J. Sudhakar Reddy, A.M.:— These are cross-appeals filed by the Assessee and Revenue for the A.Y. 2007-2008 against the order of the CIT(A)-V, Hyderabad dated 31.10.2011.

2. The assessee is a company and is in the business of software development. It has two undertakings one located at Hyderabad and the other located at Pune. It has claimed deduction under section 10A of the I.T. Act, 1961 (hereinafter referred to as “Act”). The total turnover of the assessee-company, is its export turnover. In otherwords, the assessee has no domestic turnover.

3. We have heard Shri A.V. Raghuram, Learned Counsel for the assessee and Shri P. Chandrasekhar, Ld. D.R. on behalf of the Revenue. On a careful consideration of the facts and circumstances of the case and perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows.

5.1. First we take-up assessee's appeal. The grounds of appeal reads as follows:

“In the fact and the circumstances of case, and in law, the learned Commissioner of Income-tax (Appeals)-V, Hyderabad, erred:

1. In respect of unbilled revenue of Rs. 9,55,76,699.

a) In confirming that said amount is required to be included in the total turnover for the purpose of computing deduction under section. 10A

b) Without prejudice to above, if the amount of unbilled revenue is included in the total turnover, in not directing that to the extent of subsequent realization, the realized amount ought to be included in the export turnover for the purpose of computing deduction under section 10A.

c) In not appreciating that while computing deduction u/s 10A, unbilled revenue was not considered even in export turnover by the appellant.

d) In concluding that the appellant has included imaginary sales and imaginary profits to claim higher deduction under section 10A

2. In respect of charging of interest under section 234A.

a) In not adjudicating the ground relating to charging of interest under section 234A.

b) Since there was no delay in filing of tax return by the appellant, he ought to have directed for deletion of interest u/s 234A charged by the Assessing Officer.

3. The appellant craves leave to add, modify or withdraw any of the grounds of appeal at the time of hearing.”

6. Ground No. 1 is on the issue of computation of deduction under section 10A of the Act. The assessee in its books of account has disclosed total turnover which include unbilled revenue of Rs. 9,55,76,699. This amount was billed by the assessee in the immediately succeeding financial year and amounts were realised. While computing the deduction under section 10A of the Act, the assessee excluded this unbilled revenue, both from its total turnover and export turnover. The Assessing Officer while agreeing with the assessee that it is not part of the export turnover, included this amount in the total turnover. The submissions of the assessee before the Ld. Assessing Officer are extracted for ready reference:

“5. Nature of revenue accruals:

The total turnover of the Hyderabad unit is Rs. 102,92,36,724. This amount of turnover includes an amount of Rs. 8,23,48,491 which represents net revenue recognized for which bills were not raised as on 31.3.2007 as the billable milestones were not reached (the amount is net of reversal of opening revenue accruals of Rs. 1,30,92,788). Similarly, the total turnover of the Pune unit is Rs. 44,52,44,862. This amount of turnover includes an amount of Rs. 1,32,28,208 which represents net revenue recognized for which bills were not raised as on 31.3.2007 as the billable milestones were not reached.

The amount of revenue accrual represents estimated cost incurred for work done from the date off last billable milestone to the year-end date.

This amount is akin to ‘work-in-progress’ in a manufacturing concern. This amount is not included in debtors but is shown separately as “Cost and Estimated earnings in excess of billing” under the head ‘Current Assets’. Since this amount does not represent actual billing, the same is not considered in turnover for the purpose of computing deduction u/s 10A. It can be contended that since this amount represents cost incurred subsequent to last billable milestone viz. in the nature of work-in-progress, it can be shown as reduction from total expenditure instead of including the amount in total turnover.

In any case, this amount is included in the billing of subsequent year and is included in the turnover of next year. If this amount is included in the turnover of the current year. In the next year it will be again included in the turnover of that year and thus the same amount will be considered in the turnover twice.

In view of above submissions, it is submitted that the amount of Rs. 9,55,76,699 (Rs. 8,23,48,491 + Rs. 1,32,28,208) is not required to be included in the total turnover for the purpose of computing deduction under section 10A for AY 2007-08.

Without prejudice to above submissions, it is further submitted that this amount is included in the billings of next year to the extent of Rs. 8,67,88,581. The details of the same are submitted herewith with a request that if this amount is included in the total turnover then the same should be included in export turnover also since the amount is in respect of export sales only and is also realized and brought into India.”

