2002 (8) TMI 840 - AT - Income Tax

Tribunal grants exemption under section 10A for software production, allows business loss carryforward.

The Tribunal allowed the assessee's appeal in part, directing the Assessing Officer to grant exemption under section 10A for the manufacture and ... - Issues Involved:1. Whether the assessee is engaged in 'manufacture' or 'production' of software programs u/s 10A of the Income-tax Act for the assessment year 1998-99.2. Whether the assessee is entitled to carry forward the business loss of Rs. 8,28,130 in respect of the U.S. Branch for set off in subsequent years.3. Whether the interest charged u/s 234B and 234C in the Demand Notice without levying the same in the Assessment Order is justified.Summary:Issue 1: Manufacture or Production of Software Programs u/s 10AThe primary issue was whether the assessee was engaged in 'manufacture' or 'production' of software programs as per clauses (iii) and (vi) of the Explanation to section 10A of the Income-tax Act for the assessment year 1998-99. The assessee had a software unit in SEEPZ and entered into agreements with BaaN Netherlands and BaaN India to customize standard software. The Assessing Officer denied the exemption u/s 10A, stating that the assessee was merely providing professional services and not manufacturing or producing any article or thing. The CIT(A) upheld this view, relying on several Supreme Court decisions.The Tribunal, however, found that the customization process undertaken by the assessee involved significant intellectual effort and resulted in new programs, thus meeting the criteria for 'manufacture' as per the classical connotation. The Tribunal also noted that the customization process constituted 'production' as per the wider connotation of the term. The Tribunal held that the assessee's activities fell within the scope of 'manufacture' and 'production' as defined in section 10A and directed the Assessing Officer to allow the exemption.Issue 2: Carry Forward of Business LossThe assessee's claim to carry forward the business loss of Rs. 8,28,130 in respect of the U.S. Branch was consequential to the decision on the first issue. Since the Tribunal allowed the exemption u/s 10A, it also directed that the assessee be allowed to carry forward the business loss for set off in subsequent years.Issue 3: Interest u/s 234B and 234CThe Tribunal addressed the issue of interest charged u/s 234B and 234C, noting that the Demand Notice was issued simultaneously with the Assessment Order, and both documents were signed by the Assessing Officer. Citing the Supreme Court decision in Kalyankumar Ray v. CIT and the Punjab & Haryana High Court decision in Vinod Khurana v. CIT, the Tribunal found that the interest was rightly charged. However, this issue became consequential to the Tribunal's decision on the first issue, and the Assessing Officer was directed to charge interest, if any, after giving effect to the Tribunal's order.Conclusion:The appeal filed by the assessee was allowed in part, with the Tribunal directing the Assessing Officer to allow the exemption u/s 10A and the carry forward of the business loss, and to reassess the interest charged u/s 234B and 234C accordingly.