Kernex Micro Systems(India)Limited, Hyderabad v. DCIT, Hyderabad

ITA 884/HYD/2006 | 2001-2002
Pronouncement Date: 30-03-2012 | Result: Partly Allowed

Appeal Details

RSA Number 88422514 RSA 2006
Assessee PAN AAACK8312Q
Bench Hyderabad
Appeal Number ITA 884/HYD/2006
Duration Of Justice 5 year(s) 5 month(s) 21 day(s)
Appellant Kernex Micro Systems(India)Limited, Hyderabad
Respondent DCIT, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-03-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 30-03-2012
Date Of Final Hearing 04-05-2011
Next Hearing Date 04-05-2011
Assessment Year 2001-2002
Appeal Filed On 09-10-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A' HYDERABAD BEFORE SHRI CHANDRA POOJARI ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN JUDICIAL MEMBER I.T.A. NO. 882/HYD/2006 A.Y. 1999-2000 I.T.A. NO. 883/HYD/2006 A.Y. 2000-2001 I.T.A. NO. 884/HYD/2006 A.Y. 2001-2002 I.T.A. NO. 885/HYD/2006 A.Y. 2002-2003 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. HYDERABAD PAN: AAACK8312Q VS. DY. COMMISSIONER OF INCOME - TAX CIRCLE-2(1) HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SHRI K.V.S. BHASKAR RAO AND SHRI K.A. SAI PRASAD RESPONDENT BY: SHRI V. SRINIVAS AND SHRI K. VISHWANATHAM DATE OF HEARING: 15 .0 2 .2012 DATE OF PRONOUNCEMENT: 30 .03.2012 O R D E R PER CHANDRA POOJARI AM: THESE FOUR APPEALS BY THE ASSESSEE ARE DIRECTED AG AINST THE COMMON ORDER OF THE CIT(A)-III HYDERABAD DATED 2 ND AUGUST 2006. SINCE THE ISSUES RAISED IN THESE FOUR APPEAL S ARE COMMON IN NATURE THEY ARE CLUBBED TOGETHER HEARD TOGETHE R AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2. THE FIRST COMMON GROUND IN THESE APPEALS IS WITH RE GARD TO INITIATION OF RE-ASSESSMENT PROCEEDINGS TO CONSIDER THE EXCESSIVE CLAIM ALLOWED U/S. 80HHE OF THE INCOME-TAX ACT 196 1. 3. FOR THE PURPOSE OF ADJUDICATING THIS GROUND SINCE THE FACTS ARE SAME IN ALL THESE YEARS WE CONSIDER THE ASSESS MENT YEAR 1999-2000. IN THIS YEAR THERE WAS NO SCRUTINY ASSE SSMENT. THE RETURN OF INCOME WAS PROCESSED U/S. 143(1) ON 29.3. 2000. LATER THE ASSESSING OFFICER ISSUED NOTICE U/S. 147 ON 31. 3.2004 I.E. I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 2 WITHIN FOUR YEARS FROM THE END OF RELEVANT ASSESSME NT YEAR TO CONSIDER THE EXCESSIVE DEDUCTION GRANTED U/S. 80HHC OF THE ACT. THE CONTENTION OF THE ASSESSEE'S COUNSEL IS THAT TH E NOTICE U/S. 147 WAS ISSUED FOR ALL THESE ASSESSMENT YEARS ON 31 .3.2004. ACCORDING TO THE AR THE ASSESSING OFFICER HAD NOT GIVEN ANY REASONS FOR ISSUING THE NOTICE U/S. 147 OF THE ACT. THE ASSESSING OFFICER WHILE PASSING THE IMPUGNED ASSESSMENT ORDER CONSIDERED THE ISSUE RELATING TO THE ALLOWABILITY OF DEDUCTION U/S. 80HHE FOR THESE ASSESSMENT YEARS. ACCORDING TO THE ASSESSEE' S COUNSEL ALL THE REQUIRED INFORMATION REGARDING THE ALLOWABILITY OF DEDUCTION U/S. 80HHE WAS VERY MUCH WITH THE ASSESSING OFFICER AND THERE IS NO FRESH MATERIAL CAME TO THE KNOWLEDGE OF THE ASSE SSING OFFICER TO REOPEN THE ASSESSMENT. THERE IS NO MISTAKE ON THE PART OF THE ASSESSEE IN FURNISHING THE RELEVANT INFORMATION FOR THE PURPOSE OF ASSESSMENT AND THERE IS NO FRESH MATERIAL WHICH HAS COME TO THE NOTICE OF THE ASSESSING OFFICER INDICATING ESCAPEME NT OF INCOME AND ALL THAT THE ASSESSING OFFICER HAS DONE WAS ONL Y RE-CALCULATION BASED ON FIGURES AVAILABLE ON RECORD. ACCORDING TO THE AR UNLESS SOME FRESH MATERIAL INDICATING ESCAPEMENT OF INCOME HAS COME TO THE NOTICE OF THE ASSESSING OFFICER NO NOTICE U/S. 147 OF THE ACT CAN BE ISSUED. THIS IS SO EVEN IN CASES WHERE SIM PLE INTIMATION U/S. 