Amoeba Publishing Solutions P. Ltd., Coimbatore V. ACIT, Coimbatore

CO 159/CHNY/2011

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8227 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 03-01-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 18-12-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 08-11-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K RAGHU
• Keywords: Revenue expenditure
• Section: 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT ME MBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.1634/MDS/2011 & C.O.NO.159/MDS/2011 (ASSESSMENT YEAR: 2003-04) DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3), RACE COURSE ROAD, COIMBATORE-641 005. VS. M/S.AMOEBA PUBLISHING SOLUTIONS P. LTD., 683-686, STOCK EXCHANGE BUILDING, COIMBATORE-5. PAN:AACCA4406B (APPELLANT) (RESPONDENT/CROSS OBJECTOR ) APPELLANT BY : MR GURU BASHYAM, JCIT RESPONDENT BY : MR. K.R AGHU, C.A., DATE OF HEARING : 18 TH DECEMBER, 2012 DATE OF PRONOUNCEMENT : 3 RD JANUARY, 2013 O R D E R PER VIKAS AWASTHY, JM: THE APPEAL HAS BEEN FILED BY THE REVENUE IMPUGNING THE ORDER PASSED BY THE CIT(A)-I, COIMBATORE DATED 13.07.2011 RELEVANT TO THE ASSESSMENT YEAR 2003-04. 2. THE ASSESSEE IS A COMPANY REGISTERED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS CARRYI NG ON THE BUSINESS OF SOFTWARE DEVELOPMENT. THE ASSESSEE FIL ED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2003-04 ON 29.10.2003 DECLARING NIL INCOME. THE CASE OF THE A SSESSEE ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 2 WAS TAKEN UP FOR SCRUTINY AND NOTICE WAS ISSUED TO THE ASSESSEE UNDER SECTION 143(2) OF THE INCOME TAX ACT (HEREINAFTER REFERRED TO AS THE ACT). DURING THE RELEVANT ASSESSMENT YEAR THE ASSESSEE COMPUTED INCOME FROM BUSINESS AS ` 52,55,062/- WHICH WAS SET OFF AGAINST EARLIER YEAR LOSSES. DURING THE YEAR UNDER CONSIDERATION, T HE ASSESSEE HAD DEBITED A SUM OF ` 1,29,06,390/- TOWARDS SOFTWARE DEVELOPMENT EXPENDITURE. THE SAID EXPENDI TURE PRIMARILY CONSTITUTED PAYMENT TOWARDS SALARIES FOR THE IMMEDIATELY PRECEDING YEAR I.E. ASSESSMENT YEAR 200 2-03 FOR DEVELOPMENT OF SOFTWARE. THE ASSESSING OFFICER VID E ASSESSMENT ORDER DATED 29.12.2005 DISALLOWED THE EXPENDITURE TOWARDS SOFTWARE DEVELOPMENT AS PRIOR P ERIOD EXPENSES. THE ASSESSEE FILED AN APPEAL BEFORE THE C IT(A) IMPUGNING THE ASSESSMENT ORDER. THE CIT(A) VIDE ORD ER DATED 13.3.2008 UPHELD THE ORDER OF THE ASSESSING OFFICER AND DISMISSED THIS GROUND OF APPEAL OF THE ASSESSEE. HO WEVER, UNDER THE PROVISIONS OF SECTION 115JB, THE CIT(A) H ELD THAT THE ASSESSING OFFICERS ACTION IN ADDING BACK THE S OFTWARE DEVELOPMENT EXPENSES TO THE BOOK PROFITS COMPUTED UNDER ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 3 SECTION 115JB WAS NOT WARRANTED AND THEREFORE DELET ED THE SAME. 3. