M/s Power-Com Technologies Pvt.Ltd.,, Hyderabad v. ITO, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A HYDERABAD BEFORE SHRI N.R.S. GANESAN JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER 1.ITA NO.713 /HYD/2005 : ASSTT. YEAR 2001-2002 2. ITA NO.728/HYD/2007 ASST. YEAR 2003-2004 M/S POWER COMPUTER TECHNOLOGIES (P) LTD. HYDERABAD VS ITO WARD 16 (2) HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JITENDER KUMAR RESPONDENT BY : SHRI K.V.N. CHARYA DR O R D E R PER: CHANDRA POOJARI ACCOUNTANT MEMBER THESE TWO APPEALS PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS OF THE CIT(A)V HYDERABAD AND PERT AINS TO THE ASSESSMENT YEARS 2001-02 AND 2003-04. SINCE THE GROUNDS RAISED IN THESE APPEALS ARE COMMON IN NATURE THEY ARE CLUBBED T OGETHER HEARD TOGETHER AND DISPOSED OF BY THIS COMMON ORDER FOR TH E SAKE OF CONVENIENCE. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS FOLLOWS: 1. THE CIT(A) IS ERRONEOUS BOTH ON FACTS AND IN LA W. 2. THE CIT(A) ERRED IN NOT ADMITTING ADDITIONAL GRO UND OF APPEAL AND FURTHER ERRED IN HOLDING THAT THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION U/S 80HHE. 3. THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION U/S 10B OF THE IT ACT. 4. THE CIT(A) ERRED IN HOLDING THAT THE SECOND HAND MACHINERY USED IN THE MANUFACTURING UNIT IS MORE THAN 20% OF THE TOTAL PL ANT AND MACHINERY AND FURTHER ERRED IN HOLDING THAT THE ASSESSEE IS NOT E NTITLED FOR A DEDUCTION OF SECTION 10B OF THE IT ACT. 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME O F HEARING. 2 3. BRIEF FACTS OF THE CASE RELATING TO ITA NO.713/HYD /2005 ARE AS FOLLOWS: DURING THE COURSE OF ASSESSMENT PROCEEDINGS UNDER CONSIDERA TION THE ASSESSING OFFICER VERIFIED THE CLAIM OF THE ASSESSEE U/S 10B AND OBSERVED THAT THE ASSESSEE HAD PURCHASED CERTAIN COMPUTER SY STEM FROM M/S ADVANCED COMPUTER CONSUMABLES VIJAYAWADA. TH E ASSESSING OFFICER ON EXAMINATION ESTABLISHED THAT THE PURCHASES WE RE NOT VERIFIABLE SO MUCH THAT THE PROPRIETOR OF M/S ADVANCED COMPUTER CO NSUMABLES VIJAYAWADA DENIED HAVING SOLD ANY SYSTEM TO THE ASSESSEE COMPANY. THE TOTAL OF SUCH PURCHASES FROM M/S ADVANCED COMPUTER CO NSUMABLES VIJAYAWADA WAS RS.22 43 080. ON FURTHER EXAMINATION BY THE ASSESSING OFFICER THE ASSESSEE CHANGED ITS VERSION AND STATED THAT 19 COMPUTER SYSTEMS WERE ASSEMBLED LOCALLY AND REMAINING 25 SYSTEMS WER E PURCHASED FROM M/S B-IQ TECHNOLOGY LTD. ON FURTHER EXA MINATION OF THE ASSESSING OFFICER OBSERVED THAT 25 SYSTEMS PURCHASED FROM BI Q TECHNOLOGIES LTD. WERE AT LEAST TWO TO THREE MONTHS OL D. 3.1. THE ASSESSING OFFICER FURTHER OBSERVED THAT: A) THE CLAIM OF THE ASSESSEE THAT IT HAS PURCHASED SYSTEMS WOR TH RS.22 43 080 FROM ADVANCED COMPUTER CONSUMABLES VIJAYAWADA IS NOT GENUINE. B) IT HAS PURCHASED 31 SYSTEMS AND ONE 3KVA UPS (25 SYSTEMS FRO M BIQ TECHNOLOGIES LTD. AND 5 SYSTEMS AND THE UPS FROM SOF TWARE TRAINING INSTITUTE) WHICH ARE ALREADY PUT TO USE BY TH EM. C) OUT OF THE TOTAL VALUE OF PLANT AND MACHINERY OF RS. 28 79 687 PLANT AND MACHINERY WORTH RS.15 74 800 (IE 25 COMPAQ SYSTEMS WORTH RS.14 37 500 3 KVA UPA WORTH RS.76 580 PHONE AN D 3 XEROX MACHINE ETC. WORTH RS.60 000 ARE ALREADY PUT TO USE BY OTHER COMPANIES/PERSONS. 3.2. THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTI ON 10B(2) READ WITH EXPLANATION 2 TO SECTION 80I(2) AND GAVE A FINDING THAT FOR CLAIMING DEDUCTION U/S 10B THE VALUE OF PLANT AN D MACHINERY USED PREVIOUSLY AND ACQUIRED BY THE ASSESSEE SHOULD NOT EXCEED 20% OF THE TOTAL VALUE OF PLANT AND MACHINERY. HOWEVER IN THE INSTANT CASE IT WAS NOTICED THAT OUT OF TOTAL VALUE OF PLANT AND MACHINER Y OF RS.28 79 687 PLANT MACHINERY WORTH RS.15 74 080 WERE PREVIOUSLY USE D ASSETS AND THE SAME CONSTITUTE 54.66% OF THE TOTAL VALUE OF ASSESSEE S PLANT AND MACHINERY. THUS THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAD NOT FULFILLED THE ESSENTIAL CONDITION PRESCRIBED IN SUB CLAU SE (III) OF CLAUSE (2) OF SECTION 10B. THEREFORE THE CLAIM OF DEDUCTION U/S 10 B FOR THE ASSESSMENT YEAR UNDER CONSIDERATION WAS REJECTED BY THE ASSESSI NG OFFICER. 