THE HONOURABLE MR v. M/s.Sak Soft Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 13.06.2007Coram :THE HONOURABLE MR.JUSTICE P.D.DINAKARANANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJATax Case (Appeal) No.586 of 2007Commissioner of Income-tax,Chennai. ..AppellantVsM/s.Sak Soft Ltd.,38, V.K.Iyer Road,Mandaveli,Chennai-600 028. ..RespondentAppeal under Section 260A of the Income-tax Act, 1961against the order of the Income Tax Appellate Tribunal, Bench'B', Chennai in I.T.A. No.1374/Mds/04 dated 13.10.2005 for theassessment year 2001-02.against the order of the Commissioner ofIncome Tax Officer, Chennai III made in C NO. 3033/24/111/2003-04dated 16.3.2004 for the Assessment year 2001-02 against the orderof the Income Tax Officer Company Ward VI (1) Chennai dated30.01.2003 made in PAN/GIR NO. WSA 213/AADC S9979 E for theassessment year 2001-02For Appellant :Mr.J.Narayanaswamy,Standing Counsel forIncome-tax DepartmentJUDGMENT(Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.)This appeal is filed under Section 260A of the Income TaxAct, 1961 by the Revenue, against the order of the Income TaxAppellate Tribunal, Bench 'B', Chennai in I.T.A. No.1374/Mds/04dated 13.10.2005 raising the following substantial questions oflaw:- 1. Whether in the facts and circumstances ofthe case, the Tribunal was right in holdingthat the Commissioner was not justified inrevising the assessment order under section https://hcservices.ecourts.gov.in/hcservices/ 263, as the order was not erroneous andprejudicial to the interest of the revenue?2. Whether in the facts and circumstances ofthe case, the Tribunal was right in holdingthat where a provision is capable of oneinterpretation, the order of the assessingofficer cannot be said to be erroneous?2.The facts leading to the above substantial questions oflaw are as under:The assessee is a company incorporated under the CompaniesAct. The assessee-company is registered with Software TechnologyPark of India and carries on business in export of computersoftware. The relevant assessment year is 2001-2002 and thecorresponding accounting year ended on 31.03.2001. The assesseefiled Return of income admitting "nil" income after claimingexemption on the entire profit of Rs.34,91,520/- under Section10B of the Income-tax Act ("Act" in short). The Return wasprocessed under Section 143(1) of the Act on 20.08.2002. Later,the assessment was taken up for scrutiny and notice under Section143(2) of the Act was issued. The assessee furnished details ofrealisation of the outstanding export proceeds ofRs.1,30,98,807/-. All the payments were received within sixmonths from the end of the year required under Section 10B of theAct. The assessee's local sales did not exceed 25% of the totalsales and therefore the assessee is considered as 100% ExportOriented Undertaking as per the provisions of Section 10B of theAct. The Commissioner of Income-tax issued Show Cause Noticerequiring the assessee to explain as to why the assessment ordershould not be revised under Section 263 of the Act. The assesseereplied to the Show Cause Notice. After considering the reply,the Commissioner of Income-tax revised the order of assessment onthe ground that the same is erroneous and prejudicial to theinterests of the Revenue. Aggrieved by the order, the assesseefiled an appeal to the Income-tax Appellate Tribunal ("Tribunal"in short). The Tribunal allowed the appeal and set aside theorder of the Commissioner of Income-tax. Hence the presentappeal by the Revenue. 3.Learned Standing Counsel appearing for the Revenuesubmitted that the export turnover so arrived, has to be dividedby the total turnover of the business carried on by theUndertaking and this ratio is to be multiplied by the profits ofthe business of the Undertaking. This formula has not beenapplied by the Assessing Officer while working out the deductionavailable under Section 10B of the Act. Hence the order passedby the Assessing Officer is erroneous and prejudicial to theinterests of the Revenue. Hence the Commissioner of Income-taxis right in setting aside the order of assessment under Section263 of the Act. https://hcservices.ecourts.gov.in/hcservices/

