000 ARE CONCERNED THE DEPARTMENT HAS CHALLENGED THE ACTION OF T HE LD. CIT(A) IN HOLDING THAT THE TRAINING ACTIVITY TO BE PART OF STP ACTIVITY AND THEREFORE THE ASSESSEE IS ELIGIBLE FOR EXEMPTION OF ITS INCOME UNDER SECTION 10B 4. FACTS INDICATE THAT IN NUMBER OF OCCASION THE SA ME ISSUE HAS BEEN AGITATED UPTO THE LEVEL OF TRIBUNAL IN THE APPEALS FOR THE ASSE SSMENT YEAR 1996-97 AND THE LD. CIT(A) WHILE FOLLOWING THE DECISION OF ITAT IN ITA NO. 1597/MDS/2008 DATED I.T.A. NO.2053 2054 & 2065/MDS/10 2 09.10.2009 FOR THE ASSESSMENT YEAR 1996-97 HAS AFTER INCORPORATING OPERATIVE PORTION OF THE ITAT ORDER IN PARA 10 HAS ST ATED THAT AGGRIEVED BY THIS ORDER OF THE ITAT THE ASSESSEE FILED AN APPEAL UNDER SE CTION 260A BEFORE T HE HONBLE MADRAS HIGH COURT AND AFTER CONSIDERING SUCH FACT S HAS CONCLUDED TO ALLOW THE APPEAL OF THE ASSESSEE FOR BOTH THE YEARS SUBJECT TO T HE CONDITION THAT THIS ORDER SHALL STANDS AMENDED IN CONFORMITY WITH THE ORDER OF THE HONBLE MADRAS HIGH COURT IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1996-97. RELEVANT PORTION OF THE ORDER FROM PARA 13 TO 20 ARE REPRODUCED AS UNDER: 13. I HAVE DULY CONSIDERED THESE FACT S. IN THE ORDER DT 09-10-2009 OF 1TA 1597/MDS/2008 THE HONBLE ITAT HAS NOTED THAT THE INCOME DERIVED FROM THE TRAINING FEE BY THE ASSESSEE UNIT IN THE ABSENCE OF INCOME FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTW ARE WOULD NOT BE ENTITLED FOR EXEMPTION U/S.1OB OF THE INCOME TAX ACT 1961. 14. IT ALSO HELD THAT THE VARIOUS .CIRCULARS AND NOTIFICATI ONS REFERRED BY THE ASSESSEE ARE ONLY ON THE PERMISSION OF IMPORT OF COMPUTER EQUIPMENTS FOR USING THE SAME IN ADDITION TO EXPORTING SOFTWARE FOR THE PURPOSE OF IMPARTING TRAINING TO THE PERSONNEL OF THE UNITS AND PERSONS OTHER THAN THE EMPLOYEE OF THE CONCERNED UNIT BUT WITH IN THE SOFTWARE TECHNOLOGY PARK. THUS CIRCULARS ARE ONLY REGARDING THE BENE FIT OF CUSTOM DUTY ON THE EQUIPMENTS IMPORTED FOR DEVELOPMENT OF COMPUTER SOFTWARE BUT AL SO USED FOR IMPARTIN G TRAINING TO THE PERSONNEL OF THE UNIT AND ALSO PERSONS OTHER THAN THE EMPLOYEES OF THE CONCERNED UNIT. AS SUCH PROVIDING TRAI NING WOULD NOT BE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. THEREFORE THE INCOME DERIVED FROM PROVIDING THE TRAINING CANNOT BE SAID AS THE EXPORT INCOME OF THE UNDERTAKING. 15. WITH DUE RESPECT TO THE ORDER OF THE HONBLE ITAT I FIND FORCE IN THE ARGUMENTS OF MY PREDECESSORS IN THE BO TH THE ROUNDS WHO HAVE HELD THE TRAINING ACTIVITY TO BE PART OF STP ACTIVITY. NOTIFICA TION NO. SO 388(E) DT. 30.4.1997 READS AS FOLLOWS; CLAUSE NO.2.12 SAYS US E OF COMPUTER SYSTEM IN STP FOR TRAINING PURPOSE WILL A/SO BE A//O WED SUBJECT TO THE CONDITION THAT NO COMPUTER TERMINAL WILL BE INSTALLED OUTS IDE THE STP FOR THIS PURPOSE I.T.A. NO.2053 2054 & 2065/MDS/10 3 16. THEREFORE DULY FOLLOWING THAT ORDE R I FIND THAT STP ACTIVITY. MOREOVER THE APPELLANT HAS ALSO NOT CLASSIFIED IT IN ITS ACCOUNTS TO BE OF EXPORT SALES BUT ONLY AS PART OF ITS DOMESTIC SALES. 