3.3. WHEN THE ABOVE FINDINGS OF THE ASSESSING OFFICER WERE CONFRONTED TO THE ASSESSEE A REPLY WAS SUBMITTED WHEREIN T HE ASSESSEE ARGUED THAT 25 MACHINES BOUGHT FROM BIQ TECHNOLOGIES LT D WERE NOT USED FOR DEVELOPMENT OF SOFTWARE AND THEREFORE THE ASSE SSEE WAS ENTITLED TO ITS CLAIM U/S 10B OF THE IT ACT. A DETAILE D RESPONSE OF THE ASSESSEE IS AS UNDER: AS PER THE STATEMENT RECORDED BY YOU FROM THE CEO O F THE COMPANY THE COMPANY HAS BOUGHT 19 ASSEMBLED MACHINES AND 25 MAC HINES FROM BIQ TECHNOLOGIES LTD. THE SYSTEMS PUT TO USE ARE ONLY 19 AND THE BALANCE 25 MACHINES BOUGHT FROM BIQ TECHNOLOGIES LTD. ARE NOT PUT TO USE FOR THE DEVELOPMENT OF SOFTWARE. HENCE THE TOTAL PROFITS D ERIVED FROM THE BUSINESS ARE EXEMPTED U/S 10B OF THE IT ACT. 1961. THE PLANT AND MACHINERY AS PER THE BOOKS IS RS.22 4 3 080 OUT OF WHICH PLANT AND MACHINERY WORTH OF RS.15 14 080/ WAS BOUGHT FRO M BIQ TECHNOLOGIES LTD. WHEREAS THE ACTUAL PLANT AND MACHINERY PUT TO USE FOR SOFTWARE DEVELOPMENT ARE 19 KVS BATTERY AND UPS THE GRAND TO TAL WHICH WILL BE 4 RS.8 05 580. THE TOTAL PLANT AND MACHINERY UTILIZE D FOR DEVELOPMENT OF SOFTWARE IS MORE THAN PRESCRIBED NORMS U/S 80I. 3.4. THE ASSESSING OFFICER GAVE A FINDING THAT THE L ATEST CLAIM OF THE ASSESSEE THAT PLANT AND MACHINERY PURCHASED FROM BIQ T ECHNOLOGIES LTD WAS NOT PUT TO USE IS A DELIBERATE TRICK ADOPTED BY THE ASSESSEE BECAUSE IT KNEW THAT THE PLANT AND MACHINERY WAS OLD A ND THEREFORE THE ASSESSEE WILL NOT BE ALLOWED TO CLAIM DEDUCTION U/S 10B AN D IT IS FOR THIS REASON THAT BOGUS BILLS OF ADVANCED COMPUTER CONSUMABLE S VIJAYAWADA SHOWING PURCHASE OF NEW COMPUTERS WERE BROUGHT ON RECOR D. ACCORDINGLY ASSESSING OFFICER CONCLUDED THAT THE MYSTERY OF PRODUCING BOGUS BILLS OF ADVANCED COMPUTER CONSUMABLES VIJAYAWADA WAS SOLVED THAT THE PURPOSE WAS TO ACTUALLY USE OLD PLANT A ND MACHINERY AND TO SHOW IT AS NEW PLANT AND MACHINERY SO THAT DEDU CTION U/S 10B COULD BE CLAIMED. THE ASSESSING OFFICER WAS ESTABLISHED THA T THE ASSESSEE HAD USED SECOND HAND PLANT AND MACHINERY AND VIOLA TED THE PROVISIONS OF SECTION 10B(2) READ WITH EXPLANATION 2 TO SECTION 80I(2) AND THEREFORE DEDUCTION U/S 10B WAS DISALLOWED. ACCORDIN GLY THE TOTAL PROFIT EARNED BY THE ASSESSEE AMOUNT TO RS.64 14 400 WAS BROUGHT TO TAX. 4. ON APPEAL TO CIT(A) CONFIRMED THE SAME. AGGRI EVED BY THIS THE ASSESSEE IS IN APPEAL BEFORE US . BEFORE THE CIT (A) THE ASSESSEE RAISED ONE MORE GROUND WITHOUT PREJUDICE TO THE GRANT RELATING TO SECTION 10B THAT ASSESSEE IS ENTITLED FOR U/S 80HHC DEDUCT ION AND THAT GROUND WAS NOT ENTERTAINED BY THE CIT(A) SINCE I T IS ADDITIONAL GROUND BEFORE HIM. ON THIS ISSUE ALSO THE ASSESSEE IS I N APPEAL BEFORE US. 5. THE AR SUBMITTED THAT THE TOTAL PLANT AND MACH INERY ACQUIRED DURING THE YEAR UNDER CONSIDERATION WAS RS.24 65 585 AND IT CAN BE SEEN THAT THE ENTIRE PLANT AND MACHINERY WAS PU RCHASED FROM M/S ADVANCED COMPUTER CONSUMABLES VIJAYAWADA. THEREF ORE DURING 5 THE YEAR UNDER CONSIDERATION THE ASSESSEE DID NOT PURCHASE ANY PLANT AND MACHINERY FROM M/S BIQ TECHNOLOGIES LTD. THE PU RCHASES EFFECTED FROM THE BIQ TECHNOLOGIES LTD WERE IN THE LA TER YEAR. THEREFORE THE PRESUMPTION THAT THE ASSESSEE PURCHASED SECON D HAND MACHINERY FROM BIQ TECHNOLOGIES LTD DURING THAT PERIOD AND THEREFORE THE ASSESSEE IS NOT ENTITLED FOR EXEMPTION U/S 10B IS NOT CORRECT. 