143(1)(A) OF THE ACT WAS SENT ACCORDING TO THE LATER DECISION OF MUMBAI BENCH IN THE CASE OF SINCE THE FACTS ARE S AME IN ALL THESE YEARS WE CONSIDER THE ASSESSMENT YEAR 1999-2000. IN THIS YEAR THERE WAS NO SCRUTINY ASSESSMENT. THE RETURN OF IN COME WAS PROCESSED U/S. 143(1) ON 29.3.2000. LATER THE ASS ESSING OFFICER ISSUED NOTICE U/S. 147 ON 31.3.2004 I.E. WITHIN FO UR YEARS FROM THE END OF RELEVANT ASSESSMENT YEAR TO CONSIDER THE EXCESSIVE DEDUCTION GRANTED U/S. 80HHC OF THE ACT. THE CONTE NTION OF THE ASSESSEE'S COUNSEL IS THAT THE NOTICE U/S. 147 WAS ISSUED FOR ALL THESE ASSESSMENT YEARS ON 31.3.2004. ACCORDING TO THE AR THE ASSESSING OFFICER HAD NOT GIVEN ANY REASONS FOR ISS UING THE NOTICE I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 3 U/S. 147 OF THE ACT. THE ASSESSING OFFICER WHILE P ASSING THE IMPUGNED ASSESSMENT ORDER CONSIDERED THE ISSUE REL ATING TO THE ALLOWABILITY OF DEDUCTION U/S. 80HHE FOR THESE ASSE SSMENT YEARS. ACCORDING TO THE ASSESSEE'S COUNSEL ALL THE REQUIRE D INFORMATION REGARDING THE ALLOWABILITY OF DEDUCTION U/S. 80HHE WAS VERY MUCH WITH THE ASSESSING OFFICER AND THERE IS NO FRESH MA TERIAL CAME TO THE KNOWLEDGE OF THE ASSESSING OFFICER TO REOPEN TH E ASSESSMENT. THERE IS NO MISTAKE ON THE PART OF THE ASSESSEE IN FURNISHING THE RELEVANT INFORMATION FOR THE PURPOSE OF ASSESSMENT AND THERE IS NO FRESH MATERIAL WHICH HAS COME TO THE NOTICE OF THE ASSESSING OFFICER INDICATING ESCAPEMENT OF INCOME AND ALL THA T THE ASSESSING OFFICER HAS DONE WAS ONLY RE-CALCULATION BASED ON F IGURES AVAILABLE ON RECORD. ACCORDING TO THE AR UNLESS SOME FRESH M ATERIAL INDICATING ESCAPEMENT OF INCOME HAS COME TO THE NOT ICE OF THE ASSESSING OFFICER NO NOTICE U/S. 147 OF THE ACT CAN BE ISSUED. THIS IS SO EVEN IN CASES WHERE SIMPLY AN INTIMATION U/S. 143(1)(A) OF THE ACT WAS SENT ACCORDING TO THE LATEST DECISION O F MUMBAI BENCH IN THE CASE OF H.V. TRANSMISSIONS LTD. VS. ACIT IN ITA NOS. 2230 AND 2476/MUM/2010 DATED 7.10.2011. ACCORDING TO TH E ASSESSEE'S COUNSEL THE JUDGEMENT OF SUPREME COURT I N THE CASE OF RAJESH JHAVERI STOCK BROKERS (P) LTD. 291 ITR 500 IS NOT APPLICABLE TO THE FACTS OF THE CASE. MORE SO THE SAME WAS CONSIDERED BY THE MUMBAI BENCH WHILE ADJUDICATING S IMILAR ISSUE IN THE CASE OF H.V. TRANSMISSIONS LTD. (SUPRA). HE RELIED ON THE JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF P.C. P URI VS. CIT 151 ITR 584. ACCORDING TO THE LEARNED AR THERE IS NO TANGIBLE MATERIAL JUSTIFYING THE REOPENING OF ASSESSMENT TO SAY THAT THERE IS ESCAPEMENT OF INCOME. HE RELIED ON THE ORDER OF TH E TRIBUNAL IN THE CASE OF TELCO DADAJI DHAKJEE LTD. VS. DCIT IN I .T.A. NO. 4613/MUM/05 DATED 12 TH MAY 2010. HE ALSO RELIED ON THE JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF CIT VS . KELVINATOR OF INDIA & EICHER LTD. 320 ITR 561. I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 4 4. THE LEARNED DR STRONGLY OPPOSED THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE AND SUBMITTED THAT THERE WAS NO ASSESSMENT IN THIS CASE U/S. 143(3) OF THE ACT. BE ING SO THERE IS NON CONSIDERATION OF ISSUE RELATING TO DEDUCTION U/ S. 80HHE OF THE ACT. HE RELIED ON THE JUDGEMENT OF SUPREME COURT I N THE CASE OF RAJESH JHAVERI STOCK BROKERS (P) LTD. (SUPRA). FUR THER HE RELIED ON THE JUDGEMENT OF MADRAS HIGH COURT IN THE CASE OF A REVA T. AND D INDIA LTD. VS. ACIT (294 ITR 233) FOR THE PROPOSITI ON THAT IF THERE IS ANY PROCEDURAL IRREGULARITIES IN COMPLETING THE RE- ASSESSMENT IT DOES NOT INVALIDATE THE ASSESSMENT ORDER. HE ALSO RELIED ON THE JUDGEMENT P & H HIGH COURT IN THE CASE OF SUNIL BHA SEEN VS. CIT (179 TAXMAN 148) FOR THE PROPOSITION THAT THE DEPAR TMENT WAS UNDER NO OBLIGATION TO DISPOSE OF OBJECTION OF THE ASSESSEE TO THE INITIATION OF PROCEEDINGS BY WAY OF SEPARATE AND I NDEPENDENT ORDER UNLESS THE FINDINGS OF THE ASSESSING OFFICER ARE NOT PERVERT IN ANY MANNER. 5. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE M ATERIAL AVAILABLE ON RECORD. IN THIS CASE THERE IS NO ASSE SSMENT U/S. 143(3) OF THE ACT AND ONLY THE RETURN WAS PROCESSED U/S. 143(1) OF THE ACT. THE REOPENING OF THE ASSESSMENT IS WITHIN FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. AS PER CL AUSE (B) OF EXPLANATION 2 TO PROVISO TO SECTION 147 WHERE A RET URN OF INCOME HAS BEEN FURNISHED BY THE ASSESSEE BUT NO ASSESSMEN T HAS BEEN MADE AND IT IS NOTICED BY THE ASSESSING OFFICER THA T THE ASSESSEE HAS UNDERSTATED THE INCOME OR HAS CLAIMED EXCESSIVE LOSS DEDUCTION ALLOWANCE OR RELIEF IN THE RETURN THE A SSESSING OFFICER IS ENTITLED TO REOPEN THE ASSESSMENT. FURTHER IN T HE CASE OF ACIT VS. RAJESH JHAVERI STOCK BROKERS (P) LTD. (SUPRA) IT WAS HELD THAT THE ASSESSING OFFICER IS HAVING JURISDICTION TO ISS UE NOTICE U/S. 148 FOR BRINGING TO TAX INCOME ESCAPING ASSESSMENT ON T HE GROUND THAT THE ASSESSEE CLAIMED EXCESSIVE RELIEF OR DEDUCTION. IN THE PRESENT I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 5 CASE CONSIDERING THE EXCESSIVE CLAIM OF THE ASSESSE E U/S. 80HHE WE ARE OF THE OPINION THAT REOPENING OF ASSESSMENT IS VALID. 6. WE HAVE ALSO CAREFULLY GONE THROUGH THE ORDER OF TH E MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF H.V. TR ANSMISSIONS LTD. (SUPRA). IN THIS CASE THE ASSESSEE INCURRED E XPENSES TOWARDS ENTERPRISE RESOURCE PLANNING SOFTWARE AMOUNTING TO RS. 95.14 LAKHS. IN THE ACCOUNTS THE ASSESSEE HAS DEBITED 25 % OF THIS AMOUNT I.E. RS. 23 78 500 WHEREAS IN THE COMPUTATI ON OF INCOME THE ASSESSEE HAS CLAIMED THE ENTIRE AMOUNT OF RS. 9 5.14 LAKHS AS DEDUCTION. THE EXPENSES INCURRED BY THE ASSESSEE I S PAYMENT FOR ACQUISITION OF SOFTWARE WHICH IS CAPITAL IN NATURE. HENCE THE ASSESSMENT IS REOPENED TO DISALLOW THE SAME. ON AP PEAL TO THE TRIBUNAL IT WAS HELD THAT THERE WAS NO MATERIAL CO MING TO THE POSSESSION OF THE ASSESSING OFFICER ON THE BASIS OF WHICH THE ASSESSMENT COMPLETED U/S. 143(1) WAS REOPENED AND T HIS POSITION HAS NOT BEEN DISPUTED EVEN BY THE DR. BEING SO I N THE PRESENT CASE WE ARE NOT IN A POSITION TO APPLY THE RATIO LA ID DOWN BY THAT DECISION BECAUSE CLAUSE (B) TO EXPLANATION 2 TO PRO VISO 2 OF SECTION 147 CLEARLY AUTHORISES THE ASSESSING OFFICER TO REO PEN THE ASSESSMENT. THIS PROVISION IS TO BE CONSIDERED FOR THE PURPOSE OF ADJUDICATING THIS ISSUE. THIS GROUND RELATING TO R EOPENING OF ASSESSMENT IS DECIDED AGAINST THE ASSESSEE. 7. THE NEXT COMMON GROUND IN THIS APPEAL IS WITH REGAR D TO REDUCING DEDUCTION CLAIMED BY THE ASSESSEE U/S. 80H HE ON THE REASONS THAT (A) SETTING OFF OF LOSSES OF SYSTEM/TR AINING DIVISIONS AGAINST PROFIT OF THE SOFTWARE DIVISION (B) WRONGL Y INCLUDING TURNOVER OF SYSTEM/TRAINING DIVISION IN THE TOTAL T URNOVER (C) INCLUSION OF EMPLOYEES COMPENSATION IN THE TOTAL TU RNOVER INSTEAD OF NETTING FROM EXPENSES AND (D) CONSIDERATION OF P ROFIT ON SALE OF FIXED ASSETS IN THE TOTAL TURNOVER. I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 6 8. THE LEARNED AR SUBMITTED THAT THESE GROUNDS ARE RAI SED AGAINST AGGREGATION OF THE PROFITS OF THE 100% EOU (COMPUTER SOFTWARE) WITH THE LOSSES OF THE TRAINING DIVISION FOR PURPOSES OF CALCULATING THE DEDUCTION U/S 80HHE. HE SUBMITTED THAT THE