Commissioner Of Income Tax vs Modi Xerox
2011 Latest Caselaw 2527 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI


+                           ITA No.206/2008


                                         Reserved On:08.04.2010
%
                                     Date of Decision: 11.05.2011

Commissioner of Income Tax                     .... APPELLANT
              Through: Mr.N.P. Sahni, Advocate

                                Versus

Modi Xerox                                       .... RESPONDENT
                   Through: Mr.Ajay Vohra with Ms.Kavita Jha and
                            Mr.Somnath Shukla, Advocates

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA


1.    Whether reporters of Local papers be                 No
      allowed to see the judgment?
2.    To be referred to the reporter or not?               No

3.    Whether the judgment         should   be             No
      reported in the Digest?


M.L. MEHTA, J.

*

1. This appeal is under Section 260(A) of the Income Tax Act

(hereinafter referred to as "the Act") and directed against the

order of the Income Tax Appellate Tribunal (hereinafter referred

to as "the Tribunal") dated 4th May, 2007. The assessee is a

company which is engaged in the business of manufacture and

sale of Xerox machines related items. In the return filed for the

assessment year 1997-98, the assessee had shown nil income

whereas income under Section 115JA was shown at

Rs.2,12,34,285/-. The assessment order was passed under

Section 143(3) of the Act with the taxable income at

Rs.29,61,56,079/-. While passing the assessment order, the

Assessing Officer made several disallowance in respect of

various claims raised as detailed in the assessment order.

Amongst others, the assessee had claimed deduction on account

of exemption under Section 10B of the Act and commission to

the tune of 3.27% incurred on the sale of products under Section

37 of the Act. The Assessing officer disallowed the exemption

under Section 10B. With regard to the commission on sale of

products, the Assessing Officer allowed commission to the tune

of 3% as being reasonable under Section 37 of the Act as against

the demanded 3.27%. Aggrieved against this order, the

assessee preferred appeal to the CIT(A). The CIT(A) disallowed

the claim under Section 10B, but allowed the claim of

commission of 3.27% under Section 37 of the Act. Consequently,

the CIT(A) with regard to expenses towards commission under

Section 37 allowed the claim of the assessee, whereas with

regard to commission under Section 10B disallowed its claim.

Both assessee and the revenue preferred appeals against the

order of the CIT(A), which came to be disposed of by the Tribunal

vide its order dated 4th May, 2007. On the issue of commission,

the appeal of the Revenue was dismissed thereby upholding the

decision of CIT(A) on this ground. On the issue of exemption

under Section 10B, the Tribunal while not agreeing with the AO

and the CIT(A) held the assessee to be entitled to claim

deduction under Section 10B of the Act. The Tribunal further

remanded the matter back to the Assessing Officer for doing

needful and recorded as under:-

"The AO has not pointed out any defects in this Profit and Loss a/c of the 100% EOU unit recorded on the basis of bifurcation of accounts. We however notice that the AO had not taken cognizance of the above facts. We therefore are of the view that denial u/s 1B of the Act was not justified. With regard to the quantum of income on which deduction u/s 10B has to be allowed we deem it fit and proper to restore the issue to the AO for fresh consideration. This is for the reason that the AO has complained that the assessee has not debited any expenses of 100% EOU while arriving at it‟s profits. The AO will take into consideration the bifurcated accounts prepared by the assessee for the purposes of arriving at profit from100% EOU and allow the deduction u/s 10B of the Act in accordance with law. The AO will afford the assessee the opportunity of being heard in this regard."

2. It is against this impugned order on both these counts that the

Revenue is in appeal before us.

3. With regard to the decision of the authorities below on various

other claims and allowances of the assessee, it was an accepted

position that those stood covered by a judgment of the Allahabad

High Court in ITAs No.30/2001 and 31/2001. Therefore, the

appeal was admitted only on the aforesaid two grounds, which

are as under:-

c) Whether the ITAT was correct in law in allowing the exemption u/s 10B of the Income Tax Act, 1961 amounting to Rs.2,08,11,212/ in respect of profits of 100% EOU setup under software technology park scheme which was disallowed by the Assessing Officer and confirmed by the CIT(Appeals)?

f) Whether the ITAT was correct in law in deleting the disallowance of Rs.1,29,74,000/- made by the Assessing Officer by restricting the claim of commission to 3% of the total turnover?