17. FURTHER I FIND FROM THE AUDITED A CCOUNTS FOR THESE TW O YEARS THAT THE EXPORT TURNOVER EXCEEDED 75% OF THE TOTAL SALES AS UNDER: ( ` .IN 000S) ASST. YEAR TOTAL TURNOVER EXPORT TURNOVER % OF COL.2 DOMESTIC TURNOVER % OF COL. 5 TRAINING INCOME 1997-98 1702147 1594263 93.66% 107884 6.34% 68070 1999-00 5256805 5118317 97.37% 138488 2.63% 20579 18. AS SUCH I FIND THAT THE PRESCRIBED CONDITION UNDER CL (I A) OF 10 5(2) ARE DULY SATISFIED FOR THESE TWO ASSESSMENT YEAR S. I THEREFORE HOLD THE APPELLANT IS ELIGIBLE FOR EXEMPTION OF ITS INCOME FROM EXPORT AS WELL DOMESTIC TURNOVER. HENCE THESE TWO APPEALS ARE THEREFORE TREATED AS ALLOWED. 19. FURTHER IT IS MADE CLEAR THAT AS CLAIMED BY THE ASSESSEE THIS ORDER SHALL STAND AMENDED IN CONFORMITY WITH THE ORDER OF THE HONBLE MADRAS HIGH COURT IN THE APPELLANTS OWN CASE FOR THE ASSESSMENT YEAR 1996-97. 20. IN THE RESULT TH E APPEAL IS ALLOWED. 5. AGGRIEVED BY THIS OR DER OF THE LD. CIT(A) THE DEPARTMENT HAS CAME UP IN APPEAL FOR BOTH THE ASSESSMENT YEARS AND MAINLY AGITATED THAT TRAINING ACTIVITY CANNOT BE PART OF STP ACTIVITY THEREFORE THE ASSESSEE IS NOT ELIGIBLE FOR EXEMPTION OF ITS INCOME UNDER SECTION 10B. THE LD. DR FURTHER CONTENDED T HAT THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT IN THE TRI BUNALS ORDER FOR THE ASSESSMENT YEAR 1996- 97 IT WAS HELD THAT INCOME DERIVED FROM THE TRAINING FEE BY THE ASSESSEE IN THE ABSENCE OF INCOME FROM EXPORT OF ARTICL ES OR COMPUTER SOFTWARE WOULD NOT BE ENTITLED FOR EXEMPTION UNDER SE CTION 10B AND PRAYED THAT THE ORDER OF THE LD. CIT(A) SHOULD BE REVERSED AND THAT OF THE A SSESSING OFFICER SHOULD BE RESTORED. 6. THE LD. COUNSEL FOR THE ASSESSEE ST RONGLY PLEADED THAT THE LD. DR COULD NOT BE ABLE TO POINTED OUT FROM WHICH ANGLE THE OR DER OF THE LD. CIT(A) IS NOT LEGALLY I.T.A. NO.2053 2054 & 2065/MDS/10 4 CORRECT SINCE HE HAS PASSED VERY REASONED AND APPROPRIATE ORDER IN THE LIGHT OF FACT AND CIRCUMSTANCES OF THE CASE AFTER CONS IDERING ALL THE ASPECT OF THE CASE AND MATERIALS AVAILABLE ON RECORD THEREFORE THE ORDER OF THE LD. CIT(A) SHOULD BE CONFIRMED WHEREAS THE LD. DR AT THIS JUNCTURE JUST RELIED UPON THE GROUNDS RAISED IN THE APPEAL. 7. WE HAVE HEARD BOTH THE SIDES CONSIDERED THE MATERIAL ON RECORD AND FIND THAT THE LD. CIT(A) HAS PASSED APPROPRIATE ORDER IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND HAS ALSO TA KEN DUE CARE TO OBSERVE THAT THIS ORDER SHALL STAND AMENDED IN CONFORMITY WITH THE ORDER OF THE HONBL E MADRAS HIGH COURT IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1996-97 AS SUCH WHILE CONCURRING WITH THE ORDER OF THE LD. CI T(A) APPLYING SAME BASIS WE UPHOLD HIS CONCLUSION AND FINDINGS AND DISMISS THE APPEALS OF THE D EPARTMENT IN THIS REGARD FOR BOTH THE ASSESSMENT YEARS. 