CIT can’t exercise revisionary power against a well reasoned order for mere disagreement with AO’s view

 ITAT BANGALORE BENCH ‘B’

Infosys BPO Ltd.

versus

Assistant Commissioner of Income-tax 

IT Appeal No. 222 (Bang.) of 2011

[Assessment year 2006-07]

MAY 25, 2012

ORDER

Jason P. Boaz, Accountant Member

This appeal is directed against the order passed by the Commissioner of Income Tax, Bangalore-I, Bangalore dt. 20.01.2011 under section 263 of the Income Tax Act, 1961 (herein after referred as ‘the Act’) for the Assessment Year 2006-07.

2. The facts of the case, in brief, are as under :

2.1 The assessee is an Indian company engaged in the business of Business Process Outsourcing (BPO). The return of income for the Assessment Year 2006-07 was filed on 29.11.2006 declaring total income of Rs. 2,21,60,408. The case was taken up for scrutiny by issue of notice under section 143(2) on 15.10.2007. In the course of assessment proceedings, the assessee was inter alia asked to furnish a note on expenses incurred in foreign currency. The said explanation as to the nature of foreign currency expenses and the purpose for which it was incurred was furnished by the assessee to the Assessing Officer on 5.11.2008 (pages 1 to 5 of paper book). The assessee was also asked to furnish an explanation on the activities carried out abroad, break up of the foreign currency expenses for each quarter and a note on foreign currency expenses. These were furnished to the Assessing Officer on 26.11.2008 (pages 19 to 21 of paper book). The Assessing Officer completed the assessment passing an order under section 143(3) of the Act on 31.12.2008 determining the income of the assessee at Rs. 8,44,77,660. The difference between the income returned and income assessed was on account of disallowance under section 14A, disallowance of software expenses and variation in computation of deduction allowed under section 14A.

2.2 The assessee filed an appeal against the order of assessment passed under section 143(3) on 31.12.2008 before the CIT(A) which is said to be pending disposal.

2.3 The learned CIT, Bangalore I, Bangalore (herein after referred to as CIT) issued a notice proposing action. 263 on 29.11.2010 (copy on pages 22 and 23 of paper book), stating that the assessment order passed under section 143(3) is both erroneous and prejudicial to the interest of the Revenue within the meaning of section 263 of the Act for the reasons mentioned below :

“1.  The assessment was completed by allowing deduction under section 10A of the IT Act wrongly without deducting expenses amounting to around Rs. 31.06 crores incurred in foreign currency for rendering technical services outside India, from the export turnover, which has resulted in excess allowance of deduction u/s. 10A.

 2.  Loss of Rs. 74.57 lakhs incurred by one of the STPI units was not set off against the business profits while computing the deduction allowable under section 10A.”

2.4 The assessee was provided an opportunity of hearing and filed detailed written submissions dt. 9.12.2010 against the proposal to pass an order under section 263 of the Act (copy of written submissions on pages 24 to 85 of paper book). The assessee submitted that the requirements of section 263 were not satisfied and that the assessment order under section 143(3) dt.31.12.2008 was passed after verification of all the details. It was submitted that the Assessing Officer examined the aspects of (i) reduction of foreign currency expenses from export turnover and (ii) the computation of deduction under section 10A without setting off the losses of other STPI units, before passing the order under section 143(3). It was further submitted that the order passed under section 143(3) cannot be regarded as erroneous in so far as it is prejudicial to the interest of Revenue under section 263 since the Assessing Officer has taken a correct view as also a possible view in respect of the issues dealt in the notice under section 263. The assessee placed reliance on the decision in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 and other decisions in support of the contention that when an Assessing Officer has adopted one of the courses permissible in law and it has resulted in loss of Revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an order erroneous in so far as it is prejudicial to the interest of Revenue. It was, therefore, submitted that the proposal to pass an order under section 263 is without jurisdiction.

2.5 On the merits of the case, it was submitted as to why foreign currency expenses should not be reduced from ‘export turnover’ in computing deduction under section 10A. It was submitted that the appellant is engaged in the business of BPO and the activity is regarded as ‘computer software’ under clause (b) of the definition of the term ‘computer software’ as per Explanation 2 to section 10A read with CBDT’s Notification No. SO 890(E) dt. 26.9.2000. It was submitted that the assessee is engaged in the business of ‘computer software’ and not in rendering of technical services. The assessee placed reliance on the decisions of the co-ordinate bench of the Tribunal in the case of Asstt. CIT v. Infosys Technologies Ltd. [2008] 172 Taxman 134 (Chennai) (Mag.) and of the decision of Special Bench in the case of Zylog Systems Ltd. v. ITO [2011] 128 ITD 105 in support of the proposition that foreign currency expenses should not be reduced from ‘export turnover’ in computing the deduction under section 10A. It was also submitted that since foreign currency expenses were not recovered from the customers, the same cannot be excluded from ‘export turnover’ in computing deduction under section 10A. Alternatively and without prejudice, it was submitted that if foreign currency expenses are reduced from ‘export turnover’, the same should also be reduced from ‘total turnover’ in computing deduction under section 10A. The assessee placed reliance on the decision in the case of Infosys Technologies Ltd. (supra), I-Gate Global Solutions Ltd. v. Asstt. CIT [2008] 24 SOT 3 (Bang.) (URO), Tata Elxsi Ltd. v. Asstt. CIT [2008] 115 TTJ 423 and other similar decisions in support of the above proposition.

2.6 In respect of the deduction under section 10A and losses of other STPI units, the assessee submitted that deduction under section 10A should be computed and allowed in respect of current years profit of each of the STPI units without setting off the losses of other STPI units. In support of this contention, the assessee relied on the decisions in the cases of I-Gate Global Solutions Ltd. (supra) and KPIT Cummins Infosystems (Bangalore) (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 529 (Bang.) among others. The assessee also made submissions as to why the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 255 is distinguishable both in facts and law and also referred to decisions of the co-ordinate bench of the Tribunal and High Court decisions which had distinguished this case. In view of the above submissions, the assessee requested the CIT to drop the proceedings initiated under section 263 of the Act.