4. We have heard the learned counsel for the Revenue as also for

the assessee. The relevant facts for dealing with the claim on

exemption under Section 10B are like this. The assessee

company had claimed an amount of Rs.2,08,11,212/- as

exempted under Section 10B being the profit on export oriented

unit (EOU). In support of this claim it filed copy of P&L Account

and balance sheet as on 31st March, 1997. An application dated

29th November, 1994 was moved by the assessee to the Director,

STP (Software Technology Park), NOIDA for setting up EOU under

STP Scheme in NOIDA. As mentioned in the Annexure of

application, lots of softwares were to be imported for making

exports. A letter dated 2nd December, 1994 was issued by

Director, STP, NOIDA to the assessee conveying their willingness

to provide facilities under the STP scheme provided certain

conditions are satisfied. As per clause (2)(i) of this letter the

entire 100% production was to be exported against hard

currency. In addition to this, there were various other terms and

conditions, which were to be confirmed by the assessee.

Thereafter, in agreement dated 5th January, 2009 between the

assessee and the Government of India, the conditions laid down

by the Director, STP, were more or less accepted by the

assessee. The assessee filed profit and loss account and the

balance sheet of the software division as under:-

P and L Account:

       Various expenses claimed   18185143   Income from sale of software RX     15413500

       Net profit                 20811212   Income from sale of software XC     23582855

                                  38996355                                       38996355

a) In the profit and loss account, the expenses of various

softwares imported as per annexure C of application dated

29.11.94 have not been debited.

b) No interest/finance charges have been debited in the P&L

Account.

Balance sheet

       Liabilities not invoiced         23056212    Inter Unit STP A/c                  23056212

                                         .............                                          ...............

                                        23056212                                        23056212

5. Vide communication dated 10th December, 1992, the AO asked

the assessee to explain the bifurcation of expenses/income

which was done in respect of three units only by its Chartered

Accountant, M/s.Vaish and Co.:

(i) Xerox; (ii) Toner and (iii) Service and others;

whereas during the year four units had been shown, namely:

(a) Xerox (b) toner (c) service and trading and (d) 100%

software.

6. The assessee was also asked to show the basis of

Quadruplication of expenses in the above four units. Not getting

any response to this, AO proceeded to make assessment noting

that the balance sheet clearly suggested that the sales of

Rs.2,30,56,212/- were made to Inter Units only and that there

were no direct exports of software. He noted that both these

invoices were raised by the assessee only and not by any

separate 100% export oriented unit. In addition to this, he also

noted some more facts to form a view regarding the assessee

being not entitled to commission of 100%. Some of these were

like this.

(i) No separate bank account of software division is reflected

in the balance sheet.

(ii) All remittances against exports have come to Modi Xerox

Ltd. (assessee) only.

(iii) No separate fixed assets are reflected in the balance sheet

(assets side) of the software division.

7. For all these reasons, the AO recorded finding of fact that there

were no direct export of software by any separate 100% EOU

setup in the STP area, NOIDA. No new units were setup but the

profit in this alleged unit has been generated by inter unit

transfers only as is clear from the balance sheet wherein inter

unit STP account of Rs.2.30 crore is shown on the asset side.

The export of software, if any, were done by Modi Xerox Limited

only as is clear from the invoice and not by any new internal

undertaking. Since there was no separate independent unit

established which could be called EOU under clause (2) of

Section 10B, the assessee is not entitled to claim any deduction

therein.

8. The CIT(A) also examined the entire record and returned a

finding of fact in agreement with the Assessing Officer.