8. AS REGARDS APPEAL IN ITA NO. 20 65/MDS/2010 FOR THE ASSESSMENT YEAR 2002- 03 IS CONCERNED THE DEPARTMENT HAS CHALLE NGED THE ACTION OF THE LD. CIT(A) IN DELETING THE ADDITION OF ` .22 85 59 000/- OF INTEREST PAID ATTRIBUTABLE TO LOANS AND ADVANCES DIRECTED TO SUBSIDIARY COMPANIES. THE ASPECT OF BUSINESS EXPEDIENCY WHICH INGREDIENT OUGHT TO HAVE BEEN TESTED AS PER THE HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF SA BUILDERS LTD. (288 ITR 1) HAS NOT BEEN DONE BY THE LD. CIT(A) WHO OUGHT NOT TO HAVE BASED HIS DECISION T HAT NET ADVANCE TO THE SUBSIDIARIES COULD BE TRACED TO ITS PROFITS FO R THE YEAR INCREASE IN CAPITAL REDUCTION IN OPENING CASH AND BANK BALANCE AND RECOUPM ENT OF LOANS AND ADVANCES AS ON 01.04.2001 ETC. AND ALSO S HOULD HAVE VERIFIED WHETHER SUFFICIENT LIQUIDITY WAS I.T.A. NO.2053 2054 & 2065/MDS/10 5 AVAILABLE AT THE TIME OF ADVANCE OR W HETHER MONEY WAS BORROWED AND ADVANCED. SO WITHOUT PREJUDICE TO THE ABOVE HAVING REGARD TO THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COUR T IN THE CASE OF M/S. ABHIS HEK INDUSTRIES LTD. VS. CIT (286 ITR 1) THE LD. CIT(A) OUGHT TO HAVE UP HELD THE ORDERS OF THE ASSESSING OFFICER THUS IT WAS PRAYED FOR RESTORING TH E ORDER OF THE ASSESSING OFFICER. 9. FACTS INDICATE THAT IN RESPECT OF DISALLOWANCE OF PROPOR TIONATE INTEREST ON BORROWED FUNDS AMOUNTING TO ` .22 85 59 000/- THE ASSESS EE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY AND BESIDES CHALLENGI NG SUCH ACTION IN ORIGINAL GROUNDS AGAINST SUCH DISALLOWANCE THE ASSESSEE HAS ALSO FILED SOME REVISED GROUNDS BEFORE THE LD. CIT(A) AND THE LD . CIT(A) WHILE CONSIDERING SI MILAR ISSUE IN RELATION TO THE ASSESSMENT ORDERS 2003-04 AND 2004-05 DECID ED BY HIS PREDECESSOR VIDE ORDER DATED 17.11.2006 AND 11.01.2008 FINALLY CONCLUDED BY NOTING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS LT D. (SUPRA) WHICH WAS DULY CONSIDERED BY HIS PREDECESSOR VIDE OR DER DATED 11.01.2008 FOR THE ASSESSMENT YEAR 2004-05 AND HAS AGREED TO DELETE THE ADDITION AS PER PARA 6.3 TO 6.5 OF HIS ORDER WHICH IS REPRODUCED AS UNDER: 6.3 I HAVE ALSO NOTED THE DECISION OF THE SUPREME COURT IN THE CASE OF S A BUILDERS LTD (288 ITR 1) DULY CONS IDERED BY MY PREDECESSOR IN HIS ORDER DT 11-1-2008 FOR THE A Y 2004-05. I FULLY AGREE WITH MY PREDECESSOR THAT THE ASSESSING OFFICER HAS NOT MADE OUT A CASE FOR DISALLOWANCE OF THE INTEREST PAID FO R THE MERE REASON THAT THERE ARE SECURED & UNSECURED LOANS FROM FINANCIAL INSTITUTI ONS AND THAT THERE ARE LOANS AND ADVANCES TO THE SUBSID IARY COMPANIES. THE AO HAS NOT ATTEMPTED TO BRING IN ANY NEXUS BE TWEEN THE LOAN OB TAINED FROM THE BANKS