Exemption under s 10B , 01 June 2011 - Decided on: 11 May 2011

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 under s 10B — as held by DelHC in CIT v Modi Xerox — In favour of: The Revenue (Partly) ; ITA No. 206/2008

The assessee-company, engaged in the business of manufacture and sale of Xerox machines, filed its return showing nil income whereas income under s 115JA was shown at Rs. 2,12,34,285. The assessee claimed an exemption under s 10B and commission expenses of 3.27% incurred on the sale of products under s 37. The assessment order was passed under s 143(3) with the taxable income at Rs. 29,61,56,079. The AO observed that with regard to the commission on the sale of products, the AO allowed the commission to the tune of 3% as being reasonable under s 37 as against the demanded 3.27%. The AO disallowed the exemption under s 10B, observing that the balance sheet 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, invoices were raised by the assessee only and not by any separate 100% export oriented unit, no separate bank account of software division reflected in the balance sheet, all remittances against exports had come to Modi Xerox Ltd. (assessee) only, no separate fixed assets were reflected in the balance sheet (assets side) of the software division and thus there were no direct export of software by any separate 100% EOU setup in the STP area and since there was no separate independent unit established which could be called EOU under cl (2) of s 10B, the assessee was not entitled to claim any deduction therein. The CIT(A) disallowed the claim under s 10B but allowed the claim of a commission of 3.27% under s 37. On the issue of commission, the appeal of the revenue was dismissed, thereby upholding the decision of the CIT(A). The Tribunal confirmed the order of the CIT(A) in respect of the commission expenses but reversed the order in respect of the exemption claimed under s 10B and allowed the same, stating that the AO had not pointed out any mistake in the profit and soss account of the 100% EOU unit recorded on the basis of bifurcation of accounts. With regard to the quantum of income on which the deduction under s 10B had to be allowed, the ITAT restored the issue to the AO for a fresh consideration. Being aggrieved, the revenue has filed the present appeal.

The issue is 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 is itself enough to record a finding that the said unit had in fact been established and was entitled to claim the exemption under s 10B, and where the full details of the dealers commission were furnished and the dealers were not in any manner related to assessee as per s 40A(2)(b), an ad-hoc disallowance can be made for commission expenses.

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 the AO, it apparently appears that 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 s 10B of the Act. The matter needs to be examined by the AO afresh in this regard.

The commission had been paid to outside parties who are not in any manner related to the assessee and are not persons referred to under s 40A(2)(b) of the Act. The CIT(A) recorded that the assessee had given the full details of the dealers commission in respect of the Lucknow and Jungpura region for verification on a test-check basis but no verification was done by the AO and the AO did not find any dealers commission or any portion thereof to be bogus or excessive. This being a pure question of fact, and particularly in view of the fact that the similar expenses had already been allowed as a deduction in the previous years, the commission was allowed in full.