2.7 The CIT passed the order under section 263 holding that the Assessing Officer had passed the order under section 143(3) without proper application of mind with reference to the facts of the case and relevant provisions of law and without recording any finding in respect of reduction of foreign currency expenses from ‘export turnover’ and computation of deduction under section 10A without setting off the losses of other STPI units. The learned CIT relied on the decision of the Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. (supra) in support of the proposition that no application of mind makes an order erroneous and prejudicial to the interest of Revenue.

2.8 On the merits of the case, the learned CIT held that deduction under section 10A is to be computed after setting off losses of STPI units. It was held that since the expression appearing in section 10A is ‘total income of the assessee’ and not ‘total income of the undertaking’, the losses of STPI unit should be set off from profits of other STPI units while computing the deduction under section 10A. The learned CIT relied on the decision of the jurisdictional High Court in the case of Himatasingike Seide Ltd. (supra) and the decision of the co-ordinate bench of the Tribunal in the case of Intellinet Technologies India (P.) Ltd. v. ITO [2010] 134 TTJ 744 (Bang.) in support of the view that deduction under section 10A is to be computed and allowed after setting off losses of other STPI units, brought forward losses and unabsorbed depreciation. The learned CIT in the order under section 263 observed that even though the assessee referred to a number of Tribunal decisions not following or impliedly distinguishing the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra), the assessee had not referred to the decision of the co-ordinate bench of the Tribunal in the case of Intellinet Technologies India (P.) Ltd. (supra) which followed the decision in Himatasingike Seide Ltd. (supra) and also held that the decision of the Tribunal in the case of KPIT Cummins Infosystems (Bangalore) (P.) Ltd. (supra) did not reflect the correct position of law.

2.9 In respect of reduction of foreign currency expenses from ‘export turnover’, the learned CIT held that there is no requirement under law that the expenditure incurred in foreign currency for rendering technical services outside India should be separately recovered from customers in addition to the consideration received on account of export of computer software. On the issue of reduction of foreign currency expenses from both ‘export turnover’ and ‘total turnover’, the learned CIT held that in the absence of the definition of the term ‘total turnover’ in section 10A, expenses reduced from ‘export turnover’ cannot be reduced from ‘total turnover’.

2.10 Lastly, the learned CIT held that it was necessary for the Assessing Officer to ascertain the nature and character of the expenses of Rs. 31.06 crores with reference to the facts of the assessee’s case and clause (iv) of Explanation 2 to section 10A of the Act and to verify the submissions made by the assessee. In view of the above, the learned CIT set aside the order of the assessment passed by the Assessing Officer under section 143(3) of the Act with the direction to make a fresh assessment and to allow the deduction claimed under section 10A in accordance with law and in the light of his observation after giving the assessee reasonable opportunity of being heard.

3. Aggrieved by the order of learned CIT, the assessee has filed this appeal. The grounds of appeal raised are as under :

“1.1  The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in assuming jurisdiction under section 263 of the IT Act, 1961 and in passing the revisional order. The conditions precedent for assumption/ exercise of jurisdiction. 263 not being satisfied, the order passed under section 263 is bad in law and liable to be quashed.

2.1  Without prejudice, the learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in

  (i)  concluding that foreign currency expenses should be reduced from ‘export turnover’ in computing deduction under section 10A.

 (ii)  not giving any reasons as to why foreign currency expenses should be reduced from ‘export turnover’ in computing deduction under section 10A.

2.2  The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in not appreciating that

  (i)  foreign currency expenses were not included in the figure of ‘export turnover’ so as to exclude/reduce the same from figure of ‘export turnover’;

 (ii)  even otherwise, expenses incurred in foreign currency were not for providing technical services outside India;

(iii)  the appellant, during the relevant previous year, was engaged in development of computer software and not in providing technical services outside India;

(iv)  the jurisdictional ITAT as also the Special Bench of ITAT has held that development of computer software cannot be regarded as rendering of technical services and no reduction of foreign currency expenses should be made from ‘export turnover’ in computing deduction under section 10A.

2.3  On facts and circumstances of the case and law applicable, expenses incurred in foreign currency should not to be reduced from ‘export turnover’ in the process of computation of deduction under section 10A.

2.4  Assuming without admitting that expenses incurred in foreign currency is to be reduced from ‘export turnover’, learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in concluding that the said expenditure should not be reduced from ‘total turnover’ in computing deduction under section 10A.

2.5  The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in not appreciating that ‘export turnover’ being part and parcel of ‘total turnover’, expenses reduced from ‘export turnover’ should also be reduced from ‘total turnover’ in computing deduction under section 10A.

3.1  The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in

  (i)  concluding that losses of 2nd STPI unit at Bangalore should be set off against the profits of other STPI units in computing the deduction under section 10A.

 (ii)  stating that deduction under section 10A is to be allowed from ‘total turnover’ computed after setting off the losses.

(iii)  relying on the decisions in Himatasingike Seide Ltd. and Intellinet Technologies India (P.) Ltd. which are distinguishable on both facts and law.

3.2  The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in not appreciating that

  (i)  deduction under section 10A is ‘undertaking specific’ and is to be allowed in respect of profits of each eligible unit without setting off the losses of other eligible units;

 (ii)  ‘total income’ in the context of section 10A refers to total income of the eligible undertaking and not total income of the assessee.

3.3  On facts and circumstances of the case and law applicable, deduction under section 10A is to be computed and allowed in respect of profits of each eligible unit without setting off the losses of other units.

4.1  In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT, Bangalore 1, Bangalore be quashed, or in the alternative

(i)(a) foreign currency expenses be not reduced from ‘export turnover’ in computing deduction under section 10A. Or in the alternative

(b) foreign currency expenses, if reduced from ‘export turnover’, be also reduced from ‘total turnover’ in computing deduction under section 10A.