6. HE FURTHER SUBMITTED THAT WITH REGARD TO PURCHASE OF COMPUTERS FROM M/S ADVANCED COMPUTER CONSUMABLES VIJAYAW ADA IS CONCERNED THE ASSESSING OFFICER CONTENDED THAT THE ENQUIR IES REVEALED THAT NO SUCH CONCERN EXISTED AT VIJAYAWADA AT THE ADDRES S GIVEN TO M/S VEN SOFT SOLUTIONS (P) LTD. AND THAT THE PERSON PHANI KUMAR FOUND AT THE ADDRESS GIVEN BY M/S VEN SOFT SOLUTIONS (P) LTD. AT VIJAWADA DENIED HAVING SOLD ANY SYSTEMS TO THE ASSESSEE COMPANY. IN THIS R EGARD IT IS SUBMITTED THAT THE ENQUIRIES CONDUCTED BY THE ASSESSING OF FICER DID NOT LEAD TO THE FACT THAT THE MACHINERY PURCHASED DURING T HE YEAR REPRESENTS SECOND HAND MACHINERY. THE ASSESSING OFFICER DID NOT PROVIDE COPY OF THE STATEMENT AND THE ASSESSING OFFICER AL SO DID NOT MENTION AS TO HOW MR. B. PHANI KUMAR IS RELATED TO TH E CONCERN AND AS TO HOW HE WAS EXAMINED ON BEHALF OF THE FIRM. 7. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER EXAMI NED SRI LEELADHARA RAO ONE OF THE EMPLOYEES OF THE ASSESSEE. T HE ASSESSING OFFICER STATED THAT THE COMPUTER SYSTEMS MENTIONED IN THE INVOICES PROVIDED BY M/S ADVANCED COMPUTER CONSUMABLES VIJAYAW ADA WERE NOT RECEIVED BY THE COMPANY AND THAT THE COMPUTERS WERE PURCHASED FROM M/S BIQ TECHNOLOGIES LTD . WHICH WAS TWO TO THREE MONTHS OLD. BASED ON THE STATEMENT OF MR. LEELADHARA RAO THE ASSE SSING OFFICER IS OF THE VIEW THAT THE PLANT AND MACHINERY IS A SECOND H AND MACHINERY AND THEREFORE THE ASSESSING OFFICER HELD THAT THE ASSESSEE I S NOT ENTITLED FOR EXEMPTION U/S 10B OF THE IT ACT. IN THIS REGARD IT IS SUBMITTED THAT 6 MR. LEELADHARA RAO WAS NOT IN EMPLOYMENT OF THE ASSESSE E COMPANY DURING THE YEAR UNDER CONSIDERATION. HE JOINED IN JUL Y 2001 AND DOES NOT KNOW ABOUT THE FACTS OF THE CASE. THE PURCHASE OF P LANT AND MACHINERY FROM M/S BIQ TECHNOLOGIES LTD . WAS DURING TH E LATER PREVIOUS YEAR AND NOT DURING THE YEAR UNDER CONSIDERA TION. MR. L. RAO EXPLAINED THAT THE MACHINERY WAS USED BY M/S BIQ TECHNO LOGIES LTD . FOR A PERIOD OF TWO MONTHS OR SO AND WAS SOLD TO THE ASSE SSEE. IT CAN BE SEEN THAT THE INVOICES OF M/S BIQ TECHNOLOGIES LTD. WAS DATED 13.12.2001 AND THE TOTAL COST OF ACQUISITION OF THE MAC HINERY FROM THE SAID COMPANY WAS RS.5 10 000. THIS HAS THEREFORE NOTHING TO DO WITH THE ACQUISITION OF THE PLANT AND MACHINERY DURING THE PREVIOUS YEAR UNDER CONSIDERATION. BEFORE THE ASSESSING OFFICER THE ASSE SSEE FILED THE LEDGER EXTRACT OF THE ASSESSEE IN THE BOOKS OF M/S BIQ TE CHNOLOGIES LTD . WHICH CLEARLY SHOWS THAT THEY HAVE NOT SOLD ANY PART OF THE MACHINERY TO THE ASSESSEE DURING THE PREVIOUS YEAR. AT THE SAME T IME THE OBSERVATION OF THE ASSESSING OFFICER THAT THE ASSESSEE ACQUIRE D SECOND HAND MACHINERY FROM M/S BIQ TECHNOLOGIES LTD IS NOT COR RECT. HE SUBMITTED THAT THE ASSESSING OFFICER IS NOT JUSTIFIED IN H OLDING THAT THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION PURCHASED SECOND HAND PLANT AND MACHINERY FROM M/S BIQ TECHNOLOGIES LTD. I T IS AGREED BY THE ASSESSING OFFICER THAT THE ASSESSEE USED THE PLANT AND MACHINE RY OF THE VALUE OF RS.24 65 585 AND THE ASSESSING OFFICER ALLOWED D EPRECIATION ON THE SAME. THE ASSESSING OFFICER OBSERVATION THAT THIS MACH INERY WAS ACQUIRED FROM M/S BIQ TECHNOLOGIES LTD . IS NOT CORRECT I N VIEW OF THE ABOVE EXPLANATION. THEREFORE THE ASSESSEES CONTENTION THAT IT ACQUIRED MACHINERY FROM M/S ADVANCED COMPUTER CONSUMABLES VIJA YAWADA HAS BEEN TO BE M/S ADVANCED COMPUTER CONSUMABLES VIJAYAW ADA TRUE. FURTHER THE ASSESSING OFFICER DID NOT PROVIDE OPPORTUN ITY TO THE ASSESSEE TO CROSS EXAMINE MR. B. PHANI KUMAR. 7 7.1 IT IS FURTHER SUBMITTED THAT THERE IS NO INFORM ATION BEFORE THE ASSESSING OFFICER TO SAY THAT THE PLANT AND MACHINERY AVAILABLE WITH THE ASSESSEE WAS A SECOND HAND MACHINERY. 