6.1. These submissions were rejected by the Assessing Officer. When the matter travelled before the Ld. CIT(A), the Ld. CIT(A) at paras 7.2 to 7.6 agreed with the view of the Assessing Officer and rejected the ground of the assessee.

7. The Ld. A.R. reiterated the submissions made by him before the Ld. CIT(A).

8. The Ld. D.R. submitted as follows:

8.1. With regard to assessee's ground on the issue of inclusion of unbilled revenue in the export turnover to the extent of Rs. 9,55,76,699, it is submitted that the said amount should not be included in the export turnover as the same was not realized by the assessee in the convertible foreign exchange within the due dates prescribed under section 10A of the I.T. Act.

8.2. Alternatively, it is submitted that if it is considered to be excluded both from export turnover and total turnover, then the said amount should be reduced from the profits of the business before allowing deduction under section 10A. This is precisely because of the reason that as contended by the assessee's counsel, this amount was not actually billed in the FY 2006-07 relevant to AY 2007-08 under appeal and the same was actually included in the total turnover as well as export turnover of the subsequent FY i.e. FY 2007-08 relevant to AY 2008-09. Accordingly, both the unbilled revenue included in the credit side of the Profit & Loss account and the corresponding expenditure incurred which is debited to the Profit & Loss account in the FY 2006-07 relevant to AY 2007-08 under appeal should be excluded from the Profit & Loss account. This exercise will exclude profit included on account of unbilled revenue and, therefore, deduction under section 10A on such profit related to unbilled revenue can be denied. In this view of the matter, the issue may be remitted back to the AO for ascertaining the real profits of the business after excluding the unbilled revenue and corresponding expenditure from the Profit & Loss account and thereafter to apply the provisions of Section 10A.

9. We are not convinced with these findings of the First Appellate Authority for the following reasons:

a. The yardstick adopted for determining the total turnover and export turnover should be the same.

b. In case the sale in question is excluded from the total turnover on the ground that, it is yet to be billed, then on the same logic, this sale should not form part of the total turnover.

c. Hence, Ld. CIT(A) has committed an error in giving a finding that, unbilled amount should be part of total turnover but cannot be part of export turnover.

9.1. We also find that the assessee in this case has included unbilled revenues in its total turnover in its annual accounts. So to claim otherwise, while computing deduction under section 10A of the Act in our view is not correct. Under these circumstances, the correct position would be to include this unbilled amount, both in total turnover as well as in export turnover. The assessee has specifically submitted that unbilled turnover was subsequently billed and substantial amount has been realised in the immediately subsequent year, within the statutory period permitted for claim of exemption under section 10A of the Act. All the details were filed both before the Assessing Officer and the Ld. CIT(A). Both these authorities ignored these submissions. Assessing Officer as well as the CIT(A) should have considered these details and granted relief on the amount of foreign exchange realised by the assessee within the stipulated period as per law. Any how, we do not direct the Assessing Officer to do so in view of our finding in the next paragraphs.

9.2. One other aspect in this case is that the assessee for all the previous assessment years and in the succeeding assessment years, has consistently followed a method of computation of deduction under section 10A wherein unbilled turnover was deducted both from export turnover and total turnover. We once again repeat the observation that, in the case of this assessee, the export turnover is equal to the total turnover. The assessee has been claiming deduction under section 10A on this basis and the Revenue has been allowing the same, by accepting the claim of the assessee. Though the Ld. D.R. submitted that there is no res judicata in tax proceedings, for the sake of consistency and to avoid chain reaction in future assessment years, and as the tax rates for all the years are same and as the assessee has claimed deduction under section 10A on this year unbilled revenues in the next assessment year and as the revenue has accepted this claim, we are of the opinion that the unbilled revenues have to be eliminated from the total turnover as well as the export turnover in this year and the deduction under section 10A be computed. We direct the Assessing Officer accordingly. Hence, we allow this ground of the assessee.

10. Ground No. 2 is on the issue of charging of interest under section 234A of the Act. The return of income in this case was filed well within time i.e., on 30.10.2007. Thus the levy of interest under section 234A is bad in law. Ground No. 2 of the assessee is allowed.

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

ITA. No. 2040/Hyd/2011 — Revenue Appeal:

12. The Revenue has raised the following grounds in its appeal:

1. “The Hon'ble Commissioner of Income Tax (Appeals)-V, Hyderabad erred both in facts and law.