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE TRIB UNAL IN ITA NO.922/MDS/2008 IMPUGNING THE ORDER DATED 13 .3.2008 PASSED BY THE CIT(A). THE ISSUE BROUGHT BEFORE THE TRIBUNAL FOR ADJUDICATION WAS WHETHER THE SOFTWARE DEVELOPME NT EXPENSES OF ` 1,29,06,390/- DEBITED TO PROFIT AND LOSS ACCOUNT IS TO BE DISALLOWED AS PRIOR PERIOD EXPENSES SINCE THE SAME HAD BEEN INCURRED DURING PREVIOUS YEARS. THE TRIBUN AL VIDE ORDER DATED 20 TH MARCH, 2009 HAS OBSERVED AS UNDER:- FURTHER, WE FIND THAT CIT(A) IN HIS ORDER HAD NOT AVERTED TO MATCHING PRINCIPLE THOUGH ELABORATE SUBMISSIONS WERE MADE BEFORE HIM. IN OUR OPINION, IT IS ONLY SUMMARY ORDER AND HENCE, WE RESTORE THIS MATTER TO CIT(A) WITH A DIRECTION TO PASS A SPEAKIN G ORDER AFTER CONSIDERING THE MATCHING PRINCIPLE AN D PROJECT COMPLETION METHOD CLAIMED BY THE ASSESSEE AFTER GIVING EFFECTIVE OPPORTUNITY OF BEIN G HEARD TO THE PARTIES. THE ASSESSEE IS ALSO DIRECTED TO COOPERATE WITH THE CIT(A) BY PRODUCING NECESSARY DETAILS THAT MAY BE REQUIRED FROM IT. THUS, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. IN THE SECOND ROUND OF LITIGATION, THE CIT(A) COMPL YING WITH THE DIRECTIONS OF THE TRIBUNAL DECIDED THE APPEAL O F THE ASSESSEE VIDE ORDER DATED 13.7.2011 AND HELD THAT AS PER ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 4 NOTES ON ACCOUNTS FOR 31.03.2002, DEFERRED SOFTWARE EXPENSES HAVE TO BE AMORTIZED OVER A PERIOD OF THRE E YEARS STARTING FROM ASSESSMENT YEAR 2003-04 AND DIRECTED THE ASSESSING OFFICER TO ALLOW THE EXPENDITURE FOR THE ASSESSMENT YEAR 2003-04 AND PARTLY ALLOWED THE APPEAL OF THE A SSESSEE. 4. AGGRIEVED AGAINST THE FINDINGS OF THE CIT(A), TH E REVENUE HAS COME IN APPEAL BEFORE THE TRIBUNAL. THE ASSESSEE HAS ALSO FILED CROSS OBJECTION ON THE GROU ND THAT THE CIT(A) HAS NOT ALLOWED EXPENDITURE INCURRED ON SOFTWARE DEVELOPMENT FOR THE ASSESSMENT YEAR 2003-04 IN FULL AND HAS ERRED IN DIRECTING THE EXPENDITURE TO BE AMORTIZED OVER THE PERIOD OF THREE YEARS STARTING FROM ASSESSMENT YEAR 2003-04. 