(ii) losses of 2nd STPI unit at Bangalore be not set off against profits of other STPI units in computing deduction under section 10A. (iii) deduction under section 10A be allowed as claimed by the appellant. The appellant prays accordingly.”

4.1 The learned counsel for the assessee argued the appeal both on the aspect of jurisdiction and on the merits of the case. On the aspect of jurisdiction, the learned counsel for the assessee filed a ‘Compilation of relevant material and decisions’ in support of his arguments. Page 1 of the said compilation contains a list of decisions in favour of the assessee as on the date of issue of notice under section 263. The contents are reproduced here under :

“Infosys BPO Limited – AY 2006-07

DECISIONS AVAILABLE AS ON THE DATE OF ISSUE OF NOTICE U/S.263

I. Activities of Computer Software cannot be regarded as rendering of technical services.

II. Deduction u/s.10A is to be allowed without setting off losses of other STPI units.

III. Expenses reduced from export turnover to be reduced from total turnover.

Referring to the above, the learned counsel for the assessee submitted that there were decisions in favour of the assessee on the date of issue of notice initiating proceedings under section 263 in respect of all the issues dealt with by the learned CIT. The learned counsel for the assessee relied on the decisions of the Hon’ble Apex Court in the case of CIT v. Max India Ltd. [2007] 295 ITR 282 in support of the contention that the law prevailing on the date when the CIT passed the order under section 263, is relevant to judge the validity of the said order. It was submitted that in view of the above decisions of the Hon’ble Apex Court, if there are two views possible on the date of the order under section 263, the CIT lacked the jurisdiction to pass the order. The learned counsel for the assessee also submitted that since there were decisions in favour of the assessee on the dates of issue of notice and passing of order under section 263, the order passed by the CIT taking a contrary view is bad in law and the order is liable to be quashed. The learned counsel for the assessee placing reliance on the decision of Malabar Industrial Co. Ltd. (supra) submitted that even if one were to conclude that there were two views possible in respect of the issues dealt with by the learned CIT, and the Assessing Officer has adopted one of the view possible in law with which view the CIT does not agree, the order of assessment cannot be treated as erroneous in so far as it is prejudicial to the interests of Revenue. It was therefore argued that the order passed under section 263 is without jurisdiction.

4.2 The learned counsel for the assessee submitted that the Assessing Officer had recorded his findings and conclusions in the assessment order on the issue of losses and its impact on computation of deduction under section 10A holding that the deduction should be allowed in respect of profits remaining after set off of brought forward losses and unabsorbed depreciation. It is submitted that the Assessing Officer has taken a possible view in respect of computation of deduction under section 10A and the impact of losses of STPI units. The learned Authorised Representative drew our attention to the following observation made by the learned CIT at page 10 of the order:

“Though the assessee has referred to a number of ITAT decisions where the Tribunal has impliedly distinguished/not followed the decision in the case of Himatasingike Seide Ltd., the assessee has not referred to the case of Intellinet Technologies Pvt Ltd. in ITA No. 1021/Bang/2009 dated 12.03.2010 also decided by the ITAT, Bangalore Bench in which the decision in the case of Himatasingike Seide Ltd was expressly followed in the context of the amended provisions of section 10A for the detailed reasons recorded in the Tribunal’s order, in which it was held interalia that they brought forward business loss/unabsorbed depreciation is required to be set off against the profits of the eligible unit while computing the deduction under section 10A of the IT Act, 1961. The Tribunal also held that the earlier decision in the case of KPIT Cummins Infosystems (Bangalore) Ltd. v. ACIT did not reflect the correct position of law.”

Referring to the above, it was submitted by the learned counsel for the assessee that the learned CIT himself acknowledge that there are two views i.e. decisions both against and in favour of the assessee on the impact of losses on computation of deduction under section 10A. It was accordingly submitted that no order can be passed under section 263 since there are two views on the issue. The learned counsel for the assessee furnished a copy of the decision of the co-ordinate Bench of the Tribunal in the assessee’s own case for Assessment Year 2005-06 wherein the order passed under section 263 by the CIT was quashed by the Tribunal. Relying on the above decision, it was submitted that since the ratio of the above decision squarely applies for the year under consideration, the order passed by the learned CIT under section 263 cannot be sustained and is liable to be quashed.

4.3 On the aspect of foreign currency expenses not reduced from the ‘export turnover’ by the Assessing Officer, referring to the paper book pages 1, 5, 6, 9, 19, 20 and 21, the learned counsel for the assessee submitted that the details of foreign currency expenses were called for and the same were submitted before the Assessing Officer and the order of assessment was passed only after examination and verification of details filed. It was submitted that the Assessing Officer was aware of the issue of reduction of foreign currency expenses since he himself made an adjustment to ‘export turnover’ on account of foreign exchange fluctuation difference. It was submitted that the fact that the assessment order was passed after verification of details filed ousts the jurisdiction of the learned CIT under section 263 of the Act. The learned counsel for the assessee referred to the decision in the case of A.L.A. Firm v. CIT [1991] 189 ITR 285, CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 and CIT v. Eicher Ltd. [2007] 294 ITR 310 in support of the contention that –

 (i)  the Assessing Officer can be said to have passed the order of assessment after verification of all the details and information furnished by the assessee during assessment proceedings.

(ii)  when a regular assessment is passed under section 143(3), a presumption can be raised that such an order is passed after verification of details filed and on application of mind and merely because the issues accepted by the Assessing Officer do not find place in the assessment order, this cannot be a ground to treat the order as erroneous and prejudicial to the interest of Revenue. The learned counsel for the assessee submitted extracts of various decisions under section 263 in support of the contention that no order can be passed under section 263 if the order sought to be revised has been passed after verification of all the details filed. The learned counsel for the assessee filed a copy of the decision of the jurisdictional High Court in the case of CIT v. Infosys Technologies Ltd. [2012] 205 Taxman 98 in support of which the learned counsel for the assessee submitted that if the Assessing Officer records the reasons for his conclusion in the assessment order, howsoever brief it may be, the order so passed cannot be set aside by the CIT under section 263 of the Act.

