M/S. Harman Connected Services ... vs Commissioner Of Income Tax
2021 Latest Caselaw 354 Kant

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     IN THE HIGH COURT OF KARNATAKA AT BENGALURU

        DATED THIS THE 7TH DAY OF JANUARY 2021

                         PRESENT

         THE HON'BLE MR. JUSTICE ALOK ARADHE

                               AND

     THE HON'BLE MR. JUSTICE NATARAJ RANGASWAMY

                  I.T.A. NO.353 OF 2014
BETWEEN:

M/S. HARMAN CONNECTED SERVICES
CORPORATION INDIA PVT. LTD.,
(FORMERLY KNOWN AS ADITI TECHNOLOGIES PVT LTD)
PLOT NO.3 & 3A, EOIZ INDUSTRIAL AREA
SY. NO.85 AND 86, SADARAMANGALA VILLAGE
KRISHNARAJAPURAM HOBLI, BENGALURU-560066
[REP. BY ITS VICE PRESIDENT-FINANCE
MR. VIVEK KHEMKA, AGED ABOUT 42 YEARS
S/O SRI. SUDARSHAN KUMAR KHEMKA]
                                           .... APPELLANT
(BY MR. CHYTHANYA K.K. ADV.,)
AND:

1.     COMMISSIONER OF INCOME TAX
       BANGALORE-I, 1ST FLOOR
       C.R. BUILDING, QUEEN'S ROAD
       BANGALORE.

2.     INCOME-TAX OFFICER
       WARD-11(1), 14/3 R.P. BHAVAN
       NRUPATHUNGA ROAD, BANGALORE.
                                          ... RESPONDENTS
(BY MR. K.V. ARAVIND, ADV.,)
      THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX
ACT 1961, ARISING OUT OF ORDER DATED 14.03.2014 PASSED
IN ITA NO.379/BANG/2013 FOR THE ASSESSMENT YEAR 2008-09,
PRAYING TO:
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     (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW
STATED ABOVE.
     (ii) ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED
ORDER OF THE ITAT, BENGALURU, 'A' BENCH IN ITA
NO.379/BANG/2013 DATED 14/03/2014 FOR THE ASSESSMENT
YEAR 2008-09.

     THIS I.T.A. COMING ON FOR HEARING,       THIS    DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:

                      JUDGMENT

This appeal under Section 260A of the Income Tax

Act, 1961 (hereinafter referred to as the Act for short)

has been preferred by the assessee. The subject matter

of the appeal pertains to the Assessment year 2008-09.

The appeal was admitted by a bench of this Court vide

order dated 24.02.2015 on the following substantial

questions of law:

"(i) Whether on the facts and in the circumstances of the case, the Honourable ITAT was right in law in upholding the invocation of section 263 of IT Act though the matter was subject matter of appeal before the learned Commissioner of Income-tax (Appeals) and Hon'ble ITAT?

(ii) Whether on the facts and in the circumstances of the case, the Honourable ITAT was right in law in upholding the initiation of proceedings under section 263 in respect of an order which got merged with the consequential order under section 143(3) of the IT Act dated 17-01-2012?

      (iii)     Whether on the facts and in
the   circumstances        of     the     case,      the
Honourable     ITAT    was       right    in   law    in

upholding the order under section 263 of IT Act by the learned First Respondent though the latter was himself unclear as to the correctness of action of the Learned Assessing Officer in allowing tax holiday under section 10A?

      (iv)      Whether on the facts and in
the   circumstances        of     the     case,      the
Honourable     ITAT    was       right    in   law    in
upholding     the   initiation     of    proceedings

under section 263 though there is no lack of enquiry?

(v) Whether on the facts and in the circumstances of the case, the Honourable ITAT was right in law in upholding the denial of benefit of section 10A for AY 2008-09 on the ground that the appellant's tax holiday period expired prior to AY 2008- 09?

                 (vi)      Whether on the facts and in
         the     circumstances        of        the   case,      the

Honourable ITAT was right in law denying the claim of the appellant to treat each unit as a separate undertaking for the purpose of section 10A of the IT Act?

                 (vii)     Whether on the facts and in
         the     circumstances        of        the   case,      the
         Honourable       ITAT    was      right      in   law    in
         upholding       the   denial      of    benefit      under
         section 10A in respect of income from
         staffing activity?".