5. SHRI GURU BHASHYAM APPEARING ON BEHALF OF THE REVENUE SUBMITTED THAT THE EXPENDITURE CLAIMED BY T HE ASSESSEE PERTAINS TO THE PREVIOUS ASSESSMENT YEAR I .E. ASSESSMENT YEAR 2002-03, THEREFORE, IT CANNOT BE AL LOWED IN THE ASSESSMENT YEAR 2003-04. THE ASSESSEE HAS BEEN MAINTAINING BOOKS OF ACCOUNT ON THE BASIS OF MERCAN TILE SYSTEM OF ACCOUNTING. UNDER MERCANTILE SYSTEM OF A CCOUTING, THE MATCHING IS REQUIRED TO BE DONE ON ACCRUAL BASI S. THE ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 5 SALARY PAID TO THE EMPLOYEES HAS BEEN CREDITED TO T HE PROJECT ACCOUNT. HE SUBMITTED THAT A PERUSAL OF BALANCE SHE ET AS ON 31.3.2002 WOULD SHOW THAT THE EXPENDITURE HAS BEEN SHOWN AS DEFERRED REVENUE EXPENDITURE UNDER MISCELLANEOU S EXPENSES. THE ASSESSEE HAS FAILED TO FOLLOW MATCHIN G CONCEPT OF EXPENDITURE. IN THE NOTES TO ACCOUNTS, THE ASSESSEE ITSELF HAS MENTIONED THAT THE EXPENSES AMO UNTING TO ` 1,29,06,390/-AS GIVEN IN ANNEXURE IS PROPOSED TO BE CAPITALIZED AND THE SAID CAPITALIZED EXPENSES ARE P ROPOSED TO BE AMORTIZED OVER A PERIOD OF THREE YEARS. THE D.R . STRONGLY SUPPORTED THE ASSESSMENT ORDER AND CONTENDED THAT T HE PRIOR PERIOD EXPENSES ON SOFTWARE DEVELOPMENT ARE NOT ALL OWABLE AS EXPENDITURE. 6. ON THE OTHER HAND, MR.RAGHU APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE PROJECT WAS TERMINATED WITHIN ONE YEAR. THEREFORE, THERE IS NO QUESTION OF AMORTI ZATION OF EXPENSES OVER A PERIOD OF THREE YEARS. THE REVENUE FROM THE PROJECT WAS GENERATED IN ONLY ONE YEAR. THE ANTICI PATION OF THE ASSESSEE TO AMORTIZE THE EXPENDITURE OVER A PER IOD OF THREE YEARS FELL BACK WHEN THE PROJECT WAS TERMIN ATED WITHIN ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 6 A PERIOD OF ONE YEAR. THE LEARNED AR SUBMITTED THAT IN NOTES ON ACCOUNTS FOR THE YEAR ENDING 31.03.2002, IT WAS MENTIONED THAT DEFERRED SOFTWARE EXPENDITURE HAVE TO BE AMORT IZED OVER A PERIOD OF THREE YEARS FROM THE ASSESSMENT YEAR 20 03-04 IN ANTICIPATION THAT REVENUE FROM THE PROJECT WILL CON TINUE FOR MANY YEARS, BUT WHEN THE PROJECT ITSELF WAS TERMINA TED IN ONE YEAR AFTER EARNING THE ONE AND ONLY REVENUE FROM IT , THERE WAS NO CASE FOR AMORTIZING THE EXPENSES FOR THREE YEARS AND IT HAS BEEN CHARGED OFF FULLY TO MATCH THE REVENUE DURING THE YEAR. THE A.R. ADMITTED THAT EXPENDITURE RELATES TO THE P REVIOUS YEAR. HE CONTENDED THAT SINCE THE ASSESSEE DID NOT CLAIM THE SAME IN THE ASSESSMENT YEAR 2002-03 AND TREATED T HE SAME AS DEFERRED EXPENDITURE IN ITS BALANCE SHEET AS ON 31.03.2002, THE ASSESSEE IS ENTITLED TO CLAIM THE S AME IN THE SUBSEQUENT ASSESSMENT YEAR. THE AR FURTHER CONTENDE D THAT THE CIT(A) HAS ERRED IN COMING TO THE CONCLUSION TH AT THE EXPENDITURE ON SOFTWARE DEVELOPMENT EXPENSES IS TO BE AMORTIZED OVER A PERIOD OF THREE YEARS STARTING FRO M THE ASSESSMENT YEAR 2003-04. THE AR FURTHER STATED THAT BY APPLYING MATCHING PRINCIPLE THE EXPENDITURE INCUR RED ON A ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 7 SPECIFIC SOFTWARE PROJECT IS DEDUCTIBLE IN FULL IN THE SAME YEAR IN WHICH THE REVENUE FROM SUCH SOFTWARE PROJECT HAS BEEN GENERATED. 