2. The CIT(A) erred in directing the Assessing Officer to consider the expenses of data link charges, expenditure incurred in foreign currency on travelling, payment of professional fees and other expenses in the export turnover for the purpose of computation of deduction under section 10A which is not envisaged Explanation 2(iv) of Section 10A.

3. The CIT(A) ought to have observed that if it is the intention of the legislature to extend to similar treatment to total turnover, it should have explicitly provided to exclude freight insurance and telecommunication charges attributable to the export of software even from the total turnover as was done in the case of Section 80HHC wherein in the legislature was clear at explanation (baa) to sub-section 4C.

4. The CIT(A) ought to have observed that section 43B and 40a(ia) are penal in nature for violating specified time limits in payment of statutory liabilities.

5. Any other ground that may be urged at the time of hearing before the Hon'ble ITAT.”

13. Ground No. 1 is general in nature. Ground Nos. 2 and 3 are covered in favour of the assessee by the order of the Hon'ble jurisdictional High Court in the case of CIT (Central), Hyderabad v. Aurobindo Pharma Ltd., Hyderabad in ITTA. No. 502 of 2014 Judgment dated 31.07.2014. Similar issue has been allowed by us in the assessee's appeal in the earlier assessment year. Respectfully following the same, we dismiss ground No. 2 of the Revenue.

13. On ground No. 4, the Ld. D.R. submitted as follows:

13.1. As seen from the facts of the case, in the statement of total income filed by the assessee along with return of income, the assessee itself has disallowed a sum of Rs. 31,99,845/- in terms of Sec. 40(a)(ia) of the I.T. Act as the assessee has failed to deduct tax at source under Chapter XVII of Income Tax Act. As such, there is no dispute with regard to non-deduction of tax at source by the assessee on the payment made to outside parties to the extent of Rs. 31,99,845/-. The only issue under dispute is whether the assessee is eligible to claim deduction u/s. 10A on this disallowed amount including the same in the total profits of the business. In this regard, the assessee's Counsel has placed reliance on Board Circular (supra). However, the said circular is not applicable to the facts of the assessee's case inasmuch as the said circular was issued in respect of allowability of Chapter VIA deduction on enhanced profits. To be precise, the circular has clarified that any increase in the profits on account of disallowance made u/s. 32, Sec. 40(a)(ia), Sec. 40A(3), Sec. 43B etc., would increase the total profits of the business and, accordingly, the assessee is entitled to claim deduction under Chapter VIA on such enhanced profits. As such, the Board Circular is not on the issue of allowability of deduction u/s. 10A with regard to enhanced profits on account of disallowance made u/s. 32, Sec. 40(a)(ia), Sec. 40A(3), Sec. 43B etc. Accordingly, the said circular cannot be taken into consideration in the instant case.

13.2. The Ld. D.R. further submitted that in order to deny deduction u/s. 10A on the enhanced profits on account of disallowance made u/s. 40(a)(ia) in the case of assessee:

i) Sec. 40(a)(ia) is a deeming provision by virtue of which, the assessee is not entitled to claim certain expenditure as deduction while computing the income though the said expenditure is already incurred in the relevant previous year on the basis of the method of accounting followed, but due to failure on its part in deducting tax at source in terms of the provisions contained under Chapter XVII of I.T. Act, 1961. As such, the increase in the business income of the assessee on account of such disallowance is “notional in nature” without having any real inflow or accrual of income to that extent. In case of export oriented companies, increase in business income on account of 40(a)(ia) disallowance will have no nexus with export earnings. Accordingly, without there being actual increase in export earnings and corresponding export profits brought into India in convertible foreign exchange, the assessee may claim deduction u/s. 10A. As such, legal fiction created by virtue of Sec. 40(a)(ia) cannot be extended to determine the profits of the business for the purpose of computing deduction under section 10A.

ii) The intention of legislature in introducing provisions of Sec. 40(a)(ia) is to penalise such asses sees who fail to follow the TDS provisions scrupulously, where TDS being one of the major source of revenue i.e. 40% to 45% of the total direct tax revenues comes through TDS provisions. As such, the purpose of disallowance u/s. 40(a)(ia) is to make the assessee aware that he/it should face multiple consequences on account of non-deduction of tax including levy of demand u/s. 201(1), interest 201(1A), penalty u/s. 221(1), and thereby forcing to abide by the TDS provisions.

iii) As such, the disallowance of such expenditure made u/s. 40(a)(ia) as a measure of punishment/penalty cannot give rise to benefit to the assessee by way of claiming deduction u/s. 10A on such amount disallowed. Otherwise, it would lead to absurd situation where, even after disallowance of huge amount for non deduction of TDS, the assessee will not pay any tax or penalty by virtue of claiming the entire amount of disallowance as deduction u/s. 10A Accordingly, the real intention of the legislature behind the insertion of Sec. 40(a)(ia) will be defeated in case the assessee is allowed deduction u/s. 10A on the disallowed amount/enhanced profits and thereby goes scotfree without paying any tax/penalty on such disallowance.