4.4 The learned counsel for the assessee also submitted a list of decisions in support of the argument that there is a difference between ‘lack of inquiry’ and ‘inadequate inquiry’ and that no order can be passed under section 263 even if the inquiries made by the Assessing Officer during assessment proceedings is inadequate and filed a copy of the decision of the co-ordinate bench of the Tribunal in the case of Cyber Park Development & Construction Ltd. v. Dy. CIT ITA No. 266/Bang/2011 dt. 28.12.2011. It was submitted that even if it considered that the enquiries made by the Assessing Officer in the present case is inadequate, the said inadequacy or insufficiency of material on record cannot be a ground to revise the assessment order under section 263.

5.1 The learned Departmental Representative filed written submissions and argued the matter. It was submitted by the learned Departmental Representative that since there is no discussion in the assessment order and application of mind by the Assessing Officer, the learned CIT was right in passing the order under section 263 and for the proposition relied on the decision of the jurisdictional High Court in the case of CIT v. Namdhari Seeds (P.) Ltd. [2012] 341 ITR 342/[2011] 203 Taxman 565.

5.2 On the merits of the case, the learned Departmental Representative submitted that the decision of the ITAT and the Hon’ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 and Tata Elxsi Ltd. (supra) on both issues are covered against the Revenue but with utmost respect submits that these decisions are not based on correct application of facts, interpretation of law and therefore may not be a good precedent to follow. The reasons in support of the above contention were explained in the written submissions filed by the learned Departmental Representative. The learned Departmental Representative submitted that if foreign currency expenses are reduced from both ‘export turnover’ and ‘total turnover’, the objective and purpose of the STPI scheme and section 10A in bringing more foreign exchange into India would be defeated. The learned Departmental Representative therefore prayed that the order passed by the learned CIT under section 263 should be upheld and the appeal filed by the assessee be dismissed.

6.1 We have heard the arguments of both parties to the dispute and have carefully perused and considered the material on record. In the present case, the assessee has challenged the validity of the order passed under section 263 of the Act by the learned CIT. Sub-section (1) of section 263 is reproduced hereunder :

“263. (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.”

Under sub-section (1) of section 263, the CIT may revise the order of assessment passed by the Assessing Officer provided the said order is erroneous in so far as it is prejudicial to the interest of Revenue. Section 263 requires the satisfaction of two conditions viz. (i) the order sought to be revised is erroneous; and (ii) it is prejudicial to the interests of Revenue. If one of them is absent i.e. if the order sought to be revised is erroneous but not prejudicial to the interest of Revenue or if it is not erroneous but is prejudicial to the interests of Revenue, the provisions of section 263(1) of the Act are not attracted as the phrase ‘prejudicial to the interests of Revenue’ is to be read in conjunction with an ‘erroneous’ order passed by the Assessing Officer. When an Assessing Officer adopts one of the courses permissible in law and it has resulted in loss of Revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of Revenue. Every loss of Revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of Revenue. This was the view held by the Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. (supra). The Hon’ble Apex Court followed this decision in the case of Max India Ltd. (supra) and held that the position of law as it stood on the date when the CIT passed the order under section 263 is alone relevant to examine the validity of the said order. The relevant portion of the said decision is as under :

“Firstly, it is not in dispute that when the order of the Commissioner was passed there were two views on the word “profits” in that section. The problem with section 80HHC is that it has been amended eleven times. Different views existed on the day when the Commissioner passed the above order. Moreover, the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated March 5, 1997, in purported exercise of his powers under section 263 of the Income Tax Act.”

6.2 In the instant case, the Assessing Officer asked the assessee to furnish a note on expenses incurred in foreign currency in the course of assessment proceedings. The assessee filed the same on 5.11.2008 (pages 1 to 5 of paper book). The assessee in the said note submitted that the foreign currency expenses were incurred under various heads for the purpose of carrying out on-site work at client locations and towards travelling expenses of employees outside India. The assessee was also asked to submit a note on activities carried on abroad, which was submitted vide letter dt.26.11.2008 (pages 9 to 21 of paper book).

6.3 The Assessing Officer completed the assessment by order under section 143(3) of the Act on 31.12.2008. In para 2 thereof the Assessing Officer states that the assessment is completed after verification of the books and discussions with the A.R. In the assessment order, the Assessing Officer varied the deduction claimed by the assessee under section 10A, by computing the profits in respect of the STPI units at Bangalore and Pune separately without reducing the loss of 2nd STPI unit at Bangalore. The Assessing Officer also concluded that deduction so computed under section 10A is to be allowed from ‘total income’ of the assessee after setting off of the brought forward losses. The Assessing Officer’s observation in the order are as under :

“………… After claiming the deduction under section 10A the assessee has set off the brought forward unabsorbed depreciation. It is the contention of the ‘a’ that S.10A is an exemption section and therefore adjustment for brought forward depreciation after deduction 10A has been claimed.