COMMISSIONER OF INCOME TAX HAS NOT GIVEN THE CORREC T FACTS. THE FACTS ARE THAT THE TURNOVERS AND PROFITS OF THE COM PUTER SOFTWARE DIVISION CONSTITUTED AS A 100% EOU UNIT ARE EARNED INDEPENDENT OF THE TURNOVER AND THE FINANCIAL RESULTS OF THE OT HER DIVISION NAMELY TRAINING DIVISION FOR THE FIRST TWO YEARS A ND RAILWAY SYSTEMS DIVISION FOR THE LATER TWO YEARS AND SEPARA TE BOOKS OF ACCOUNT ARE MAINTAINED FOR EACH DIVISION. THE OPERA TIONS OF THE COMPUTER SOFTWARE DIVISION ARE STATUTORILY REQUIRED TO BE KEPT ISOLATED AND INDEPENDENT OF THE OTHER OPERATIONS OF THE COMPANY. THE ACTIVITIES OF THE DIVISION DO NOT DOVETAIL INT ERLACE OR COMBINE WITH THE OPERATIONS OF THE OTHER DIVISIONS. IT IS B ROUGHT TO OUR NOTICE THAT THE INCOME TAX DEPARTMENT HAS ACCEPTED THE INDEPENDENCE OF THE 100% EOU SOFTWARE DIVISION IN A LL THE YEARS UP TO A.Y. 1998-99 BY ACCEPTING A SEPARATE COMPUTAT ION UNDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS OR PROFESSION ' IN RESPECT OF COMPUTER SOFTWARE DIVISION AS DISTINCT AND SEPARATE FROM OTHER BUSINESSES OF THE ASSESSEE. 9. THE ASSESSEE'S COUNSEL SUBMITTED THAT THE COMPUTER SOFTWARE DIVISION IS CONTINUED TO BE RECOGNIZED AND APPROVED BY THE STPI AUTHORITIES TO DATE AS A 100% EOU UNIT FO R THE PURPOSES OF FOREIGN TRADE POLICY AS IT FULFILS ALL THE CONDI TIONS THERE UNDER THOUGH THE BENEFITS UNDER SEC 10B OF THE INCOME TAX ACT. 1961 HAVE EXPIRED BY A.Y. 1998-99. MERE CLAIM OR OTHERW ISE UNDER SEC 10A/10B OR SEC 80IA/80IB DO NOT DETERMINE WHETHER A PARTICULAR UNIT IS INDEPENDENT OR NOT. THE INDEPENDENCE HAS T O BE JUDGED ON THE BASIS OF THE RULES GOVERNING THE SAID UNIT AND WHETHER IN ACTUAL PRACTICE AND AS A MATTER OF FACT IT IS INDE PENDENT OR NOT. THEREFORE THE COMPUTER SOFTWARE DIVISION IS INDEPE NDENT AND DISTINCT FROM THE OTHER BUSINESSES OF THE ASSESSEE. 10. THE ASSESSEE'S COUNSEL FURTHER SUBMITTED THAT THE A SSESSING OFFICER IN HIS LENGTHY ORDER DID NOT DISPUTE ANY OF THE ABOVE FACTS I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 7 BROUGHT BEFORE HIM. IT IS NOT THE CASE OF THE ASSES SING OFFICER THAT NO SEPARATE BOOKS ARE MAINTAINED. THERE IS NO DISPU TE ON FACTS BEFORE THE ASSESSING OFFICER. HIS ONLY OBJECTION ST EMS FROM THE LEGAL ANGLE AND CONFINED TO INTERPRETATION OF THE D ECISION OF SUPREME COURT IN THE CASE OF IPCA LABORATORIES LTD VS DCIT (266 ITR 521) RENDERED IN THE CONTEXT OF SEC. 80HHC AND IN THE CASE OF H.H. SIR RAMA VARMA VS CIT (205 ITR 433) IN CONNECT ION WITH DEDUCTION UNDER SEC. 80T. HE RELIED ON THESE DECISI ONS TO HOLD THAT THE PROFITS OF THE COMPUTER SOFTWARE DIVISION SHOUL D BE REDUCED BY THE LOSSES OF THE TRAINING DIVISION AND THE CIT(A) UPHELD THE SAME. 11. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT THE COMMISSIONER OF INCOME TAX (A) TREATED THE ISSU E AS THOUGH THERE ARE NO SEPARATE BOOKS OF ACCOUNT. HE CITED AL L CASES RELATING TO 80HHC WHICH ARE NOT APPLICABLE TO THE DEDUCTIONS UNDER OTHER SECTIONS LIKE 80HHE 80HHF. FOR EXAMPLE IN SEC 80HH C THE MECHANISM FOR WORKING OUT THE PROFITS DERIVED FROM EXPORT HAS BEEN GIVEN IN THREE DIFFERENT SITUATIONS DEPENDING ON THE FULFILMENT OF THE RELEVANT REQUIREMENTS. BUT AS PER 80HHE(3) AND 80HHF(3) IT IS CLEAR THAT ONLY ONE METHOD HAS BEEN PROVIDED FOR TO COMPUTE THE PROFITS DERIVED FROM EXPORTS. THERE IS NO PROVI SION SIMILAR TO CLAUSE (B) OF SEC 80HHC(3) PRESCRIBING METHOD OF DE TERMINING THE EXPORT PROFITS BY REDUCING DIRECT AND INDIRECT COST S FROM THE EXPORT TURNOVER. IT IS TO BE NOTED THAT SUB-SECTION (1) OF SEC 80HHE SIMPLY REFERS TO DEDUCTION TO THE EXTENT OF