7.2 THE ASSESSEE SUBMITED THAT IN THE CASE OF SUPPLY OF SOF TWARE TO THE FOREIGN COUNTRIES AND DERIVING INCOME THERE FRO M THE ASSESSEE IS ENTITLED FOR EXEMPTION U/S 10 B AND ALSO DEDUCTION U/S 80HHE OF THE IT ACT BY PROVIDING AN OPPORTUNITY. THE ASSESSEE WAS UNDER THE BONAFIDE IMPRESSION THAT THE ASSESSING OFFICER WOULD ALLOW EXEMPTIO N U/S 10B OF THE IT ACT AND THEREFORE DID NOT MAKE AN ALTERNATIV E CLAIM. AS THE ASSESSING OFFICER DID NOT ALLOW EXEMPTION THE ASSESSEE BY A SEPARATE APPLICATION FILING ADDITIONAL GROUND REQUESTING THE C IT (A) TO ADMIT THE FRESH GROUND AND ALLOW DEDUCTION U/S 80HHE WHICH WAS NOT CONSIDERED BY THE CIT(A). 7.3 THE ASSESSING OFFICER VIDE LETTER DATED 19.4.2005 SUBMITTED BEFORE THE CIT(A) MENTIONED THAT THE PLANT AND MACHI NERY NOT PUT TO USE EARLIER WAS RS.2 56 564 AS AGAINST THE TOTAL PLANT AND MACHINERY OF RS.8 44 107. IN THIS REGARD IT IS SUBMITTED THAT IN S O FAR AS AIR CONDITIONERS ARE CONCERNED THE SAID AIR CONDITIONERS WERE FIRST PUT TO USE AT THE RESIDENCE OF SRI M. VENKATESWARULU GUNTUR. IT WAS PROPOSED TO FINALIZE THE ACCOUNTS UNDER THE GUIDANCE OF SRI. M V ENKATESWARULU AND THEREFORE THE AIR CONDITIONERS WERE FIRST INSTALLE D AT HIS RESIDENCE FOR CARRYING ON THE FINALIZATION WORK AND LATER THE AIR CONDITIONERS WERE SHIFTED TO HYDERABAD. THEREFORE THEY CANNOT BE CONSIDER ED AS NOT USED FOR THE PURPOSE OF BUSINESS. 7.4 IN SO FAR AS XEROX MACHINES STD TELEPHONE BOOTH ARE CONCERNED IT WAS SUBMITTED BY THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE THAT THEY ARE NOT THE MACHINERY BUT REPRESENT OFFICE 8 EQUIPMENT AND THEREFORE COULD NOT BE CONSIDERED FOR THE PURPOSE OF WORKING OUT THE PERCENTAGE OF NEW MACHINERY. IN SO FAR AS THE COMPUTER PRINTERS EPSON PRINTERS MONITORS ETC. ARE CONCERNED T HE ASSESSING OFFICER IS OF THE VIEW THAT THEY WERE PURCHASED BY M/S V EN SOFT SOLUTIONS (P) LTD. SOFT. THEREAFTER THEY WERE PURCHA SED BY THE APPELLANT. IN THIS REGARD IT IS SUBMITTED THAT AS BY TH E TIME THE APPELLANT PROPOSED TO PURCHASE THESE ASSETS THE CERTIFICATE OF INCORPO RATION OF THE APPELLANT COMPANY WAS NOT RECEIVED(THE CERTIFICATE OF I NCORPORATION WAS DATED 21.06.2000) THE BILL WAS TAKEN IN THE NAME OF M/S VEN SOFT SOLUTIONS (P) LTD.. THE MACHINERY WAS USED AS FIRST HAND MACHINERY AND IT WAS NOT USED BY M/S VEN SOFT SOLUTIONS (P) LTD. 7.5 IN SO FAR AS THE COMPUTERS PURCHASED FROM M/S ADVANCED COMPUTER CONSUMABLES VIJAYAWADA IT WAS SUBMITTED THA T THE PURCHASE IS NOT BOGUS. THE ASSESSEE DID NOT CHANGE ITS VER SION. IT IS NOT THE CLAIM OF THE ASSESSEE THAT DURING THE YEAR UND ER CONSIDERATION THE MACHINERY WAS PURCHASED FROM M/S BIQ TECHNOLOGIES LTD . 7.6. IT IS FURTHER SUBMITTED THAT THE AIR CONDITION ERS REFRIGERATORS CANNOT BE CONSIDERED AS THE PLANT AND MACHINERY AS THEY R EPRESENT OFFICE EQUIPMENT. THEREFORE IT IS NOT CORRECT FOR THE ASSESSING OFFICER TO MENTION THAT THE SECOND HAND MACHINERY IS MORE THAN 20% . 7.7 . THE A.R. SUBMITTED THAT THE ASSESSEE ACQUIRED MACHINERY SUCCEEDING ASSESSMENT YEAR FROM M/S BIQ TECHNOLOGIES LTD . A ND IN THIS YEAR THE ASSESSEE PURCHASED MACHINERY FROM M/S ADVANCED CO MPUTER CONSUMABLES VIJAYAWADA AND OTHERS AS PER DETAILS AND NO T FROM M/S BIQ TECHNOLOGIES LTD. 9 7.8. HE DREW OUR ATTENTION TO THE COPIES OF THE BILL S FROM M/S ADVANCED COMPUTER CONSUMABLES VIJAYAWADA AND THE DETA ILS OF PAYMENTS MADE TO THE SAID CONCERN. IT WAS SUBMITTED THAT THE ASSESSEE DID NOT MAKE ANY PURCHASE FROM M/S BIQ TECHNOLOGIES LTD DURING THE PREVIOUS YEAR. SO FAR AS THE DETAILS OF PURCHASE OF MACHI NE IS CONCERNED THE ASSESSEE HAS SUBMITTED AN ACCOUNT COPY OF PLANT MACH INERY ACCOUNT AND THE BILLS FOR PURCHASE OF THE MACHINERY FROM M/S ADVANCED COMPUTER CONSUMABLES VIJAYAWADA. HE SUBMITTED THAT IT CAN BE SEEN FROM THE ABOVE THAT THE ASSESSEE DID NOT MAKE ANY PURCH ASE FROM M/S BIQ TECHNOLOGIES LTD. AND THE ENTIRE MACHINERY PURCHASE D FROM M/S ADVANCED COMPUTER CONSUMABLES VIJAYAWADA AND A FEW OT HERS AND IT IS