Section 10A is placed in Chapter III of the Act, which deals with incomes which do not form part of total income. Section 10A was initially in the nature of an exemption. The provision was substituted w.e.f. 1.4.2001 and thereafter from an exemption section it was converted into a deduction section. While the loss of a 10A unit was not eligible to be carried forward initially, after the amendment brought about by the Finance Act, 2000 the loss of a section 10A unit is now eligible to be carried forward and set off against profits of subsequent years. This is in terms of section 10A(6) of the IT Act. The Karnataka High Court in the case of Himatasingike Seide Ltd. (288 ITR 255) stated that the computation of total income has to be in terms of the IT Act. The judgment of the High Court makes it clear that the computation of eligible profits for section 10A has to be in accordance with the provisions of the Act and the profit of the undertaking cannot be determined in isolation of the other provisions of the Act. It is therefore held that the provisions of section 70 and section 72 are applicable in determining the profits of the business for the purposes of section 10A. As far as unabsorbed depreciation is concerned, carry forward and set off is governed by section 32(2) and the unabsorbed depreciation assumes the character of current year’s depreciation and has to be allowed as a deduction from current year’s income. Therefore the claim under section 10A is allowed from total income only after setting off the brought forward losses. There are no brought forward losses of Assessment Year 2005-06 to be adjusted against the profits of the current year.”

6.4 In addition thereto, the Assessing Officer reduced telecommunication expenses only from ‘export turnover’ without a corresponding reduction from ‘total turnover’. The reason of the Assessing Officer for doing so were as under :

“5.1 The expression ‘total turnover’ has not been defined under section 10A of the Act. It is the argument of the ‘a’ that since S. 10A does not have definition of ‘total turnover’, the definition of this term in S. 80HHE should be adopted. These contentions raised by A.R. has been carefully considered. The provisions of section 10A of the Act provides for a deduction instead of exemption w.e.f. A.Y. 2001-02. As per these provisions a proportionate deduction would be admissible and in an explanation introduced at the end of the section the term ‘export turnover’ has been defined with certain other terms such as ‘computer software’ and ‘convertible foreign exchange’. These terms have also been defined under S. 80HHE of the Act. It is the contention of the assessee company that since S. 10A does not define the term ‘total turnover’ then the meaning assigned to it in the other provisions of the Act will be have to be adopted.

5.2 The contention of the assessee is applicable in a case where if the term is not defined in the said section then the meaning assigned to the term ‘total turnover’ in the defining provision of the Income Tax Act to section 2 should be made applicable. However, section 2 does not define the term ‘total turnover’. The next step would be to consider the meaning assigned to the term ‘total turnover’ in any other provision of the Income Tax Act. However the meaning assigned to the term in other sections could be adopted only if the restrictive clause is not present. In the instant case all the sections wherein the term ‘total turnover’ has been defined commences with obstante clause “For the purposes of this section’. Therefore, as per the principles of interpretation of the statue it would not incorrect to extend such meaning to all provisions of the Act, thereby rendering the restrictive clause redundant. Therefore, the only course would be to assign the meaning applicable to the term in general parlance. As per this the term ‘total turnover’ would necessarily include all such charges which are sought to be excluded from the purview of the export turnover. Hence the exclusion of telecommunication charges from total turnover is incorrect. The deduction under section 10A is recomputed by excluding the telecommunication charges only from export turnover and not total turnover.”

From the above, we find that the Assessing Officer passed the assessment order after giving reasons in support of his conclusions and after application of mind. The allowability of deduction under section 10A, the computation thereof, the impact of losses of other STPI units, brought forward losses, unabsorbed depreciation, impact of foreign exchange fluctuation on ‘export turnover’ were examined by the Assessing Officer and conclusions and findings thereon were recorded. Hence, in our considered view, the conclusions of the learned CIT that the assessment order was passed without application of mind and without references to the provisions of the Act is incorrect.

6.5 In the case of Infosys Technologies Ltd. (supra), the Hon’ble jurisdictional High Court in paras 26 to 28 of the order has held that :

“26. We are also not in a position to accept the submission that the materials had been placed before the assessing authority and therefore there should be a conclusion that the authority has applied his mind to the same and there was no question of the commissioner interfering by taking a different view etc.

27. Assessing authority performs a quasi judicial function and the reasons for his conclusions and findings should be forthcoming in the assessment order. Though it is urged on behalf of the assessee by its learned counsel that reasons should be spelt out only in a situation where the assessing authority passes an order against the assessee or adverse to the interest of the assessee and no need for the assessing authority to spell out reasons when the order is accepting the claim of the assessee and the learned counsel submit that this is the legal position on authority, we are afraid that to accept a submission of this nature would be to give a free hand to the assessing authority, just to pass orders without reasoning and to spell out reasons only in a situation where the finding is to be against the assessee or any claim put forth by the assessee is denied.

28. We are of the clear opinion that there cannot be any dichotomy of this nature as every conclusion and finding by the assessing authority should be supported by reasons, however brief it may be, and in a situation where it is only a question of computation in accordance with relevant articles of a double taxation avoidance agreements and that should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it. It is the duty of the assessing authority to do that and if the assessing authority had failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interest of the Revenue and therefore while the commissioner was justified in exercising the jurisdiction. 263 of the Act, the Tribunal was definitely not justified in interfering with this order of the commissioner in its appellate jurisdiction.”

In the above discussion, the Hon’ble jurisdictional High Court has held that if the reasons for the conclusion and findings of the Assessing Officer are not forthcoming in the order, the order can be regarded as erroneous in so far as it is prejudicial to the interests of Revenue. Consequently, if the order of the Assessing Officer contains the reasons for his conclusions and findings, the said order cannot be regarded as erroneous in so far as it is prejudicial to the interests of Revenue. In the instant case, the allowability of deduction under section 10A and its computation were examined by the Assessing Officer in the course of assessment proceedings and he has recorded reasons for such conclusions and findings in the assessment order and therefore we are of the view that the learned CIT had no jurisdiction to interfere with the order passed by the Assessing Officer under section 143(3) of the Act.