4.Heard the counsel. Section 263 of the Act can beinvoked only if the order of the Assessing Officer is erroneousand prejudicial to the interests of the Revenue. The said twoconditions must be satisfied before assuming jurisdiction underSection 263 of the Act. It is seen from the records that thedomestic sales of Rs.78,01,754/- did not exceed 25% of the totalturnover of Rs.3,48,84,904/-. As per second proviso to Section10B applicable for the assessment year, the profits and gainsderived from such domestic sales of computer software which didnot exceed 25% of total sales shall be deemed to be the profitsand gains from the export of computer software. The statement ofcomputation in accordance with the proviso which would result inentire income being eligible for deduction under Section 10B wasplaced before the Tribunal and on this basis the Tribunal heldthat the assessment was neither erroneous nor prejudicial to theinterests of the Revenue. The Tribunal, in its order, held asfollows:-"5. CIT in his order took into consideration languageof this proviso as clarified in circular No.794 dated9-8-2000 (245 ITR 36 St.). It was concluded that thisproviso was enacted for a limited purpose. Itclarifies that if domestic sales are less than 25% ofthe total sales including export sales, in thateventuality income derived from domestic sales shall betreated as export profits. If the domestic salesexceed 25% of the total sales, then two possiblesituations which may arise are not clear from thestatute, viz. (a) the excess above 25% should not betreated as export profits or (b) the entire profitsfrom domestic sales have to be ignored. 6. The analysis made by the CIT shows that theprovision is capable of more than one interpretation.Ex consequenti, the view adopted by the AO could beconstrued to be a possible view. Once this finding isarrived at, the matter can be decided in the light ofthe ratio laid down in the case of CIT v. Max (India)Ltd. (268 ITR 128) (P&H). In this case Hon'ble HighCourt has held that the view expressed by the AO was apossible view and since the AO had taken a possibleview, CIT had no jurisdiction to interfere byexercising his power under section 263 of the Act. Indeciding this issue, the ratio of the decision laiddown by the Hon'ble Supreme Court in the case ofMalabar Industrial Co. v. CIT (243 ITR 83) (S.C.) wasfollowed wherein at page 130 Hon'ble Supreme Court hasheld as under: https://hcservices.ecourts.gov.in/hcservices/ "The phrase 'prejudicial to the interests ofthe Revenue' has to be read in conjunctionwith an erroneous order passed by theAssessing Officer. Every loss of revenue asa consequence of an order of the AssessingOfficer cannot be treated as prejudicial tothe interests of the Revenue. For example,when an Income-tax Officer adopted one of thecourses permissible in law and it hasresulted in loss of revenue; or where twoviews are possible and the Income-tax Officerhas taken one view with which theCommissioner does not agree, it cannot betreated as an erroneous order prejudicial tothe interests of the Revenue, unless the viewtaken by the Income-tax Officer isunsustainable in law..."In view of the above, in my opinion conditionsprecedent for invoking the jurisdiction under section263 did not exist inasmuch as the order passed by theAO was neither erroneous nor prejudicial to theinterests of the Revenue. Accordingly, I quash theorder passed under section 263 of the Act."From a reading of the above, it is clear that two views arepossible in the above matter. The Assessing Officer preferredone view against the another view. The Assessing Officerfollowed a particular view and hence it cannot be said that theorder is erroneous or prejudicial to the interests of theRevenue. The Tribunal correctly followed the principlesenunciated in the Supreme Court judgment in the case of MalabarIndustrial Co. Vs. C.I.T. reported in 243 ITR 83, wherein thescope of Section 263 was considered. In view of the same, wefind no error or illegality in the order of the Tribunal so as towarrant interference. 5.Under the circumstances, no substantial questions oflaw arise for consideration of this Court and accordingly the taxcase is dismissed. No costs. kmSd/Asst.Registrar/true copy/Sub Asst.Registrar https://hcservices.ecourts.gov.in/hcservices/ To1. The Assistant Registrar, Income-tax Appellate Tribunal, Bench "B", Chennai.2. The Secretary, Central Board of Direct Taxes, New Delhi.3. The Income-tax Officer, Company Ward VI(1), Chennai-34.4. The Commissioner of Income-tax, Chennai-III, Chennai. + one cc to Mrs. Pushya Sitaraman, Advocate sr no. 34592rs(co)nm(02.07.07) T.C.(A) No.586 of 2007