THE FIRST HAND MACHINERY. THEREFORE IT WAS SUBMIT TED THAT THE ASSESSING OFFICER IS NOT CORRECT IN REJECTING THE CLAIM FOR EXEMPTION U/S10B OF THE ACT. THE ASSESSEE FURTHER SUBMITTED THAT IN THE ALTERNATE IT IS ENTITLED FOR DEDUCTION U/S 80HHE IF THE ACT. THUS H E PRAYED US TO DIRECT THE ASSESSING OFFICER TO GRANT DEDUCTION U/S 10B AND IN THE ALTERNATE A DIRECTION MAY BE GIVEN TO ALLOW DEDUCTIO N U/S 80HHE OF THE ACT. 7.9. IT IS FURTHER SUBMITTED THAT THE ALTERNATE CLAIM MADE BY THE ASSESSEE THE ASSESSING OFFICER MENTIONED THAT IT IS NOT AN A DDITIONAL GROUND BUT A TOTALLY DIFFERENT AND ALTERNATE PLEA. THE ALTERNATE PLEA IS PLACID IN THE FORM OF ADDITIONAL GROUND WHICH MAY BE ADMITTED. THE ASSESSEE WAS UNDER THE BONA FIDE IMPRESSION THAT IT WAS E NTITLED FOR EXEMPTION 10B AND THEREFORE DID NOT FILE FORM 10C CAF. WHEN THE ASSESSING OFFICER REJECTED THE CLAIM OF 10B THE ASSESSING OF FICER IS DUTY BOUND TO INTIMATE THE ASSESSEE ABOUT THE AVAILABILITY O F THE PROVISIONS OF SECTION 80HHE WHICH WAS NOT DONE BY ASSESSING OFFICER. 10 7.10. HE SUBMITTED THAT DURING THE COURSE OF PROCEEDIN GS BEFORE THE CIT(A) THE INFORMATION AND THE CERTIFICATE REQUIR ED FOR GRANTING EXEMPTION U/S 80HHE WERE SUBMITTED. 7.11. HE SUBMITTED THAT PARTICULARLY WHEN THE CLAIM U /S 10B IS NOT ALLOWED THE ASSESSEE IS ENTITLED TO CLAIM THE ALTERNATI VE CLAIM BEFORE THE ASSESSING OFFICER OR BEFORE CIT(A). THE CLAIM U/S 80HHE EMA NATED OUT OF THE REJECTION OF THE CLAIM OF EXEMPTION U/S 10B. I T IS NOT CORRECT FOR THE ASSESSING OFFICER TO MENTION THAT IT WAS IN THE KNOW LEDGE OF THE COMPANY THAT THE COMPANY IS NOT ENTITLED FOR U/S 10B. IN FACT THE COMPANY BELIEVES THAT IT IS ENTITLED FOR EXEMPTION U/ S 10B 7.12. HE SUBMITTED THAT THE ASSESSING OFFICER IS NOT CORRE CT IN MENTIONING THAT THE CIT(A) CANNOT CONSIDER AN ISSUE WH ICH WAS NOT DECIDED BY THE ASSESSING OFFICER. IN THIS REGARD THE ASSESSIN G OFFICER RELIED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF ADDL. CIT GUJARAT VS. GURJARGRAVURES P LTD. REPORTED IN 111 I TR 1 WHICH WAS DISTINGUISHED BY THE JUDEMENT OF THE SUPREME COURT IN THE CASE OF JUTE CORPORATION OF INDIA LTD. VS. CIT REPORTED IN 187 IT R 688. THE DECISION OF THE SUPREME COURT IN THE SAID CASE REPORTED IN 187 ITR 688 IS REAFFIRMED IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. VS. CIT REPORTED IN 229 ITR 383 WHEREIN IT WAS HELD THAT THE TRIBUNAL HAD JURISDICTION TO EXAMINE THE QUESTION OF LAW WHICH ARISE S FROM THE FACTS AS FOUND BY THE ITAT AND HAVING A BEARING ON THE TAX LIABILITY OF THE ASSESSEE. THEREFORE THE ASSESSING OFFICERS RELIANCE ON THE DECISION REPORTED IN 111 ITR 1 REFERRED TO ABOVE IS MISPLACED. 8. THE DEPARTMENTAL REPRESENTATIVE DREW OUR ATTEN TION TO THE REMAND REPORT SUBMITTED BY THE ASSESSING OFFICER VIDE F.N O.W- 2(2)/386/2001-02 DATED 19.4.2005 SPECIFICALLY PARA.7 O F THE SAID REPORT AND SUBMITTED THAT PLANT & MACHINERY ACQUIRED BY THE A SSESSEE AMOUNTS 11 TO RS.8 44 107. OUT OF THIS PLANT & MACHINERY WORTH R S.2 56 564 WAS NOT PUT TO USE EARLIER. THIS AMOUNTS TO ONLY 30.39% AS AGAINST THE REQUIREMENT OF NOT LESS THAN 80% UNDER THE PROVISIONS O F SECTION 10B. EVEN IF THE ASSETS PURCHASED ORIGINALLY BY M/S VEN SOFT SOLUTIONS (P) LTD. IS TAKEN INTO CONSIDERATION THE PLANT & MACHIN ERY NOT PUT TO USE EARLIER WOULD WORK OUT ONLY TO 45.72%. THUS HE SUBM ITTED THAT THE ASSESSEE WOULD NOT BE ELIGIBLE FOR EXEMPTION U/S 10B OF IT ACT 1961. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IN THE PRESENT CASE TOTAL PLANT AND MACHINERY SA ID TO BE PURCHASED BY THE ASSESSEE IN THE ASSESSMENT YEAR UNDER CONSIDER ATION AT RS.30 89 687. ON ENQUIRY IT WAS FOUND THAT PLA NT AND MACHINERY PURCHASED FROM M/S ADVANCED COMPUTER CONSUMABLES AMOUNTI NG TO RS. 22 43 080/- IS FOUND TO BE BOGUS. THIS FACT HAS BEE N ADMITTED BY THE CEO OF THE ASSESSEE COMPANY NAMELY SHRI LEEDHARA RA O MARUPUDI VIDE HIS STATEMENT RECORDED ON 6.1.2004 ON SURVEY U/S 13 3A OF THE IT ACT. AS SUCH THERE IS NO DISPUTE REGARDING THE BOGUS NATU RE OF THESE TRANSACTIONS. 