PROFITS DERIVED BY THE ASSESSEE 'FROM SUCH BUSINESS'. HENCE THE LOWER AUTH ORITIES ARE NOT JUSTIFIED IN RELYING ON DECISIONS RENDERED IN THE C ONTEXT OF 80HHC AS THE DEDUCTION CLAIMED IN THIS CASE IS UNDER SEC 80HHE. HE RELIED ON THE ORDER OF THE TRIBUNAL BOMBAY BENCH I N THE CASE OF SRI ADHIKARI BROS. TELEVISION NET WORKS LTD. VS. AC IT 130 ITD 439 WHICH IS GIVEN IN THE CONTEXT OF AN IDENTICAL PROVI SION IN SEC. 80HHF WHILE HOLDING THAT THE RULES APPLICABLE TO CO MPUTATION OF PROFIT UNDER SEC. 80HHC WOULD NOT APPLY FOR ARRIVIN G AT ELIGIBLE PROFIT UNDER SEC. 80HHF. IT APPROVED ITS COORDINATE BENCH DECISION IN DATAMATICS LTD V ACIT (110 ITD 24) AS WELL AS TH E DECISION OF BANGALORE BENCH IN THE CASE OF WIPRO GE MEDICAL SYS TEMS V DCIT I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 8 (81 TTJ 455) RENDERED IN CONNECTION WITH THE COMPUT ATION OF RELIEF UNDER SEC. 80HHE -'COMPUTER SOFTWARE'. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE TRIBUNAL I N THE CASE OF DATAMATICS 110 ITD 24 (MUMBAI) LTD WHICH DEALT WIT H THE COMPUTATION OF DEDUCTION U/S. 80HHE AND IS DIRECTLY APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN THAT CASE THE AS SESSEE-COMPANY WAS EXPORTING COMPUTER SOFTWARE MANUFACTURED IN SEE PZ UNIT AND KEEPING SEPARATE ACCOUNT BOOKS. THE ASSESSING O FFICER HELD THAT TOTAL TURNOVER OF ENTIRE BUSINESS WAS TO BE CO NSIDERED INSTEAD OF TURNOVER OF ONLY THE UNIT LOCATED AT SEEPZ. BEFO RE THE TRIBUNAL IT WAS PLEADED ON BEHALF OF THE ASSESSEE THAT: 'WHE RE THE TWO SEPARATE BUSINESSES OF AN ASSESSEE ARE PROPERLY DEM ARCATED IN TERMS OF LOCATION OPERATIONS AND ALSO WHERE SEPARA TE BOOKS OF ACCOUNT ARE MAINTAINED FOR DIFFERENT UNITS IT SHOU LD BE CONSIDERED AS SEPARATE ENTITY AND ONLY TURNOVER OF SEEPZ UNIT SHOULD HAVE BEEN CONSIDERED WHILE CALCULATING DEDUCTION UNDER S ECTION 80HHE'. IT WAS IN THIS BACKDROP OF FACTS THAT THE T RIBUNAL HELD THAT ONLY TURNOVER OF SEEPZ UNIT WAS TO BE CONSIDER ED WHILE CALCULATING DEDUCTION UNDER SECTION 80HHE. 12. IT WAS SUBMITTED THAT IN TWO CASES CONSIDERED BY BA NGALORE BENCH IN THE CASE OF WIPRO GE MEDICAL SYSTEMS LTD V DCIT (2003) 81 TTJ 455 AND WIPRO LTD VS. DCIT (2006) (96 TTJ 21 1 /5 SOT 805) ALSO RELATE TO SEC 80HHE. IN THESE CASE IT I S HELD THAT THE INCLUSION OF TURNOVER OF THE ASSESSEE NOT CONNECTED WITH COMPUTER SOFTWARE BUSINESS WAS NOT JUSTIFIED. AT PARAGRAPH 3 3 & 34 OF THE ORDER IN THE CASE OF WIPRO LTD THE BENCH HELD THAT THE TOTAL TURNOVER FOR THE PURPOSES OF SEC. 80HHE CAN ONLY ME AN THE TOTAL TURNOVER OF THE COMPUTER SOFTWARE BOTH IN INDIA AND ABROAD. BY ADVERTING TO THE LEGISLATIVE INTENT THE BENCH SAID THAT IT IS NOT CORRECT TO INCLUDE ANY OTHER TURNOVER NOT CONNECTED WITH THE COMPUTER SOFTWARE BUSINESS AND THEREFORE TURNOVERS ON ACCOUNT OF MANUFACTURING TRADING ETC. SHOULD BE EXCLUDED FRO M THE COMPUTATION OF ELIGIBLE PROFIT FOR SEC. 80HHE. 13. IN THE LIGHT OF THE ABOVE DISCUSSION THE LEARNED C OUNSEL FOR THE ASSESSEE PRAYED THAT THE TRIBUNAL BE PLEASE D TO ALLOW I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 9 RELIEF U/S 80HHE ON THE PROFITS OF THE 100% EOU COM PUTER SOFTWARE TO THE EXCLUSION OF THE PROFITS OR LOSSES OF OTHER DIVISIONS. THESE GROUNDS ARE PERFECTLY JUSTIFIED A S AMOUNT RECEIVED TOWARDS EMPLOYEE'S COMPENSATION AND PROFIT ON SALE OF FIXED ASSETS DO NOT FORM PART OF THE TURNOVER AND T HEY MAY BE DIRECTED TO BE DELETED FROM TURNOVERS. 14. THE LEARNED DR SUPPORTED THE ORDER OF THE LOWER AUT HORITIES AND HE ALSO RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF DCIT VS. EDS ELECTRONICS DATA SYSTEMS (INDIA) (P) LD. 2 0 SOT 403 (DEL). 