6.6 In the decision of the Hon’ble High Court in the case of Namdhari Seeds (P.) Ltd. (supra), the assessee was engaged in the activity of growing and selling of fruits, vegetables etc and claimed that the income from such activity is ‘agricultural income’ which is exempt under section 10(1) of the Act. The Assessing Officer accepted the claim of the assessee and completed the assessment. The Hon’ble High Court held that since there was no discussion in the assessment order as to how the claim of the assessee is correct, the order passed under section 263 by the CIT is in accordance with law. In the instant case, the Assessing Officer has given reasons in support of his conclusions and findings in the assessment order. The issues dealt by the learned CIT in the order under section 263 were already examined by the Assessing Officer in the assessment order passed under section 143(3) of the Act. The Assessing Officer reduced the deduction claimed under section 10A and taken one of the possible views discussed by the learned CIT in the order passed under section 263. The Hon’ble jurisdictional High Court in the case of Yokogawa India Ltd. (supra) has held that deduction under section 10A should be allowed without setting off losses of other units and therefore the order passed by the Assessing Officer cannot be termed as erroneous and prejudicial to the interest of Revenue.

6.7 The Hon’ble Apex Court in the case of A.L.A. Firm (supra) held that the Assessing Officer cannot be said to have passed the assessment order without looking into all the details and information furnished by the assessee and placed before him during the assessment proceedings. The Hon’ble Apex Court observed as follows :

“We think there is force in the argument on behalf of the assessee that, in the face of all the details and statement placed before the Income Tax Officer at the time of the original assessment. It is difficult to take the view that the Income Tax Officer had not at all applied his mind to the question whether the surplus is taxable or not. It is true that the return was filed and the assessment was completed on the same date. Nevertheless, it is opposed to normal human conduct that an officer would complete the assessment without looking at the material placed before him. It is not as if the assessment record contained a large number of documents or the case raised complicated issues rendering it probable that the Income Tax Officer had missed these facts. It is a case where there is only one contention raised before the Income Tax Officer and it is, we think, impossible to hold that the Income Tax Officer did not at all look at the return filed by the assessee or the statements accompanying it. The more reasonable view to take would, in our opinion, be that the Income Tax Officer looked at the facts and accepted the assessee’s contention that the surplus was not taxable.”

6.8 The Full Bench of the Hon’ble Delhi High Court in the case of Kelvinator of India Ltd. (supra) held that a presumption can be raised that the assessment order under section 143(1) has been passed on application of mind. The observation of the Court as under :

“We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”

6.8.1 The Hon’ble Delhi High Court in the case of Eicher Ltd. (supra) held that the assessee had no control over the way an assessment is drafted and that merely because the issues accepted by the Assessing Officer do not find mention in the assessment order, it cannot be a ground to treat the order erroneous and prejudicial to the interests of Revenue if the Assessing Officer has accepted the view put forth by the assessee after verification of details submitted and on application of mind. The relevant portion of the decision is reproduced hereunder :

“In Hari Iron Trading Co. v. CIT [2003] 263 ITR 437, a Division Bench of the Punjab and Haryana High Court observed that an assessee has no control over the way an assessment order is drafted. It was observed that generally, the issues which are accepted by the Assessing Officer do not find mention in the assessment order and only such points are taken note of on which the assessee’s explanations are rejected and additions/disallowances are made. We agree.

Applying the principles laid down by the Full Bench of this court as well as the observations of the Punjab and Haryana High Court, we find that if the entire material had been placed by the assessee before the Assessing Officer at the time when the original assessment was made and the Assessing Officer applied his mind to that material and accepted the view canvassed by the assessee, then merely because he did not express this in the assessment order, that by itself would not give him a ground to conclude that income has escaped assessment and, therefore, the assessment needed to be reopened. On the other hand, if the Assessing Officer did not apply his mind and committed a lapse, there is no reason why the assessee should be made to suffer the consequences of that lapse.”

The above two referred decisions in the cases of CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 and Eicher Ltd. (supra) have been affirmed by the Hon’ble Apex Court in Kelvinator of India Ltd. (supra).

6.9 In the present case, the Assessing Officer has passed the assessment order under section 143(3) of the Act after examination of the details furnished by the assessee. The Assessing Officer examined the aspect of computation and allowability of the deduction under section 10A; computed the deduction allowable under section 10A in respect of the profits of 1st STPI unit at Bangalore and STPI unit at Pune without setting off of the losses of the 2nd STPI unit at Bangalore from ‘total income’ after setting off brought forward losses and unabsorbed depreciation and after disallowing software expenses, made the disallowance under section 14A and telecommunication expenses were reduced only from ‘export turnover’ without reducing the same from ‘total turnover’. The Assessing Officer has recorded and discussed the reasons for his findings and conclusions in the assessment order that expenses reduced from ‘export turnover’ should not be reduced from ‘total turnover’ and accordingly adjustments were made in respect of foreign exchange fluctuations. Obviously the said adjustment was made by the Assessing Officer after examining the details of foreign currency expenses also, which were called for by him and furnished by the assessee. In computing the deduction. 10A, the Assessing Officer relied on the decision of the Hon’ble Jurisdictional High Court in the case of Himatasingike Seide Ltd. (supra), that the deduction should be allowed from profits remaining after setting off brought forward losses and unabsorbed depreciation. In para 2 of the assessment order under section 143(3), the Assessing Officer has stated that the assessment is completed after verification of the books, details filed and discussion with the Authorised Representative. Thus, it appears that the Assessing Officer consciously formed a view in respect of the deduction under section 10A and the reasons for his findings and conclusion are discussed in the assessment order. The details examined during the assessment proceedings and the order passed under section 143(3) clearly indicate application of mind by the Assessing Officer in taking one of the possible views in the order in respect of which the learned CIT has not agreed and consequently taken a different view in the order passed by him under section 263. It is settled law that when an officer adopts one of the courses permissible in law and it has resulted in a loss of Revenue or when two views are possible and the Assessing Officer takes one view with which the CIT does not agree, the order cannot be treated as erroneous in so far as it is prejudicial to the interests of Revenue. The decisions of the Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. (supra) and Max India Ltd. (supra) confirm the above position of law and therefore the order passed by the CIT under section 263 is bad in law.