9.1 REGARDING THE PURCHASE OF COMPUTER FROM M/S BIQ TECHNOLOGIES LTD THE REMAND REPORT READS AS FOLLOWS: P URCHASE OF COMPUTERS FROM BIQ TECHNOLOGIES LTD M/S BIQ TECHNOLOGIES LTD IS A COMPANY ASSESSED IN R ANGE 1 HYDERABAD. AS PER THE ENQUIRIES MADE THROUGH THE I NSPECTOR OF THIS OFFICE IT IS ASCERTAINED THAT M/S BIQ TECHNOL OGIES LTD HAS SOLD 25 COMPUTERS TO M/S POWER COM TECHNOLOGIES P L TD FOR A CONSIDERATION OF RS.3 70 000 VIDE INVOICE NO.50 DAT ED 12.12.2001. THE CONSIDERATION WAS RECEIVED VIDE CH EQUE NO.031250 DATED 15.12.2001 DRAWN ON VYSYA BANK. THE 25 COMPUTERS SOLD BY M/S BIQ TECHNOLOGIES LTD ARE PART OF 70 COMPUTERS PURCHASED BY IT IN AUGUST 2000 FROM M/S SINGAPORE COMPANY ASIA P LTD. OUT OF THIS 45 COMPUTERS WERE BRANCH 12 OFFICE OF M/S BIQ TECHNOLOGIES LTD CHENNAI. THE 2 5 COMPUTERS INSTALLED IN CHENNAI OFFICE WERE SOLD TO M/S POWER COM TECHNOLOGIES P LTD AS MENTIONED ABOVE. AS VERIFIED FROM THE DEPRECIATION SCHEDULE ENCLOSED TO THE RETURN OF INC OME OF M/S BIQ TECHNOLOGIES LTD FOR THE FINANCIAL YEAR 2001-02 IT IS SEEN THAT THERE IS A DELETION OF COMPUTER AND RELTED ITE M TO THE EXTENT OF RS.29 95 388. FROM THE BREAK UP OF THIS AMOUNT OBTAINED IT IS NOTICED THAT THE 25 COMPUTERS SOLD TO M/S POWER COM TECHNOLOGIES P LTD FOR RS.3 70 000 IS PART OF THIS DELETION. IT IS ALSO NOTICED THAT THE COMPANY HAS CLAIMED DEPRECIAT ION ON THESE COMPUTERS DURING THE ASSESSMENT YEAR 2001-02. 9.2. AS SEEN FROM THE ABOVE THE ASSESSING OFFICER HAS GI VEN THE FINDINGS IN THE REMAND REPORT THAT PLANT AND MACHIN ERY PURCHASED FROM M/S BIQ TECHNOLOGIES LTD. IS NOT IN THE ASSESSMENT YEAR UNDER CONSIDERATION AND THE SAME WAS PURCHASED IN THE FINANCIAL YEAR 2001-02 RELEVANT TO ASSESSMENT YEAR 2002-03 BECAUSE THESE MACHINE RIES ARE PURCHASED VIDE INVOICE NO.50 DATED 12.12.2001 AND THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR ENDED ON 31.3.200 1 AND THE SAME CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTATION OF GROSS VALUE OF PLANT AND MACHINERY IN THE ASSESSMENT YEAR 200 1-02 (YEAR ENDING ON 31.3.2001). HENCE THE BALANCE LEFT OUT WITH THE ASSESSEE IS AT RS.8 44 107/- . THIS PLANT AND MACHINERY OF RS.8 4 4 107/- CONSISTS AS FOLLOWS: I) PURCHASED BY FROM M/S VEN SOFT SOLUTIONS (P) LTD. A) EPSON PRINTERS RS. 6 415 B) MONITORS RS.64 800 C) AIR CONDITIONER RS.21 000 D) ALLYWIN FRIDGE RS. 9 000 E) EXCIDE BATTERIES RS.28 170 -------------- RS.1 29 385 II.) NEW PLANT & MACHINERY PURCHASED BY ASSESSEE NOT PUT TO USE EARLIER 13 A) ELECTRICAL INSTALLATIONS RS.63 267 B) MONITORS RS. 35 200 C) CPU RS.74 640 D) CPU RS.38 950 E) PHILIPHS TV RS.28 700 F) MISCELLANEOUS ITEMS RS.15 807 ------------- RS.2 56 564 III) MACHINERIES ALREADY PUT TO USE: ( FURNITURE & FITTINGS) A) XEROX MACHINE RS.60 000 B) COMPUTER PRINTERS RS.1 50 000 -------------- 2 1 0 000 IV) AIR CONDITION INSTALLED AT GUNTUR 6 NOS. 2 48 000 ------------- TOTAL 8 44 107/- 10. THE ASSESSEE COUNSEL CONTENDED THAT ENTIRE VALUE OF 8 44 107 WHICH ARE SAID TO BE ACTUALLY ACQUIRED BY THE ASSESSEE CANNOT BE CONSIDERED IN THE CATEGORY OF PLANT AND MACHINERY A ND ONLY ACTUAL PLANT AND MACHINERY INSTALLED IN THE INDUSTRIAL UNDE RTAKING TO BE CONSIDERED FOR THE PURPOSE OF FULFILLMENT OF CONDITION PRESCRIBED IN CLAUSE (2 ) OF SECTION 10B. THE PLANT AND MACHINERY PURCHASED FROM VEN SOFT SOLUTIONS (P) LTD. AT RS.1 29 385/- WAS NOT AT ALL USE D BY THE M/S VEN SOFT SOLUTIONS (P) LTD.. AND THEY WERE PURCHASED IN TH E NAME M/S VEN SOFT SOLUTIONS (P) LTD. SINCE ON THE DATE OF PURCHASE TH E ASSESSEE WAS UNDER INCORPORATION