7. WE HAVE HEARD THE SUBMISSIONS MADE BY BOTH THE PARTIES. WE HAVE GONE THROUGH THE ORDERS PASSED BY THE AUTHORITIES BELOW. IT IS AN ADMITTED FACT THAT THE EXPENDITURE ON SOFTWARE DEVELOPMENT HAS BEEN INCURRED BY THE AS SESSEE IN THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2002- 03. THE A.R. HAS REFERRED TO AN AGREEMENT WHICH IS AT PAGE 12 TO 20 OF THE PAPER BOOK TO SHOW THAT THE ASSESSEE HAS UND ERTAKEN SOFTWARE DEVELOPMENT PROJECT IN ACCORDANCE WITH THE AGREEMENT DATED 1.7.2002 BETWEEN THE ASSESSEE AND M/S.ISOFTEL LTD., A COMPANY INCORPORATED UNDER LAW OF SINGAPORE. A PERUSAL OF THE SAME SHOWS THAT SOFTWA RE DEVELOPMENT AGREEMENT HAS BEEN EXECUTED BETWEEN THE SINGAPORE COMPANY AND M/S. AMOEBA TELECOM LTD. AND NOT THE ASSESSEE I.E., M/S.AMOEBA PUBLISHING SOLUTIONS P. LTD. BOTH THE COMPANIES ARE TWO SEPARATE LEGAL ENTITIES . THEY MAY HAVE SIMILAR OBJECTS AND BUSINESSES BUT THERE I S NOTHING ON RECORD TO SHOW THAT THE ASSESSEE COMPANY HAS ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 8 UNDERTAKEN THE EXECUTION OF THE PROJECT. THE A.R. H AS PLACED ON RECORD LEDGER EXTRACTS OF EXPORT SALES FOR THE PERIOD STARTING FROM 1.4.2002 TO 31.3.2003 WHICH IS AT P AGE 21 OF THE PAPER BOOK AND SALES INVOICES WHICH ARE AT PAGE 22 TO 25 OF THE PAPER BOOK. ALL THESE INVOICES AND LEDGER E XTRACTS PERTAIN TO M/S. AMOEBA TELECOM LTD AND HAS NOTHING TO DO WITH THE ASSESSEE COMPANY. THE A.R. HAS REFERRED TO EXPORT INVOICES SHOWING THE NAME OF THE CUSTOMER AND THE D ETAILS OF INVOICED PRODUCT. A FURTHER PERUSAL OF THE DESCRIPT ION OF THE PRODUCT SHOWS THAT IT RELATES TO INVOICING OF MAN-H OURS /MAN- DAYS/MAN-MONTHS AND NOT TO ANY PARTICULAR SOFTWARE DEVELOPMENT AS CONTENDED BY THE A.R. THE A.R HAS A LSO REFERRED TO NOTES ON CAPITALIZATION OF SOFTWARE DEV ELOPMENT, WHICH IS AT PAGE 26 OF THE PAPER BOOK. THE SAID N OTES ALSO RELATES TO M/S. AMOEBA TELECOM LTD. THE ASSESSEE H AS ALSO REFERRED TO THE DETAILS OF CENTERWISE EXPENDITURE FOR THE PERIOD STARTING FROM JULY TO MARCH, 2002 CAPITALIZE D ON 31.3.2002 AT PAGE 27. THE SAID DETAILS ALSO RELATES TO M/S. AMOEBA TELECOM LTD AND NOT TO THE ASSESSEE. THE ONL Y DOCUMENT RELATING TO THE EXPENSES OF ASSESSEE DURIN G THE ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 9 FINANCIAL YEAR 2001-02 WITH RESPECT TO DETAILS OF S ALARY PAID TO ENGINEERS IS AT PAGE 28 & 29 OF THE