6.10 It is also a matter of record that on the date the CIT passed the order under section 263 of the Act, there were decisions in favour of the assessee in respect of the issues revised by him. The Hon’ble Apex Court has held in the case Max India Ltd. (supra) that action under section 263 is impermissible under such circumstances. The Hon’ble Bombay High Court in the case of Hindustan Unilever Ltd. v. Dy. CIT [2010] 325 ITR 102 has held that deduction under section 10A should be computed in respect of profits of each unit without setting off of the losses of other unit. The co-ordinate bench of the Tribunal in the cases of I-Gate Global Solutions Ltd. (supra) and Tata Consultancy Service Ltd. v. Asstt. CIT [IT Appeal No. 590 (Bang.) of 2008, dated 14-11-2008], has also held that deduction under section 10A should be computed in respect of profits of each unit without setting off the losses of other STPI units. Thus, the conclusion of the CIT that the losses of 2nd STPI unit at Bangalore should be set off against profits of other STPI units in computing deduction under section 10A is not correct. It is also seen that the learned CIT himself has acknowledged on page 11 of the order under section 263 that there are a number of decisions in favour of the assessee on the issue of set off of brought forward losses and deduction under section 10A. The mater being a debatable issue with contrasting views, the learned CIT was not correct in assuming jurisdiction under section 263 of the Act.

7.1 For Assessment Year 2005-06, in the assessee’s own case, the Assessing Officer had computed the eligible deduction under section 10A without setting off brought forward losses and unabsorbed depreciation. The deduction so computed was allowed from total income of the assessee after setting off brought forward losses and unabsorbed depreciation. The learned CIT passed an order under section 263 thereon directing the Assessing Officer to compute the deduction under section 10A after setting off brought forward losses and unabsorbed depreciation. On appeal, the Tribunal in order dt.16.3.2012 in ITA No. 698/Bang/2009 quashed the order under section 263. The relevant observation of the Tribunal in paras 7 to 9 thereof are as under :

“7. Having heard both the parties and having considered the rival contentions, we find that the basic grievance before us is with regard to the validity of the proceedings u/s 263 of the Income-tax Act. As held by the Hon’ble High Court of Karnataka in the case of Infosys Technologies Ltd., (cited Supra), where the assessing authority has considered the issue at length and has taken a possible view, then merely because the said order does not meet the approval of the CIT, it would not become an erroneous order to be revised u/s 263 of the Income-tax Act. In the case before us, the assessing authority has considered the issue at length and at page 2 and 3 of his order, has held as under :

“The assessee company has computed the profits from the business at Rs. 70,00,353/- and from this profits the exemption u/s 10A was claimed at Rs. 31,89,260/-. The remaining profits of Rs. 38,11,093/- was set off against brought forward business loss. The assessee company vide letter dated 23rd Aug, 2007 submitted the reasons for claiming benefit u/s 10A before setting off the brought forward losses. It is the contention of the assessee that sec. 10A is an exemption section. Section 10A is placed in Chapter III of the Act, which deals with incomes which do not form part of total income. Section 10A was initially in the nature in exemption. The provision was substituted w.e.f. 1.4.2001 and thereafter in an exemption sec. it was converted into a deduction section. While the loss of a 10A unit was not eligible to be carried forward initially, after the amendment brought about by the Finance Act, 2000 the loss of a sec. 10A unit is eligible to be carried forward and set off against profits of subsequent years. This is in terms of sec. 10A(6) of the I.T. Act. The Karnataka High Court in the case of Himatasingike Seide Ltd., 286 ITR 255 stated that the computation of total income has to be in terms of the IT Act. The judgment of the High Court makes it clear that the computation of eligible profits for sec. 10A has to be in accordance with the provisions of the Act and the profit of the undertaking cannot be determined in isolation of the other provisions of the Act. It is therefore held that the provisions of sec. 70 and sec. 72 are applicable in determining the profits of the business for the purposes of sec. 10A as far as unabsorbed depreciation is concerned, carry forward and set off are governed by sec. 32(2) and the unabsorbed depreciation assumes the character of current year’s depreciation and has to be allowed as a deduction from current year’s income. Therefore the claim u/s. 10A is allowed from total income of the assessee after setting off the brought forward losses.”

8. The above order of the assessing authority clearly shows that he has applied his mind to the facts of the case before him and as to whether the unabsorbed business loss and depreciation are to be reduced from the total turnover before allowing claim of deduction u/s. 10A of the Income-tax Act. Therefore, in our opinion, the decision of the Hon’ble High Court of Karnataka in the case of Infosys Technologies Ltd. cited (supra) is clearly applicable to the facts of the case before us and, therefore, the order of the CIT(A) u/s 263 has to be quashed. As we have already quashed the proceedings u/s 263 of the Income-tax Act, we are not inclined to go into merits of the direction of the CIT.

9. In the result, the assessee’s appeal is allowed.”

In the instant case also the Assessing Officer computed the deduction under section 10A without setting off the losses of 2nd STPI unit at Bangalore. The deduction so computed was held to be allowable from total income after setting off brought forward losses and unabsorbed depreciation. The learned CIT passed an order under section 263 concluding that deduction. 10A should be computed after setting off the losses of 2nd STPI unit at Bangalore. The facts of the above case and the instant case are similar in nature and the ratio of the above decision squarely applies to the instant case of the assessee. Therefore, the order passed under section 263 is without jurisdiction and bad in law.

7.2 The Special Bench of Chennai Tribunal in the case of Zylog Systems Ltd. (supra) has held that foreign currency expenses incurred for the purpose of development and export of computer software cannot be regarded as expenses incurred on technical services. Accordingly, it was held that foreign currency expenses should not be reduced from ‘export turnover’ in computing deduction under section 10A. In this view of the matter, the conclusion of the learned CIT in the instant case that foreign currency expenses should be reduced from ‘export turnover’ in computing the deduction under section 10A is incorrect. Whether the activities of Business Process Outsourcing is tantamount to ‘technical services’ under section 10A is also an issue which has contrasting views and therefore the learned CIT was also not correct in concluding that foreign currency expenses should be reduced from ‘export turnover’ in the course of proceedings under section 263.