UNDER COMPANY ACT 1956 AND FOR THE PURPOSE OF CONVENIENCE IT WAS PURCHASED IN THE NAME OF THE M/S VEN SOFT 14 SOLUTIONS (P) LTD. AND THESE PLANT AND MACHINERIES WER E FIRST TIME PUT INTO USE BY THE ASSESSEE ITSELF. WE HAVE GONE THROUGH THE REMAND REPORT ON THIS ISSUE AND ORDER OF CIT(A) . THE MAIN CONTENTION OF THE REVENUE IS THAT THERE IS NO EVIDENCE REGARDING PURCHASE OF THESE ITEMS FROM M/S M/S VEN SOFT SOLUTIONS (P) LTD. BY THE ASSESSEE A ND THE ASSESSEE HAS JUST TAKEN THESE EQUIPMENTS ON ITS RECORD. THE ASSESSEE IS REQUIRED TO PROVE THE PURCHASE OF THESE EQUIPMENTS FR OM THE M/S VEN SOFT SOLUTIONS (P) LTD. AND ALSO REQUIRED TO PROVE T HESE ARE FIRST HAND MACHINERY AND NEVER PUT INTO USE BY ANY OTHER PARTY. ACCORDINGLY WE DIRECT THE ASSESSEE TO PROVE THE FACTS. IN THE EVENT ASSESSEE ABLE TO PROVE THAT THE PLANT AND MACHINERY PURCHASED FROM M/S VEN SOFT SOLUTIONS (P) LTD. IS NEVER PUT TO USE EARLIER THEN THE ASSESSING OFFICER CONSIDER THE SAME AS NEW MACHINERY. SINCE THE CLAUSE (2) O F S.10B PRESCRIBED THAT THE BENEFIT U/S 10B IS AVAILABLE TO AN UNDERTAKING IF IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINER Y OR PLANT PREVIOUSLY USED FOR ANY PURPOSE . IF THE MACHINERY ACQUIRED FROM THE M/S VEN SOFT SOLUTIONS (P) LTD. IS NOT PREVIOUSLY USED BY ANY PERSON THEN IT WILL BE CONSIDERED AS NEW MACHINERY. 11. REGARDING THE PLANT AND MACHINERY AT RS.2 56 5 64 THERE IS NO DISPUTE AND THESE ARE MACHINERIES NOT PUT IN USE EAR LIER BY ANY PERSON AND TO BE TREATED AS NEW MACHINERY FOR THE PURP OSE OF GRANTING DEDUCTION U/S 10B. 11.1. THE XEROX MACHINERIES AT RS.60 000 AND COMPUTER PRINTER AT RS.1 50 000 THESE ARE NOT PLANT AND MACHINERY. ON THE OTHER HAND THESE ARE FURNITURE AND FITTINGS INSTALLED IN THE OFFI CE AND THE SAME WAS REFLECTED IN THE SCHEDULE OF FURNITURE AND FITTINGS AN D DEPRECIATION WAS ALLOWED BY THE ASSESSING OFFICER AT THE RATE APPLICABLE TO THE FURNITURE AND FITTINGS AND FOR THE PURPOSE OF APPLICABILITY OF CL AUSE (2) TO SECTION 10B HE HAS CONSIDERED THESE ASSETS AS PLANT AND MACHINE RY. WE 15 HAVE GONE THROUGH THE DEPRECIATION SCHEDULE AS PER INC OME TAX ACT 1961 PLACED AT PAGE NO.28 AND 29 OF ASSESSEES PAPER BOO K WHEREIN THESE ASSETS ARE TREATED AS FURNITURE AND FITTINGS AND D EPRECIATION ON XEROX MACHINERY ALLOWED AT 10% AND COMPUTER PRINTER A LLOWED AT 5%. BEING SO THE ASSESSING OFFICER WITHOUT DISTURBING THE D EPRECIATION GRANTED ON THESE ASSETS HE CANNOT CHANGE THE CLASSIFICATION OF THE ASSETS. FURTHER THERE IS NO FINDINGS BY THE ASSESSING OFFI CER REGARDING THE FACT THAT THESE ASSETS ARE NOT INSTALLED AT THE OFFI CE OF THE ASSESSEE. IN THE EVENT THESE ASSETS ARE INSTALLED AT THE OFFICE OF THE ASSESSEE THE QUESTIONED OF PREVIOUSLY USAGE OF THESE ASSETS DOES NOT MAKE ANY DIFFERENCE TO CLAIM DEDUCTION U/S 10B OF THE IT ACT. 11.2 NOW COMING TO THE AIR CONDITIONER THE ASSESSING O FFICER IN HIS REMAND REPORT GIVEN FINDINGS AS FOLLOWS: AS PER THE INFORMATION GATHERED THE ABOVE 6 AI R CONDITIONERS WERE PURCHASED FROM M/S AIRLOOM ENGINEERING SECUNDERABAD V IDE THEIR INVOICE NO. 473 DATED 28-3-2001. THE INVOICE WAS MADE IN THE NAME OF M/S POWER CO. TECHNOLOGIES P. LTD C/O M.VENKATESHWAR LU CHINTALAPUDI POST PONNUR MANDAL GUNTUR DISTRICT. A S PER THE LETTER DATED 18-4-2005 OBTAINED FROM M/S AIRLOOM ENGINEERI NG THE ABOVE AIR CONDITIONERS WERE DISPATCHED TO CHINTAAPUDI GUNTUR DI STRICT THOROUGH SRMT VIDE L.R. NO. 1213949 DT. 28-3-2001. THE PAYME NT WAS MADE BY THE ASSESSEE THROUGH CHEQUE. FROM THE ABOVE IT IS CLEAR T HAT THROUGH THE COMPANY HAS PAID FOR THE ABOVE ITEMS THE AIR COND ITIONERS WERE NOT INSTALLED IN THE COMPANY AND PUT TO USE BY THE COM PANY. INSTEAD IT WAS DELIVERED TO ONE MR. M. VENKATESHVARLU GUNTUR. I T MAY BE NOTICED THAT THE COMPANY HAS NO BRANCH OFFICE IN CHINTALAPUDI GUNTUR. FROM THE RECORDS IT IS NOTICED THAT MR. M.VENKATESHVARLU IS FATH ER OF SRI M. LEELADHARA RAO CEO OF THE COMPANY. 