PAPER BOOK. THE SAID DETAILS ARE ONLY EXTRACTS AND ARE NOT SUPPORTED BY ANY OTHER DOCUMENT. NO DOCUMENT HAS BEEN PLACED ON RECORD WI TH RESPECT OF THE ASSESSEE COMPANY TO SHOW THAT THE SA ME ARE IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE COMPANY. THE AR OF THE ASSESSEE HAS CERTIFIED THAT ALL THE DOCUMENT S VIZ., AGREEMENT, LEDGER EXTRACTS, NOTE ON CAPITALIZATION, BREAK-UP OF EXPENDITURE ETC. WERE PLACED BEFORE THE CIT(A). TH E CIT(A) IN PARA 5 OF ITS ORDER HAS OBSERVED THAT THE AGREEM ENT DATED 1.7.2002 IS BETWEEN ISOFTEL LTD AND AMEOBA TELECOM LTD. AND NOT THE ASSESSEE. THE CIT(A) FURTHER OBSERVED THAT IT IS NOT KNOWN WHETHER M/S. AMOEBA TELECOM LTD. IS ONE A ND THE SAME AS AMOEBA PUBLISHING SOLUTIONS P. LTD. DESPITE SUCH OBSERVATION, THE ASSESSEE HAS NOT PLACED ANY DOCUME NT ON RECORD TO SHOW THE RELATION BETWEEN M/S. AMOEBA TEL ECOM LTD. AND THE ASSESSEE. IT IS NOT THE CASE OF THE AS SESSEE THAT THERE IS ANY CHANGE OF NAME OF COMPANY, IT IS ALSO NOT THE CASE OF THE ASSESSEE THAT THERE HAS BEEN ANY MERGER OR AMALGAMATION OF THE COMPANIES. THE ASSESSEE HAS NE ITHER ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 10 PLACED ANY DOCUMENT ON RECORD TO SHOW THAT THE ASSE SSEE WAS EXECUTING THE PROJECT FOR THE OTHER COMPANY NOR ANY EVIDENCE TO LINK IT WITH THE PROJECT. THE ASSESSEE HAS ONLY FILED EXTRACT OF DETAILS OF SALARY PAID TO ENGINEER S IN THE FINANCIAL YEAR 2001-02 AT PAGE 28 AND 29 OF THE PAP ER BOOK. THE SAID EXTRACTS ARE ALSO NOT CERTIFIED, THEREFORE , NO RELIANCE CAN BE PLACED ON THEM. EVEN FORM 35 AND 36 FILED BE FORE THE CIT(A) AND THE TRIBUNAL RESPECTIVELY DOES NOT MENTI ON ANY RELATION BETWEEN THE ASSESSEE COMPANY AND M/S. M/S. AMOEBA TELECOM LTD. BE THAT AS IT MAY, THE EXPENDITURE RELATED TO PRIOR PERIOD EXPENSES CANNOT BE ALLOWED IN SUBSEQUENT ASSESSMENT YEAR. THE ASSESSEE OUGHT TO HAVE CLAIMED THE SAME IN THE YEAR OF EXPENDITURE ITSELF. 8. WE ARE OF THE CONSIDERED OPINION THAT THE ASSESS EE HAS NOT BEEN ABLE TO SHOW FROM THE DOCUMENTS PLACED ON RECORD THAT THE EXPENDITURE RELATES TO THE ASSESSEE COMPAN Y. WE THEREFORE HOLD THAT THE SAME IS NOT ALLOWABLE IN T HE HANDS OF THE ASSESSEE . ITA NO.1634/MDS/2011 & CO NO.159/MDS/2011 11 9. IN VIEW OF OUR ABOVE FINDINGS, THE APPEAL OF THE REVENUE IS ALLOWED AND THE CROSS OBJECTION OF THE A SSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY, T HE 3 RD DAY OF JANUARY, 2013 AT CHENNAI. SD/- SD/- (ABRAHAM P.GEORGE) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 3 RD JANUARY, 2013 SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.