By TIOL News Service

CHENNAI, OCT 07, 2014: THE issue before the Bench is- Whether, for the purpose of claiming Sec 10B benefits, it is necessary to obtain approval of the STPI authority. And the answer goes against the assessee.

Facts of the case

The assessee company, incorporated in 2003, was engaged in software development. It had started business operations from January, 2004. The assessee prepared accounts for the period 19.12.2003 to 31.3.2005. For the first time, in AY 2005-06, the assessee claimed deduction u/s 10B and filed return of income declaring total income of Rs.38,430/-. The said return was processed u/s 143(1) and subsequently, the case was taken up for scrutiny. The AO while dealing with the claim of deduction u/s 10B, found that the assessee had applied for registration as 100% EOU to Software Technology Parks of India (STPI) and obtained approval only in May, 2005; hence, as per Circular No.1 of 2005 dated 06.01.2005 of the CBDT, the assessee was not eligible for the benefit u/s 10B. Accordingly, AO disallowed the entire claim of deduction u/s 10B on the ground that the assessee had obtained approval from STPI only in May, 2005, which was after the end of the previous year relevant to the A.Y. 2005-06. On appeal, CIT(A) had partly allowed the appeal holding that it was settled proposition of law that an exemption had to be granted as and from the AY in which the conditions prescribed in the section had been satisfied until the end of the holiday period. (C.I.T. Vs. Gopal plastics Ltd., 215 ITR 136 Mad). This view was also supported by the decision of SC in the case of Textile Corporation Ltd. Vs. C.I.T. 107 ITR 195. In the case of assessee, it was found that the assessee was engaged in the manufacturing and export of computer software and had commenced hundred percent export of computer software during the A.Y. 2005-06. CIT(A) held that the assessee had fulfilled all the conditions specified u/s 10B and had correctly claimed deduction under that section. The AO, therefore was not justified in denying the claim of deduction, consequently, he was directed to allow the same as per the claim made by the assessee in the return of income. On further appeal, Tribunal held that if the assessee satisfies the three conditions as stipulate , it would be granted the benefit u/s 10B. It had also held that there was no pre-condition that the assessee company had to obtain registration from STPI before making a claim u/s 10B; the Circular of the CBDT could not override the plain provisions of the Act and the circulars of the CBDT were either in the nature of clarification or rather explanatory in nature. The Tribunal further held that the STPI agreement/certificate nowhere mentioned that it was for claiming deduction u/s 10B. The Tribunal also held "a claim which is allowed by the plain provisions of the Act cannot be restricted by imposing conditions which cannot be carried out". The Tribunal also held that beneficial, promotional and incentive provisions like the provisions of Section 10B, which was aimed at promoting software industry in India, should be liberally construed and should not be defeated on technical grounds.

Before HC, the Revenue's counsel had submitted that Explanation 2 (iv) of Section 10B defines 100% EOU as one approved by the Board. The ten year period commences from the date of such approval. It was further submitted that when the STPI registration itself was beyond the financial year, the assessee was not entitled to the benefit of exemption prior to the date of approval and the assessee was entitled to the benefit of exemption from the next assessment year only. Also the circular of the CBDT was not contrary to the statute but it has only clarified the position. Hence, the order of the Tribunal was liable to be set aside and the appeal may be allowed. On the other hand, the assessee's counsel had submitted that the assesseehad fulfilled the conditions prescribed u/s 10B and hence eligible for exemption. The provision does not make it mandatory that STPI registration should be obtained before making a claim u/s 10-B. Hence, the Tribunal was correct in granting benefit of exemption u/s 10-B to the assessee.

Held that,

++ it is seen that the assessee, which is a company engaged in software development, has applied for registration as 100% Export Oriented Unit on 24.3.2005 before the competent authority and got the approval in May, 2005. The assessee claimed benefit of exemption under Section 10-B of the Act, which falls under Chapter IV, for the assessment year 2005-06. What is relevant for seeking benefit under Section 10-B is deduction of profits or gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. A reading of the above provision makes it clear that a 100% EOU as provided under Section 10B(1) will be one that is approved by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the Rules made under that Act. Admittedly, in this case, such approval was granted during May, 2005 only and therefore, prior to that date or the assessment year, relevant to the date of registration, the benefit of Section 10-B would not be available as the requirement of approval by the competent authority is not available as on the date, from which the assessee claimed exemption. Hence, we have no hesitation to hold that Section 10B is very clear and unambiguous that approval by the competent authority is pre-requisite for grant of benefit under Section 10-B. Hence, it will not be appropriate for the Tribunal to hold that there is no pre-condition that the assessee should have obtain STPI registration before making the claim under Section 10-B of the Income Tax Act. That finding of the Tribunal is totally wrong and contrary to the provisions of the Act;

++ the provisions of Section 10-B of the Income Tax Act make it clear that the benefit will flow if there is a certificate of approval issued by the Board appointed in this behalf, namely, STPI. Hence, we find that the Tribunal is not justified to hold that the claim allowed by the provision of Section 10B cannot be restricted by imposing certain conditions. We hold that this finding of the Tribunal is totally contrary to Clause (iv) to Explanation (2) of Section 10B of the Income Tax Act. The Department, no doubt, clearly states that for the next assessment year the benefit would automatically flow. We do not find any justification to be swayed by the view of the Tribunal that the promotion of software industry should not be scuttled by technicalities. We are also aware of the fact that the benefit granted under Section 10B is more in the nature of exemption, for which certain pre-requisite conditions, namely, approval by the appropriate Board, have to be complied with in the manner prescribed. Unless and until the assessee gets an approval in the manner prescribed under Section 10-B, the question of granting the benefit does not arise. The Tribunal's opinion that if there are two views, then the view in favour of the assessee should be accepted is fully inadmissible on the facts of the present case. We hold that the Circular is nothing but clarification of what the Section 10B really provides for. It is of no avail either to the assessee or to the Department when the provisions of Section 10-B is clear;

++ it is to be noted that there is no second opinion on the facts of the ratio decided by this Court in the case of C.I.T. Vs. Gopal plastics Ltd., reported in 215 ITR 136 (Mad) that exemption will be available from the inception if the conditions are fully satisfied, which fact is not available to the facts of the present case. We hold that the assessee in this case will be entitled to the benefit of Section 10-B only on complying with the conditions contained prescribed in Section 10-B of the Income Tax Act, and it does not enure to the benefit for the assessment year in question, namely, 2005-06. The decisions relied on by the Tribunal have no relevance to the facts of the present case. We, therefore, hold that the question of law raised by the Revenue is answered in favour of the Revenue and against the assessee. Accordingly, the order of the Tribunal stands set aside and the Tax Case (Appeal) stands allowed. No costs. Counsel appearing for the assessee submits that if there is any material to show that the assessee has got the approval earlier, the assessee may be given liberty to produce the same before the Assessing Officer for availing the benefit. It is open to the assessee to submit the certificate of approval, if any, to show that on earlier date, it has obtained approval and seek rectification in accordance with law.

(See 2014-TIOL-1743-HC-MAD-IT)