16 11.3. AS SEEN FROM THE ABOVE PARA OF THE REMAND REPO RT SUBMITTED BY THE ASSESSING OFFICER IT IS ADMITTED FACT THAT AIR CONDITI ONS ARE NOT AT ALL INSTALLED AT THE PREMISES OF EXPORT ORIENTED UNDERTAK ING AND IT WAS INSTALLED AT THE PREMISES OF SHRI. K VENKATESWARALU F/O CEO SHRI M. LEEDHARA RAO OFFICER AT GUNTUR. HENCE IT CANNOT BE CONSID ERED AS PLANT AND MACHINERY FOR THE PURPOSE OF APPLICABILITY OF SECTI ON 10B(2) OF THE IT ACT IN THE HANDS OF THE ASSESSEE AND SAME TO BE EXCLUD ED FOR THE PURPOSE OF COMPUTATION GROSS VALUE OF PLANT AND MACHINER Y. 11.4. IN THE LIGHT OF THE ABOVE THE FINDINGS OF CI T(A) THAT THE PLANT AND MACHINERY VALUING AT RS.5 87 547/- OUT OF RS.8 44 107/- HAS BEEN PREVIOUSLY USED BY OTHER UNDERTAKINGS IS NOT CORRE CT AND IT REQUIRED TO BE REWORKED BY ASSESSING OFFICER AND THEREAF TER HE HAS TO EXAMINE THE ALLOWABILITY OF DEDUCTION U/S 10B OF THE IT ACT. 12. NOW COMING TO THE SECOND GROUND OF THE ASSESSEE REGAR DING DEDUCTION U/S 80HHE THIS GROUND AS BEEN RAISED BY THE ASSESSE E BEFORE THE CIT(A). THE SAME WAS REJECTED ON THE REASON THAT T HE ASSESSEE IS CHANGING ITS STANCES TIME AND AGAIN TO SUIT ITS CONVENIE NCE. THE ASSESSING OFFICER AS WELL AS THE CIT(A) DOUBTED THE BON A FIDE BEHAVIOUR OF THE ASSESSEE AND ASSESSEE MADE A CLAIM OF 80HHE WHEN IT WAS CAUGHT IN THE FALSEHOOD OF ITS OWN SHIFTING STANCES. WE HAVE GONE THROUGH THE FACTS OF THE CASE. ORIGINALLY THE ASSESSEE MAD E A CLAIM U/S 10B. THIS EXEMPTION WAS DENIED BY THE ASSESSING OFFICER O N THE REASON THAT THE ASSESSEE NOT FULFILLED THE CONDITIONS LAID DOWN IN THE SECTION 10B (2) OF THE IT ACT. ALTERNATIVELY ASSESSEE MADE A CLAIM U /S 80HHE OF THE IT ACT BEFORE THE CIT(A). WE DO NOT FIND ANY INFIRM ITY IN THIS CLAIM OF THE ASSESSEE SINCE WHEN THE ASSESSEES ORIGINAL CLAIM U/S 10B WAS DENIED THE ASSESSEE IS AT LIBERTY TO MAKE AN ALTERNATIV E CLAIM. WE FIND NO JUSTIFICATION IN THE ORDER OF THE CIT(A) IN STATIN G THAT THE BEHAVIOUR OF THE ASSESSEE IS NOT BONA FIDE. BY TAKING INTO CONSIDERAT ION OF THE 17 FACTUAL SITUATION AND THE CIRCUMSTANCES CASE IN OUR VIEW T HERE WAS A SUFFICIENT CAUSE ON THE PART OF THE ASSESSEE FOR NOT MAKI NG THE CLAIM U/S 80HHE IN ITS ORIGINAL RETURN AND FILING THE PRESCRIBED F ORM BEFORE ASSESSING OFFICER. MOREOVER WHEN THERE IS CONFLICT BETWEE N SUBSTANTIAL CAUSE AND TECHNICALITY IN OUR VIEW SUBSTANTIAL CAUSE HA S TO BE PREFERRED RATHER THAN THE TECHNICALITIES. THEREFORE IN OUR VI EW IF THE ASSESSING OFFICER FINDS THAT ASSESSEE NOT ENTITLED DEDUCTION U/S 10 B THE ALTERNATIVE CLAIM OF THE ASSESSEE U/S 80HHE TO BE CONSIDERED BY THE ASSESSIN G OFFICER IN ACCORDANCE WITH LAW. THE ISSUES RAISED BY ASSESSEE IN THIS APPEAL ARE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION IN THE LIGHT OF ABOVE OBSERVATIONS. 13. THE OTHER GROUND IS RELATING TO CHARGING OF INTE REST U/S 234B AND 234C WHICH ARE CONSEQUENTIAL AND MANDATORY IN NATURE WHICH ARE TO BE CONSIDERED BY ASSESSING OFFICER AT THE TIME OF PASSING FRESH ASSESSMENT ORDER. 14. THE GROUNDS RAISED BY THE ASSESSEE IN ITA NO.728/HYD /2007 IS IDENTICAL AS SUCH THIS APPEAL ALSO SET ASIDE TO THE FIL E OF ASSESSING OFFICER ON SIMILAR DIRECTIONS. 15. IN THE RESULT THE APPEALS OF THE ASSESSEES IN ITA NOS.713/HYD/2005 AND ITA NO.728/HYD/2007 ARE PARTLY AL LOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 29.1.2010 SD/- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 29 TH JANUARY 2010 18 COPY FORWARDED TO: 1. M/S POWER COMPUTER TECHNOLOGIES (P) LTD. FLAT NO.G -2 PLOT NO.29B ROAD NO.8 FILMNAGAR JUBILEE HILLS HYDERABAD 2. ITO WARD 16 (2) HYDERABAD 3. CIT(A)-V HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. NP