TO THE LOAN ADVANCED TO TH E SUBSIDIARY COMPANIES. FURTHER ASSESSING OFFICER HAS ALSO NOT DULY EST ABLISHED THE FACT THAT THERE IS NO COMMERCIAL EXPEDIENCY IN THE LOANS ADVANCED TO TH E SUBSIDIARY SO AS TO SAY THAT THE CASE IS NOT COVERED BY THE DECISION OF THE SUPREME COURT IN THE CASE OF S A BUILDERS LTD. I.T.A. NO.2053 2054 & 2065/MDS/10 6 6.4 I FIND THERE IS FORCE IN THE AR GUMENTS OF THE APPELLANT DIVEST OF THE BORROWALS FROM THE BANKS ETC. TH E SOURCE FOR NET ADVANCE OF `.22.19 CRORES TO SUBSIDIARY COMPANIES DURING THIS YEAR COULD ALSO BE TRACED TO ONE OR MORE OF THE FOLLOWING S OURCES AVAILABLE DURING THE YEAR NAMELY A) THE NET PROFIT AFTER TAX ITSELF IS ` . 98.75 CRORES; B) THE NET INCREASE OF ` .7.23 CRORES IN THE ISSUED & SUBSCRIBED CAPITAL; C) REDUCTION IN OPENING CASH AND BA NK BALANCES AS ON 1-4-2001; AND D) RECOUPMENT OF LOANS AND ADVANC ES OUTSTANDING AS ON 1-4-2001. 6.5 MOREOVER IT IS SEEN THAT THE APPELLANT HAS BUSINESS CONNECTIONS WITH THE SUBSIDIARY COMPANIES AS TH ESE COMPANIES FIGURE IN THE LIST OF SUNDRY DEBTORS TOO. THEREFORE TH E ADDITION BY DISALLOWANCE CANNOT BE SUSTAINED AND REQUIRES TO BE DELETE D EVEN IF THE OTHE R ADDITIONAL GROUND RAISED CHALLENGING THE REOPENING OF THE ASSESSMENT IS TO BE HELD AS JUSTIFIED. HENCE THE ADDITION IS DELETED. 10. AGGRIEVED BY THIS OR DER OF THE LD. CIT(A) THE DEPARTMENT HAS CAME UP IN APPEAL AND WHILE RELYING UPON THE GROUNDS OF APPEAL AS RAISED IN THE MEMORANDUM OF APPEAL IT HAS BEEN PLEADED BY THE LD. DR TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORING THAT OF THE ASSESSING OFFI CER AS THE ASSESSING OFFICER HAS MADE A PROPER ADDITION WHICH HAS JU ST BEEN DELETED BY THE LD. CIT(A) WITHOUT CONSIDERING RELEVANT FACTS AND CIRCUMSTANCES THER EFORE THE IMPUGNED OR DER SHOULD BE SET ASIDE AND THE ASSESSING OFFICERS ORDER WH ICH IS LIABLE TO BE UPHELD MAY BE RESTORED. 11. THE LD. COUNSEL FOR THE ASSESSEE WHILE RELYING UPON THE ORDER OF THE LD. CIT(A) HAS STRONGLY PLEADED T HAT THE LD. CIT(A) HAS RE LIED UPON THE OR DER OF HIS PREDECESSOR FOR THE ASSESSMENT YEAR 2004-05 AND THE DEPARTMENT HAS NOT CHALLENGED SUCH ACTION WHERE SIMILAR ISSUE WAS THERE AND FACTS WERE ALSO IDENTICAL WHICH MEANS THE DEPARTMENT HAS ALREADY A CCEPTED THE ORDER OF THE LD. CIT(A) FOR I.T.A. NO.2053 2054 & 2065/MDS/10 7 THE ASSESSMENT YEAR 2004-05 ON T HE SIMILAR ISSUE IN WHICH THE RATIO OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF SA BUILDERS LT D. (SUPRA) HAS BEEN APPLIED. THEREFORE T HERE APPEARS TO BE NO JUSTIFICATION FOR THE ASSESSING OFFICER TO MAKE THE IMPUGNED ADDITION WHICH HAS RIGHTLY BEEN DELETED BY THE LD. CIT(A) IT WAS THUS PLEADED THAT THE OR DER OF THE LD. CIT(A) S HOULD BE CONFIRMED AND APPEAL OF THE DEPARTMENT SHOULD BE DISMISSED. 