2. Facts leading to filing of this appeal briefly

stated are that the assessee is a private limited

company incorporated under the Companies Act, 1956

and is engaged in the business of development software

and certain Information Technology Enabled Services

(ITEs) activity. The assessee was initially accorded

approval for setting up a unit under software technology

park scheme on 06.09.1994. The licence granted to the

assessee was valid upto 05.09.2009 which was renewed

subsequently upto 05.09.2014. For the Assessment Year

2008-09, the assessee filed the return of income on

25.10.2008, by which total income was declared as 'NIL'

after claiming exemption of Rs.16,20,65,750/- under

Section 10A of the Act.

3. The case of the assessee was selected for

scrutiny and a notice under Section 143(2) and Section

142 of the Act was issued to the assessee. The assessee

responded to the aforesaid notices by filing replies and

by furnishing documents. The Assessing Officer by an

order dated 24.12.2010 inter alia held that assessee is

entitled to deduction under Section 10A of the Act and

quantified the amount claimed as deduction under

Section 10A of the Act.

4. The assessee thereupon filed an appeal

before Commissioner of Income Tax (Appeals) who by

an order dated 02.11.2011 partly allowed the appeal

preferred by the assessee. The Assessing Officer by an

order dated 07.01.2012 gave effect to the order passed

by the Commissioner of Income Tax (Appeals). The

revenue filed an appeal before the Income Tax Appellate

Tribunal (hereinafter referred to as 'the tribunal' for

short) against order dated 02.11.2011. However, the

tribunal dismissed the appeal. Thereupon, the revenue

filed an appeal before this court, which was allowed with

the direction to the Assessing Officer that Assessing

Officer shall pass consequential order in the light of

judgment of the Supreme Court in the Special Leave

Petition filed by the revenue in the case of TATA ELXSI

LTD.

5. The Commissioner of Income Tax (Appeals)

issued a notice under Section 263 of the Act dated

16.07.2012 to the assessee inter alia on the ground that

the assessee is not eligible to claim deduction under

Section 10A of the Act for Assessment Year 2008-09 as

the period of 10 years in the case of assessee expired

with Assessment Year 2007-08 and the Assessment Year

in case of assessee has to be reckoned from Assessment

Year 1998-99. It was also mentioned that the assessee

is deriving the revenue from 'staffing' from STPI unit.

Therefore, the assessee is not engaged in export of

computer software. It was further held that the

Assessing Officer did not examine the aforesaid aspect

of the matter and has wrongly allowed the deduction

under Section 10A of the Act. It was further held that

the order of assessment has been passed without proper

application of mind and therefore, order of assessment

passed by the Assessing Officer is erroneous and is

prejudicial to the interest of the revenue. The assessee

thereupon was asked to file his objections and was given

an opportunity of being heard. After affording an

opportunity of hearing to the assessee, the

Commissioner of Income Tax (Appeals) by an order

dated 23.01.2013 set aside the order of assessment

made by the Assessing Officer with the direction to the

Assessing Officer not to allow deduction under Section

10A of the Act to the assessee and to examine the

services provided by the assessee under the caption

'Human Resources Services' as per Notification dated

26.09.2000. The Assessing Officer was also directed to

examine the facts and take view with reference to the

Notification issued by the Central Board of Direct Taxes

(CBDT) vide circular No.1/2013 dated 17.01.2013. The

assessee thereupon filed an appeal before the tribunal.

The tribunal by an order dated 14.03.2014 has

dismissed the appeal. In the aforesaid factual

background, the assessee has filed this appeal.

6. Learned counsel for the assessee submitted

that the Assessing Officer had made enquiries during th

scrutiny proceeding and the Assessing Officer has taken

one of the plausible views. Therefore, the tribunal ought

to have appreciated that the Commissioner of Income

Tax committed an error of law in invoking the powers

under Section 263 of the Act in the fact situation of the

case. It is further submitted that human resource

services would qualify for deduction under Section 10A

of the Act and the aforesaid view was taken by the

tribunal was taken by the division bench of Delhi High

Court vide decision dated 03.09.2014 passed in

I.T.A.No.1255/2011, which was followed by this court in

COMMISSIONER OF INCOME TAX AND ANR. MS.

NTT DATE GLOBAL ADVISORY SERVICES PVT. LTD.

IN ITA NO.544/2013 decided on 12.11.2020. It is

further submitted that in view of Section 10A(8) of the

Act, which begins with a non obstante clause. It was

permissible for the assessee to opt out of the provisions

of Section 10A of the Act and therefore, the assessee did

not opt for the benefit of the provisions for the

Assessment Year 1995-96, 1996-97, 1997-98, 2002-03,

2004-05 and therefore, period of ten years expired in

the year 2010-11.