15. WE HAVE CAREFULLY CONSIDERED THE PROVISIONS OF SECT ION 80HHE AND THE RIVAL ARGUMENTS. IN SUB-SECTION (1) IT IS PROVIDED THAT THE ASSESSEE SHALL BE ALLOWED A DEDUCTION OF T HE PROFITS FROM THE ELIGIBLE BUSINESS. SUCH DEDUCTION IS TO BE ALLO WED IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. SUB-SEC TION (3) HAS BEEN ENACTED ONLY FOR THE PURPOSES OF SUB-SECTION ( 1). SUB-SECTION (1) REQUIRES THAT THE PROFITS WHICH ARE ELIGIBLE FO R THE DEDUCTION SHOULD BE DERIVED BY THE ASSESSEE FROM THE ELIGIBLE BUSINESS. WHAT ARE THE PROFITS DERIVED FROM THE ELIGIBLE BUSINESS IS EXPLAINED IN SUBSECTION (3). IT SAYS THAT THE PROFITS DERIVED FR OM THE ELIGIBLE BUSINESS SHALL BE THE AMOUNT WHICH BEARS TO THE PR OFITS OF THE BUSINESS THE SAME PROPORTION AS THE EXPORT TURNOVE R BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE AS SESSEE. EXPLANATION (D) BELOW THE SECTION DEFINES THE EXPRE SSION PROFITS OF THE BUSINESS AS MEANING THE PROFITS OF THE BUSINES S AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AS R EDUCED BY INTER ALIA 90% OF THE RECEIPTS BY WAY OF BROKERAGE COMM ISSION ETC. WHICH ARE INCLUDED IN SUCH PROFITS. THE WORKING OF THE ASSESSING OFFICER IS PREMISED ON THE ASSUMPTION THAT THE EXP RESSION PROFITS OF THE BUSINESS APPEARING IN SUB-SECTION (3) READ WITH EXPLANATION (D) MEANS PROFITS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE. THE ASSESSING OFFICER HAS TAKEN THE B USINESS INCOME AS A WHOLE. THIS FIGURE OF PROFIT REPRESENTS PROFIT S OF THE VARIOUS BUSINESSES CARRIED ON BY THE ASSESSEE INCLUDING THE PROFITS ON EXPORT OF COMPUTER SOFTWARE (ELIGIBLE BUSINESS). I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 10 16. FROM THE BUSINESS PROFITS FIGURE THE ASSESSING OFFI CER HAS REDUCED 90% OF THE COMMISSION BROKERAGE ETC. AS A LSO INTEREST RECEIPT WHICH HE HAS CONSIDERED TOBE INCOME FROM OT HER SOURCES AND HAS ARRIVED AT A FIGURE AND THEREAFTER APPLIED THE FORMULA TO DETERMINE THE 80HHE DEDUCTION. HE DID NOT CONSIDER IT NECESSARY TO EXAMINE THE ASSESSEES CONTENTION THAT THE TOTAL TURNOVER OF ONLY THE ELIGIBLE BUSINESS SHOULD BE TAKEN NOTE OF FOR THE PURPOSE OF APPLYING THE FORMULA LAID DOWN IN SUB-SECTION (3 ). 17. THE CONTROVERSY BEFORE US THEREFORE IS LIMITED TO T HE QUESTION AS TO WHETHER WHILE APPLYING SUB-SECTION (3) AND T HE FORMULA PRESCRIBED THEREIN THE EXPRESSION PROFITS OF THE BUSINESS SHOULD MEAN ONLY THE PROFITS OF THE ELIGIBLE BUSINESS OR T HE PROFITS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE. WHEREAS THE FIGURE ADOPTED BY THE ASSESSING OFFICER REPRESENTS THE AGG REGATE PROFITS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE T HE FIGURE OF WHICH FORMS THE BASIS OF THE ASSESSEES COMPUTATION REPRESENTS ONLY THE PROFITS OF THE ELIGIBLE BUSINESS. THE TAS K BEFORE US IS TO EXAMINE WHICH OF THE TWO VIEWS IS CORRECT. 18. ACCORDING TO US THE VIEW CANVASSED ON BEHALF OF TH E ASSESSEE IS TO BE PREFERRED OVER THE VIEW PUT FORTH ON BEHALF OF THE INCOME TAX DEPARTMENT. AS ALREADY NOTED SUB-SECTIO N (3) EXISTS ONLY FOR THE PURPOSES OF SUB-SECTION (1) AND IT SAY S THAT PROFITS DERIVED FROM THE BUSINESS REFERRED TO IN SUB-SECTIO N (1) WHICH IS THE ELIGIBLE BUSINESS SHALL BE THE AMOUNT WHICH BE ARS TO THE PROFITS OF THE BUSINESS THE SAME PROPORTION AS THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE. IF REGARD IS HAD TO BE USE OF THE DEFINIT E ARTICLE THE IT SEEMS TO US THAT THE EXPRESSION PROFITS OF THE BUS INESS APPEARING IN SUBSECTION (3) REFERS ONLY TO THE PROFITS OF THE