7.3 On the date the order under section 263 was passed, the decisions of the Special Bench of Chennai Tribunal in ITO v. Sak Soft Ltd. [2009] 30 SOT 55 and of the co-ordinate bench of the Tribunal in Tata Elxsi Ltd. (supra) had held that expenses reduced from ‘export turnover’ should also be reduced from ‘total turnover’ in computing deduction under section 10A of the Act. In this view of the matter, the conclusion of the CIT that expenses reduced from ‘export turnover’ should not be reduced from ‘total turnover’ is not correct.

7.4 The learned Departmental Representative submitted that section 10A is to be interpreted on the basis of net foreign exchange earned and brought into India as foreign currency expenses incurred outside India results in outflow of foreign exchange and to that extent foreign exchange cannot be brought into India. He contended that in view of this, foreign currency expenses should not be reduced from total turnover. The contentions of the learned Departmental Representative have been considered in the case of Sak Soft Ltd. (supra) wherein at para 45 on pages 393 and 394 thereof it was observed as under :

“The learned representative for Adventnet Development Centre (India), one of the interveners submitted that the definition of ‘export turnover’ in clause (iii) of Explanation 2 below section 10B was not based on the concept of “Net inflow of foreign exchange” as sought to be made out in the order of the Chennai Bench of the Tribunal in California Software Co. Ltd. (2008) 118 TTJ 842 because the condition that the assessee should have used foreign currency is applicable only to the expenses incurred by it in providing the technical services outside India and is not applicable to the expenses incurred in freight, telecom charges or insurance attributable to the delivery of the goods outside India. We have gone through the order especially paragraphs 22.3 and 23. In paragraph 22.3 the Tribunal has observed that the effect of the judgment of the Supreme Court in the case of K. Ravindranathan Nair [2007] 295 ITR 228 is that “what is deducted from the ‘export turnover’ (the numerator in the formula) need not necessarily be deducted from the ‘total turnover’ (the denominator in the formula)”. It appears to us, with respect, that this may not be an accurate description of the controversy before the Supreme Court because in K. Ravindranathan Nair [2007] 295 ITR 228 the Supreme Court was concerned with the “profits of the business” and the ‘total turnover’ and the argument of the assessee was that the processing charges, which was includible in the profits of the business, should be excluded from the total turnover. The relationship between ‘export turnover’ and ‘total turnover’, which are the numerator and the denominator in the formula in section 80HHC was not the subject matter of decision by the Supreme Court in paragraph 23 the Tribunal observed that certain expenses incurred in foreign exchange are deducted from the export turnover by definition, the object of which “apparently” was netting in relation to the foreign exchange inflow and outflow and not because such expenses were part of the export turnover. The bench further observed that there can be no logical reason to exclude from the total turnover what was never part of it in the first instance. The concept of net inflow of foreign exchange, with respect, seems inappropriate to the definition of ‘export turnover’ in section 10B because, as pointed out on behalf of the intervener, this concept cannot in the very nature of things apply to freight, telecom charges and insurance attributable to the delivery of the goods outside India because these expenses were not required to be incurred in foreign exchange; the assessee could incur them in India currency in which case there is no question of net inflow of foreign exchange so far as these expenses are concerned. It cannot possibly be argued that the concept is limited to that part of the definition which requires the expenses to be incurred in foreign exchange.”

In para 49 of the said order on page 396 thereof the Chennai Special Bench of Tribunal went onto hold :

“In California Software Co. Ltd. [2008] 118 TTJ 842, the Chennai Bench of the Tribunal, as already noticed, has held that the objective of the definition of ‘export turnover’ in section 10B was to apply the principle of netting by comparing the inflow and outflow of foreign exchange from or into the country. We have already held that this could not have been the objective. The order of the Chennai Bench, to the extent it holds so, with respect, cannot be approved.”

7.5 The submission of the learned counsel for the assessee that even if enquiries made by the Assessing Officer in the present case is considered inadequate, the said inadequacy of the material on record cannot be a ground to revise the assessment order under section 263, in our opinion, is to be accepted. If the Assessing Officer passes the order of assessment after examination of the material on record and with application of mind thereon, then the conclusion of the Assessing Officer cannot be regarded as erroneous simply because the CIT does not feel satisfied with the said conclusion, the provisions of section 263 are not attracted merely to substitute the judgment of the CIT for that of the Assessing Officer. “Lack of enquiry” is different from “inadequate enquiry.” If the Assessing Officer passed the order after making enquiries, even if they are considered inadequate, the CIT has no jurisdiction. 263. The CIT may assume jurisdiction. 263 only in cases of “lack of enquiry”. The co-ordinate bench of the Tribunal in the case of Cyber Park Development & Construction Ltd. (supra) has held that for inadequacy of enquiries made by the Assessing Officer or insufficiency of material on record cannot be a ground to revise the assessment order under section 263 of the Act. The order passed under section 263 in the instant case cannot be sustained for this reason also’.

8. In conclusion, we find that the assessment order was passed by the Assessing Officer after examination of details called for and furnished and on application of mind. The Assessing Officer has examined the aspects of computation and allowability of deduction under section 10A and has also examined the details called for in respect of foreign currency expenses. We also find that there were judicial decisions in favour of the assessee on the issues dealt with by the learned CIT in the order passed under section 263 as on the date of said order and which fact has been acknowledged by the CIT on page 11 of his order. Even otherwise, the issues dealt with by the learned CIT in the order passed under section 263 are capable of two views and the Assessing Officer has taken one of the possible views. On the facts and in the circumstances of the case as discussed above and the judicial decisions applicable, we are of the opinion that the order passed by the learned CIT under section 263 is without jurisdiction and liable to be quashed.

9. In the result, the appeal of the assessee is allowed.