7. It is further submitted that the Assessing

Officer was not required to pass a detailed order. In

support of aforesaid submissions, reliance has been

placed on decision in 'MARICO LTD. VS. ASSISTANT

COMMISSIONER OF INCOME TAX', (2020) 425 ITR

177 (Bom). It is also pointed out that against the

aforesaid order the Special Leave Petition has been

dismissed by the Supreme Court by a speaking order,

which is reported in (2020) 117 Taxmann.com 244 (SC).

It is also urged that Section 10A of the Act is a complete

code in itself. Reference has also been made to decision

of this court in 'COMMISSIONER OF INCOME TAX VS.

YOKOGAWA INDIA LTD.', (2012) 341 ITR 385

(KAR). It is also urged that even if the view taken by

the Assessing Officer is not legally tenable but since, the

order passed by the Assessing Officer was subjected to

appeal before Commissioner of Income Tax (Appeals) in

respect of Section 10A of the Act. Therefore, the powers

under Section 263 of the Act could not have been

invoked in the fact situation of the case. In support of

aforesaid submission, reliance has been placed on

decision of Gujarat High Court in 'CIT VS. NIRMA

CHEMICAL WORKS (P) LTD.', (2009) 182 TAXMAN

183 (GUJ). It is also urged that tribunal wrongly

distinguished the decision rendered in Nirma Chemical

Works (P) Ltd. supra. It is also urged that the alternate

claim made by the assessee ought to have been

considered and due enquiries were made by the

Assessing Officer during the scrutiny proceeding and on

the issue of staffing, a view was taken and the view

taken by the Assessing Officer on tax holiday was a

plausible view and the revisional powers could not have

been invoked as the order of the Assessing Officer was

subject matter of the appeal.

8. On the other hand, learned counsel for the

revenue submitted that as per Section 10A of the Act,

which existed prior to amendment by Finance Act, 2000

which was applicable tot eh Assessment Year 2001-02

provided for deduction for five consecutive Assessment

Years relevant to Previous Year in which undertaking

begins to manufacture or produce such articles, things

or computer software. It is pointed out that in the

instant case, the assessee commenced manufacturing

activities from Assessment Year 1995-96, however, the

assessee did not claim deduction under Section 10A of

the Act for Assessment Year 1995-96, 1996-97 and

1997-98 and therefore, the period of five years out of a

period of eight years had to be completed from 1998-99

and the same expired in 2002-03. In view of the

amendment to Section 10A of the Act by Finance Act,

2000 with effect from 01.04.2001, the assessee was

permitted to claim benefit of Section 10A of the Act for

the unexpired period. It is urged that even as per

amended provisions, the period of 10 consecutive years

has to commence with Assessment Year relevant to

Previous Year in which undertaking begins to

manufacture or produce such articles, things or

computer software. Thus, the period of 10 consecutive

years would start from 1995-96 and would end with

Assessment Year 2004-05.

9. It is also contended that incentive provision

have been provided only for a particular period and the

benefit cannot be extended beyond the outer limit of 10

consecutive Assessment Years commencing from first

year of production i.e., Assessment Year 1995-96. It is

also urged that eligibility of assessment for deduction

under Section 10A of the Act for the Assessment Year

2008-09 beyond a period of 10 consecutive years was

not subject matter of the order of assessment and

therefore, the same could not be subject matter of the

appeal before the Commissioner of Income Tax

(Appeals) and therefore, there was no bar in invoking

the powers under Section 263 of the Act. It is also

submitted that eligibility of the assessee for deduction

under Section 10A of the Act in respect of income from

staffing is concerned, no enquiries were made in this

regard and therefore, the order passed by the Assessing

Officer suffers from the vice of non application of mind

and on this ground also invocation of powers under

Section 263 of the Act is justified. It is further submitted

that the issue with regard to eligibility of deduction

under Section 10A of the Act was never examined by the

Assessing Officer and the Assessing Officer has to record

a finding that the activities carried on by the assessee

constitute human resource services to be eligible for

deduction under Section 10A of the Act. It is further

submitted that since, the order passed by the Assessing

Officer was erroneous and was prejudicial to the interest

of the revenue, therefore, the powers have rightly been

invoked by Commissioner of Income Tax (Appeals). In

support of aforesaid submissions, reliance has been

placed on 'COMMISSIONER OF INCOME-TAX VS.