ELIGIBLE BUSINESS WHICH IS REFERRED TO IN SUB-SECTION (1). IN OTHER W ORDS IT IS ONLY THE PROFITS OF THE ELIGIBLE BUSINESS WHICH HAVE TO BE S PLIT IN THE SAME PROPORTION AS THE EXPORT TURNOVER IN THE SAID BUSIN ESS BEARS TO THE TOTAL TURNOVER IN THE SAID BUSINESS. EXPLANATION (D ) WHICH DEFINES THE EXPRESSION PROFITS OF THE BUSINESS REFERS TO THE PROFITS OF THE I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 11 BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GA INS OF BUSINESS. UNDER THE INCOME TAX ACT HAVING REGARD TO THE PROVISIONS OF CHAPTER IV READ WITH SECTION 70 AND S ECTION 71 IT SEEMS TO US THAT IN THE CASE OF AN ASSESSEE CARRYIN G ON MORE THAN ONE BUSINESS EACH BUSINESS IS CONSIDERED AS A SEPA RATE SOURCE FALLING UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS. THE NET RESULT OF THE COMPUTATION IN RESPECT OF ANY SOURCE OF BUSINESS IF IT IS A LOSS CAN BE ADJUSTED AGAINST THE INCOME FROM ANY OTHER BUSINESS AS PROVIDED IN SECTION 70(1). THEREFORE W HEN EXPLANATION (D) PROVIDES THAT THE EXPRESSION PROFI TS OF THE BUSINESS MEANS THE PROFITS OF THE BUSINESS AS COMP UTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS IT MEANS THE PROFITS OF THE ELIGIBLE BUSINESS AS COMPUTED UNDER THE AFORESAID H EAD. IN OTHER WORDS EXPLANATION (D) DOES NOT EXPAND THE MEANING OF THE EXPRESSION PROFITS OF THE BUSINESS TO INCLUDE PRO FITS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE. HAVING SAID IN SUB-SECTION (3) THAT THE PROFITS OF THE BUSINESS MEANS THE PROF ITS OF THE ELIGIBLE BUSINESS REFERRED TO IN SUB-SECTION (1) IT IS INCO NCEIVABLE THAT BY EXPLANATION (D) THE EXPRESSION PROFITS OF THE BUSI NESS WOULD HAVE BEEN DEFINED TO INCLUDE THE PROFITS OF ALL THE BUSI NESSES CARRIED ON BY THE ASSESSEE. THE EXPLANATION CAN ONLY EXPLAIN THE EXPRESSION PROFITS OF THE BUSINESS APPEARING IN SUB-SECTION (3) BUT IT CANNOT EXPAND THE MEANING OF THE EXPRESSION. EXPLANATION ( D) IS CONTROLLED BY SUBSECTION (3) AND WHAT IT SAYS IS ON LY DESCRIPTIVE OF WHAT THE PROFITS OF THE BUSINESS ARE. IT ONLY SAYS THAT THE PROFITS OF THE BUSINESS WHICH MEANS THE ELIGIBLE BUSINESS AR E THE PROFITS AS COMPUTED IN THE ASSESSMENT ORDER UNDER THE HEAD PR OFITS AND GAINS OF BUSINESS. IT HAS POSSIBLY BEEN ENACTED TO CLARIFY OR EXPLAIN THAT THE PROFITS OF THE ELIGIBLE BUSINESS I S NOT WHAT THE BOOKS OF ACCOUNT OF THE ASSESSEE SHOW AND IT CAN ON LY BE WHAT THE ASSESSMENT ORDER SHOWS. IT IS ALSO SIGNIFICANT THAT SUB-SECTION (3) AS WELL AS EXPLANATION (D) REFER ONLY TO PROFITS O F THE BUSINESS AND NOT THE PROFITS OF ALL THE BUSINESSES CARRIED O N BY THE ASSESSEE. THIS REASONING ALSO TAKES CARE OF THE ARG UMENT OF THE LEARNED DR BASED ON TRIBUNAL DECISION. IN THIS VIEW OF THE I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 12 MATTER WE ARE UNABLE TO ACCEPT THE CONTENTION ADV ANCED ON BEHALF OF THE DEPARTMENT. 19. OUR VIEW IS IN CONFORMITY WITH THE VIEW TAKEN BY A COORDINATE BENCH IN MUMBAI IN THE CASE OF DATAMATIC S LTD. VS. ACIT (2007) 111 TTJ (MUM) 55. PARAGRAPHS 35 AND 36 OF THIS ORDER DEAL WITH THE QUESTION. THESE PARAGRAPHS ARE AS UNDER: - 35. IT IS THE CASE OF THE ASSESSEE THAT ASSESSEE COMPANY IS EXPORTING THE COMPUTER SOFTWARE MANUFACTURED IN SEEPZ UNIT. ASSESSEE IS KEEPING SEPARATE ACCOUNT. THE ENTIRE ACTIVITY OF THE ASSESS EE IN THIS ZONE IS INDEPENDENT FROM ASSESSEES OTHER BUSINESS. THERE IS NO OVERLAPPING AND MINGLING OF T HE SERVICES OR ANY LINK BETWEEN THE MANUFACTURING ACTIVITIES OF BOTH. BOTH ARE EXCLUSIVE OF EACH OTHE R. 36. AS RIGHTLY CONTENDED BY THE LEARNED COUNSEL SE CTION 80HHC