The Ld. D.R. placed reliance on the decision of Hon'ble ITAT, Ahmedabad ‘C’ Bench in the case of DCIT v. , Rameshbhai C Prajapati (29 Taxmann.com 64).

14. The Ld. A.R. relied on the order of the Ld. CIT(A) as well as the Circular of the CBDT No. 37/2016 dated 02.11.2016.

15. After hearing rival contentions, we find that the Ld. CIT(A) held as follows:

5.1. “During appeal proceedings, the appellant relied on the decision of the worthy CIT(A)-III in its own case for Asst. Year 2005-06 vide order in ITA. No. 0076/CIT(A)-III/09-10 dated 14.03.2011. From the above facts, I find that identical issue in the case of the appellant has been decided by CIT(A)-III in the aforementioned order. The following reasons have been given by the CIT(A) in upholding the disallowance u/s 40(a)(ia) and thereafter allowing the deduction under section 10A.

“8. In ground No. 3, it is stated that the AO erred in disallowing expenditure of Rs. 2,91,450/- under section 40(a)(ia) and taxing it separately and not allowing deduction under section 10A in respect of the same.

8.1. With reference to the above ground, in the written submissions filed by the Ld. AR, it was submitted that the disallowance is made in the computation of total income under the head ‘Income from Business’. It was stated that profits of the business of the undertakings are required to be computed and the proportion of export turnover to total turnover has to be applied to such profits of the business. Profits of the business are required computed and the proportion of export turnover to total turnover has to be applied to such profits of the business. Profits of the business are required to be computed as per the Part 0 of Chapter IV viz. as per the provisions of section 28 to 44DB. The above disallowance is made u/s. 40(a)(ia). Thus, while computing deduction u/s. 10A, first income from business has to be computed and then deduction u/s. 10A has to be computed by considering the entire income from business including from disallowance u/s. 40(a)(ia). Stating that such disallowance u/s. 40(a)(ia) is made under the head ‘Income from Business’, it was submitted that hence the same is eligible for deduction u/s. 10A.

8.2. On careful consideration of the submissions of the Id. AR and after going through the provisions of section 28 and 29 of the Act, I agree with their such contention. Profits and gains of Business or Profession is defined in section 28 and u/s. 29, it says, the income referred to in section 28, shall be computed in accordance with the provisions contained in sections 30 to 430. Thus, the same covers the disallowance to be made u/s 40(a)(ia)/Since, such disallowance of consultancy charges made u/s. 40(a)(ia) in this case, pertains to the business income of the undertaking in the case of the appellant company, the said additional income, arising from such disallowance, is eligible for deduction u/s. 10A. In this regard, reliance is also placed on the order dated 29-08-2008 in ITA. No. 1016/Hyd/07 of the Hon'ble ITAT, Hyderabad, in the case of DCIT v. Planet Online Pvt. Ltd., for the Asst. Year 2004-05, wherein it was held that exemption U/s. 10B has to be computed on the profits determined, after taking into account the disallowance to be made under section. 43B of the Act. Therefore, while upholding the said disallowance made in the assessment, for the reasons stated above, I direct the AO to allow deduction u/s. 10A in respect of the same.”

5.2 Since the issue involved in the current year is identical, respectfully following the aforementioned order, I too hold that exemption under section. 10A is to be allowed in respect of the amounts in question relating to the disallowance u/s 40(a)(ia).”

16. The finding of the Ld. CIT(A) is in line with the Circular of CBDT No. 37/2016. He followed the proposition of law laid down by a Coordinate Bench of the Tribunal. We see no infirmity in the order of the Ld. CIT(A). Hence, we uphold the same and dismiss this ground of Revenue.

17. In the result, appeal of the Revenue is dismissed and assessee's appeal is allowed.