Interestingly, the Tribunal reversed the finding of fact of the AO

and the CIT(A) relying upon some documents lying in the

assessee‟s paper book as produced before it. The Tribunal

proceeded to record that the monthly reports with regard to the

proceeds realized are lying in the assessee‟s paper books, that

the assessee was maintaining separate books of accounts for

100% export oriented units; the copy of the balance sheet and

profit and loss account are placed in the assessee‟s paper book;

foreign remittances for export of software were received by the

head office on behalf of 100% EOU; that there was no inter unit

sale as alleged by the AO; that AO has not pointed out any

defects in the profits and loss account of 100% EOU etc.

9. From the findings as recorded by the Tribunal, as noted above,

we may surprisingly note that all the documents which have

been sought to be relied upon by the Tribunal were not before

the Assessing Officer. The AO has pointed out and rightly so the

defects in the profits and loss account and the balance sheet and

no clarification was furnished by the assessee. The way the

Tribunal proceeded to rely upon the documents presented before

it by the assessee, without even caring for seeking their

verification either at his level or that of AO, it apparently

appears, the Tribunal acted to arrive at such a conclusion

without any application of mind. Based on those documents

lying in the paper book of the assessee, the Tribunal seems to

have jumped over the conclusion of the assessee having

established a 100% EOU. It may be noted that merely because

the assessee had been permitted to establish a new industrial

undertaking for the manufacture of computer software as 100%

EOU under the STP scheme was itself not enough to record a

finding that the said unit had in fact been established and was

entitled to claim the exemption as applicable under Section 10B

of the Act. We are of the view that the matter needs to be

examined by the Assessing Officer afresh in this regard. The

Assessing Officer will not be influenced by any finding recorded

by the Tribunal or by this Court. AO will proceed with an

objective view of the factual position regarding the claim made

by the assessee under Section 10B. Therefore, the matter is

being remitted to the AO in this regard.

10. With regard to the claim of commission paid by the assessee to

the consumers, dealers and others by way of various schemes to

promote the sale of products, the assessee has debited

commission under the head "selling and distribution,

administrative and other expenses" to the tune of 15,20,21,000/-

for the relevant assessment year. On calculation, this came to

be 3.27% of the total sales of Rs.353.64 crores as against 2.90%

of the total sales of the previous assessment year. The AO

being not satisfied with the increase in the commission asked the

assessee to give the details of the commission paid dealer-wise

with addresses etc. The AO recorded that the assessee failed to

give details of dealer-wise commission with their addresses and

proceeded to make assessment by adopting a method of

reasonable commission at 3% on the sale of products and

consequently disallowed the claim to the extent of 1,29,72,000/-

on this account under Section 37. The CIT(A) took note of the

fact that the dealers commission was being allowed by the

Revenue to the assessee in the past in full and it was only for the

first time that the disallowance of the dealers commission had

been made. The CIT(A) went through the details of the dealers

commission in respect of Lucknow and Jangpura region for

verification on test-check basis. The CIT(A) recorded that the

assessee had given full details of dealers commission in respect

of Lucknow and Jungpura region for verification on test-check

basis but no verification was done by the AO and AO did not find

any dealer commission or any portion thereof to be bogus or

excessive. Regarding restricting the said commission at 3%

without any reason was an arbitrary decision of the Assessing

Officer. The Tribunal though agreed with the findings recorded

by the CIT(A) in this regard but referred to some of the pages

lying in the assessee‟s paper book. It also found that the

commission had been paid to outside parties who are not in any

manner related to assessee and are not persons referred to

under Section 40A(2)(b) of the Act. This part of the finding was

not disputed by the Revenue before us. This being a pure

question of fact and particularly in view of the fact that the

similar expenses had already been allowed deduction in the

previous years, we do not see any reason to interfere in the

finding of the CIT(A) or the Tribunal in this regard.

11. In view of the above discussions, the matter is remitted back to

the AO to examine the claim of the assessee under Section 10B

of the Act afresh as per law. Consequently, we answer question

No.(c) in negative, i.e., in favour of the Revenue and question (f)

in affirmative, i.e., in favour of the assessee and against the

Revenue. The appeal is disposed of accordingly.

                    M.L.MEHTA
                    (JUDGE)



                   A.K. SIKRI
MAY 11, 2011        (JUDGE)
„Dev‟