SPEAKS OF DEDUCTION IN RESPECT OF PROFITS DER IVED BY THE ASSESSEE FROM EXPORT OF SUCH GOODS OR MERCHANDISE; WHEREAS SECTION 80HHE SPEAKS OF SUCH BUSINESS. SUCH BUSINESS ONLY COULD MEAN THE BUSINESS OF EXPORT OF COMPUTER SOFTWARE. THE SCOPE OF CONSIDERATION HAS BEEN NARROWED DOWN. IN OTHER WORDS WHETHER THE ASSESSEE DERIVES INCOME FROM ANY OTHER BUSINESS OR NOT IS NOT A CRITERIA AND IT IS WHOLLY EXTRANEOUS WHILE GRANTING DEDUCTION UNDER SECTION 80HHE WHICH IS EXCLUSIVELY FOR COMPUTING DEDUCTION IN RESPECT OF PROFIT FROM EXPORT OF COMPUTER SOFTWARE ETC. FOR THE REASONS STATED HEREINABOVE WE ALLOW THE CL AIM OF THE ASSESSEE ON THIS GROUND. IN COMING TO THE ABOVE CONCLUSION THE TRIBUNAL HAS REFERRED TO TWO JUDGMENTS OF THE MADRAS HIGH COURT IN THE CASE OF CIT VS. RATHORE BROTHERS (2002) 254 ITR 656 (MAD) AND IN THE CASE OF CIT VS. MADRAS MOTORS / M M FORGINGS LTD. (2002) 257 ITR 60 (MAD). THESE TWO JUDGMENTS WERE CONCERNED WITH SECTION 80HHC OF THE ACT. HOWEVER THERE WAS SIMILARITY BETWEEN SECTION 80HHC AND SECTION 80HHE IN THE SENSE THAT WHILE WORKING OUT THE ELIGIBLE PROFITS ON THE BASIS OF TH E RATIO BETWEEN THE EXPORT TURNOVER AND THE TOTAL TURNOVER IT WAS HELD BY THE MADRAS HIGH COURT THAT IT IS ONLY T HE PROFITS OF THE EXPORT BUSINESS THAT HAVE TO BE SO APPORTIONED AND THE PROFITS OF BUSINESSES WHICH DID NOT QUALIFY FOR THE DEDUCTION WHICH WERE ALSO CARRIED ON BY I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 13 THE ASSESSEE CANNOT BE HELD ELIGIBLE FOR THE DEDUC TION. THE RATIO LAID DOWN IN THESE JUDGMENTS WAS CONSIDER ED APPLICABLE TO THE PROVISIONS OF SECTION 80HHE ALSO. 20. THE RESULT OF THE ABOVE DISCUSSION IS THAT THE DEPA RTMENTAL AUTHORITIES WERE NOT CORRECT IN TAKING THE PROFITS OF THE ELIGIBLE BUSINESS AS RELATING TO WHOLE BUSINESS OF THE ASSES SEE. THEY OUGHT TO HAVE TAKEN THE FIGURE AS CONTENDED FOR BY THE ASSESSEE WHICH FIGURE REPRESENTS THE PROFITS OF THE SOFTWARE DIVISION WHICH IN OTHER WORDS ARE THE PROFITS OF THE ELIGIBLE BUSI NESS. 21. IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE OPIN ION THAT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 80HHE T HE PROFIT OF 100% EOU COMPUTER SOFTWARE HAS TO BE CONSIDERED. 22. REGARDING THE TOTAL TURNOVER FOR THE PURPOSE OF S ECTION 80HHE ONLY THE TURNOVER OF THE COMPUTER SOFTWARE BO TH IN INDIAN AND ABROAD HAS TO BE CONSIDERED AND TURNOVER OF BUS INESS NOT CONNECTED WITH SOFTWARE BUSINESS CANNOT BE CONSIDER ED TO INCLUDE IN THE TOTAL TURNOVER. SIMILARLY AMOUNT RECEIVED T OWARDS EMPLOYEES COMPENSATION CANNOT FORM PART OF THE TOT AL TURNOVER. SAME THING IS APPLICABLE WITH REGARD TO PROFIT ON S ALE OF FIXED ASSETS WHICH IS THE ISSUE FOR A.YS. 2001-02 AND 200 2-03. FOR THIS PURPOSE WE PLACE RELIANCE ON THE ORDER OF THE PUNE BENCH OF THIS TRIBUNAL IN THE CASE OF PATNI COMPUTER SYSTEMS LTD. VS. DCIT 60 DTR 113 AND INFOSYS TECHNOLOGIES LTD. VS. DCIT 45 SOT 157 (BANG). 23. IN THE RESULT ALL THE ASSESSEE'S APPEALS ARE PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH MARCH 2012. SD/ - (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD DATED THE 30 TH MARCH 2012 I.T.A. NOS. 882 TO 885/HYD/2006 M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. ============================== 14 COPY FORWARDED TO: 1. M/S. KERNEX MICRO SYSTEMS (INDIA) LTD. 'THRUSHNA' PLOT NO. 7 SOFTWARE UNITS LAYOUT INFOCITY MADHAPUR HYDERABAD-500 081. 2. THE DEPUTY COMMISSIONER OF INCOME - TAX CIRCLE - 2(1) AAYAKAR BHAVAN HYDERABAD. 3. THE CIT(A) - III HYDERABAD 4. THE CIT - I I HYDERABAD. 5. THE DR A BENCH ITAT HYDERABAD. TPRAO