DSL SOFTWARE LTD.', (2012) 18 TAXMANN.COM

151 (KARNATAKA), 'COMMISSIONER OF INCOME

TAX-II, NEW DELHI VS. ML OUTSOURCING

SERVICES (P.) LTD.', 228 TAXMAN 54 (DELHI),

'SAINT GOBAIN CRYSTALS & DETECTORS (I)

LIMITED VS. DEPUTY COMMISSIONER OF INCOME-

TAX, ITA NO.441/2015, 'THE COMMISSIONER OF

INCOME-TAX VS. M/S NTT DATEA GLOBAL

ADVISORY'. ITA NO.544/2013.

10. We have considered the submissions made

by learned counsel for the parties and have perused the

record. Before proceeding further, it is apposite to take

note of the relevant extract of Section 263 of the Act,

which reads as under:

263. Revision of orders prejudicial to revenue

(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

11. Thus, from close scrutiny of Section 263 it is

evident that twin conditions are required to be satisfied

for exercise of revisional jurisdiction under Section 263

of the Act firstly, the order of the Assessing Officer is

erroneous and secondly, that it is prejudicial to the

interest of the revenue on account of error in the order

of assessment.

12. The aforesaid provision was considered by

the Supreme Court in 'MALABAR INDUSTRIAL

COMPANY VS. CIT', 243 ITR 83 and it was held that

the phrase 'prejudicial to the interests of the revenue'

has to be read in conjunction with an erroneous order

passed by the Assessing Officer and every loss of

revenue as a consequence of the order of the Assessing

Officer cannot be treated as prejudicial to the interest of

revenue. It was further held that where two views are

possible and the Income Tax Officer has taken one view

with which the Commissioner does not agree, the order

passed by the Assessing Officer cannot be treated as

erroneous order prejudicial to the interest of the

revenue. The principles laid down in the aforesaid

decision were reiterated by the Supreme Court in 'CIT

VS. MAX INDIA LTD.,' 295 ITR 282 (SC) and

recently in 'ULTRATECH CEMENT LTD. AND ORS. VS.

STATE OF RAJASTHAN AND ORS.', CIVIL APPEAL

NO.2773/2020 DECIDED ON 17.07.2020.

13. In the backdrop of aforesaid well settled

principles, the facts of the case in hand may be

examined. As per Section 10A of the Act which existed

prior to amendment of Finance Act, 2000 which was

applicable for Assessment Year 2001-02 provided for

deduction for a period of 5 consecutive Assessment

Years. Thereafter, in view of amendment to Section 10A

of the Act by Finance Act, 2000 with effect from

01.04.2001, an assessee was entitled to claim benefit

for 10 consecutive years. In the instant case, the period

of 10 consecutive years would start from Assessment

Year 1995-96 and would end with Assessment Year

2008-09. It is pertinent to mention here that the period

of 10 year commences from 1995-96 irrespective of the

fact that whether or not the assessee has claimed

benefit in between the Assessment Years and the period

of 10 consecutive years therefore, in view of the plain

language of the enactment cannot be extended. The

Assessing Officer without examining the aforesaid

aspect of the matter granted the benefit of deduction

Section 10A of the Act to the assessee. The view taken

by the Assessing Officer cannot but be said to be

erroneous and prejudicial to the interest of the revenue.

The view taken by the Assessing Officer cannot be said

to be a plausible view. It is also pertinent to mention

here that no reasons have been assigned by the

Assessing Officer for holding the assessee eligible for

benefit of deduction under Section 10A of the Act. Since,

the issue with regard to eligibility of the assessee for

deduction under Section 10A of the Act for Assessment

Year 2008-09 beyond a period of 10 consecutive years

was not subject matter of order of assessment itself.

Therefore, the same could not have been the subject

matter of the appeal before the Commissioner of Income

Tax (Appeals) and thus, in the fact situation of the case

there was no bar in invoking the powers under Section

263 of the Act. The income of the assessee from

staffing, which was not an income from export of

computer software was also allowed by the Assessing

Officer without any application of mind and without any

enquiry. Therefore, the Commissioner of Income Tax

has rightly invoked the powers under Section 263 of the

Act in the fact situation of the case.

In view of preceding analysis, the substantial

questions of law are answered against the assessee and

in favour of the revenue. In the result, we do not find

any merit in this appeal, the same fails and is hereby

dismissed.

Sd/-

JUDGE

Sd/-

JUDGE

SS