12. THE LD. DR FURTHER ASSERTED THAT IF OR DER OF THE LD. CIT(A) CANNOT BE SET ASIDE IN ORDER TO RESTORE THE OR DER OF THE ASSESSING OFFICER THAN ATLEAST THE MATTER SHOULD BE SENT BACK TO THE ASSESSING OFFICER FOR ASCERTAINING AND ES TABLISHING THE NET ADVANCE TO THE SUBSIDIARIES WHICH COULD BE TRACED TO ITS PROFITS FOR THE YEAR INCREASE IN CAPITAL REDUCTION IN OPENI NG CASH AND BANK BALANCES AND RECOUPMENT OF LOANS AND ADVANCES AS ON 01.04.2001 ETC. WITH THE DIRECTION TO THE ASSESSING OFFICER TO VERIFY WHETHER SUFFI CIENT LIQUIDITY WAS AVAILABLE AT THE TIME OF ADVANCE OR WHETHER MONEY WAS BORROWED AND ADVANCED AND AT THIS JUNCTURE THE LD. DR ADMITTED THAT IT IS A CASE OF MIXED FUND BUT NECESSARY ENQUIRIES WHICH COULD BE MADE BY THE LD. CIT(A) HAVE NOT BEEN MADE IN THIS CASE T HEREFORE IN ALL FAIRNESS THE ISSUE REQUIRES TO BE SET ASIDE ON THE FI LE OF THE ASSESSING OFFICER FOR DOING ALL NECESSARY EXERCISE TO ASCERTAIN FACTUAL DET AILS AND TO RE-DECIDE THE ISSUE AFRESH. 13. WE HAVE HEARD BOTH THE SIDES CONSIDERED THE MATERIAL ON RECORD AS WELL AS PRECEDENTS RELIED UPON AND FIND THAT T HE ASSESSING OFFICER MADE THE ADDITION OF ` .22 85 59 000/- OF THE INTEREST PAID ATTRIBUT ABLE TO THE LOANS AND ADVANCES DIRECTED TO THE SUBSIDIARY COMPANIES AND THE LD. CI T(A) WHILE CONSIDERING THE RATIO OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS LTD. (SUPRA) THE I.T.A. NO.2053 2054 & 2065/MDS/10 8 ADDITION MADE BY THE ASSESSING OFFICER CAME TO BE DELETED AGAINST WHICH THE DEPARTMENT HAS CAME UP IN APP EAL. WE AFTER CONSIDERING THE RIVAL SUBMISSIONS IN THE LIGHT OF MATERIAL AVAILABLE ON RECORD FIND THAT THE LD. CIT(A) WHILE FOLLOWING THE ORDER OF HIS PREDECESSOR IN THE CASE OF ASSESSEE FOR THE ASSESSMENT YEAR 2004-05 HAS DELETED THE IMPUGNED ADDITION BUT IT IS CASE OF MIXE D FUNDS AND IN VIEW OF THE HONBLE SUPREME COURTS DECIS ION IN THE CASE OF SA BUILD ERS LTD. (SUPRA) BUSINESS EXPEDIENCY IS REQUIRED TO BE LOOKED INTO WHICH ASPECT HAS NOT BEEN APPROPRIATELY CONSIDERED EITHER BY THE ASSESSING OFFICER OR BY THE LD. CIT(A). THER EFORE IN VIEW OF THE FACTS CIRCUMSTANCES AND DISCUSSION AS HELD ABOVE WE FIND IT JUST AND APPROPRIATE TO SET ASIDE THE ORDERS OF BOTH THE AUTHORITIES ON THIS ISS UE AND RESTORE THE MATTER BACK ON THE FILE OF THE ASSESSIN G OFFICER FOR RECONSIDERATION OF THE ISSUE AFRESH WITH PARTICULAR EMPHASIS ABOUT BUSINESS EXPEDIENCY BY GIVING OPPORTUNITY TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. 14. IN THE RESULT THE APPEALS OF THE REVENUE FOR THE ASSESSMENT YEARS 1997-98 AND 1999-2000 ARE DISMISSED AND FOR THE AS SESSMENT YEAR 2002-03 IS ACCEPTED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON 25.02.2011. SD/- SD/- (ABRAHAM P. GEORGE) ACCOUNTANT MEMBER (U.B.S. BEDI) JUDICIAL MEMBER CHENNAI DATED THE 25.02.2011 VM/- TO:THE ASSESSEE//A.O./CIT(A)/CIT/D.R.