Eco Tech Software Pvt Ltd., CHENNAI V. DCIT, CHENNAI

ITA 3094/CHNY/2014

• Counselvise Citation: 309421714 RSA 2014
• Duration Of Justice: 2 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 24-02-2015
• Assessment Year: 2001-2002
• Appeal Filed On: 23-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN
• Assessee Lawyers: S RAGHUNATHAN; S SANKARANARAY ANAN
• Keywords: Depreciation
• Section: 143(3); 37(1); 10B; 148

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . , ! . . ' , # $ BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER ./ ITA NO.3094/MDS/2014 # % !&% / ASSESSMENT YEAR : 2001-02 M/S ECO TECH SOFTWARE PVT. LTD., G-42, FIRST AVENUE, ANNA NAGAR EAST, CHENNAI - 600 102. PAN : AAACE 6684 R V. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(3), CHENNAI - 600 034. (()/ APPELLANT) (+,()/ RESPONDENT) () - . / APPELLANT BY : SHRI S. RAGHUNATHAN, ADVOCATE & SHRI S. SANKARA NARAYANAN, ADVOCATE +,() - . / RESPONDENT BY : SHRI P. RADHAKRISHNAN, JCIT / ! - 0 / DATE OF HEARING : 24.02.2015 1& - 0 / DATE OF PRONOUNCEMENT : 05.03.2015 / O R D E R PER S.S. GODARA, JUDICIAL MEMBER: THIS ASSESSEES APPEAL FOR ASSESSMENT YEAR 2001-0 2 ARISES FROM ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)- II, CHENNAI, DATED 12.08.2014 PASSED IN ITA NO.944/ 2013-14 AFFIRMING THE A.O.S ACTION APPORTIONING SOFTWARE D EVELOPMENT - - I.T.A. NO. 3094/MDS/2014 2 EXPENSES OF ` 2,47,420/- TO DOMESTIC AND EXPORT UNITS IN AD HOC MANNER IN 50-50 RATIO, IN PROCEEDINGS UNDER SECTION 143(3) R.W.S. 147 OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT' ). 2. THE ASSESSEE IS A COMPANY DEVELOPING COMPUTER SOFTWARE. IT IS ENGAGED IN BOTH EXPORT AND DOMESTI C SALES. IT HAD FILED ITS RETURN ON 31.03.2001 ADMITTING INCOME OF ` 1,20,322/-. THE SAME WAS SUMMARILY PROCESSED RESULTING IN A D EMAND OF ` 26,895/-. THEREAFTER, THE ASSESSING OFFICER FORMED AN OPINION ON REASONS TO BELIEVE THAT THE ASSESSEES EXPENDITURE WRITTEN OFF HAD TO BE APPORTIONED BETWEEN ITS EXPORT AND DOMEST IC UNITS AND FAILURE THEREOF RESULTED IN ESCAPEMENT OF INCOME FR OM BEING ASSESSED. THIS CULMINATED IN A SECTION 148 NOTICE DATED 31.03.2008. THE ASSESSEE REITERATED WITH THE INCOM E ALREADY RETURNED. 3. IN CONSEQUENTIAL PROCEEDINGS, THE ASSESSING OFFI CER NOTICED THE ASSESSEE TO BE HAVING DOMESTIC AS WELL AS EXPORT SALES. IT WAS FOUND TO HAVE WRITTEN OFF THE IMPUGN ED SOFTWARE DEVELOPMENT EXPENDITURE AMOUNTING TO ` 2,47,420/- BY DEBITING IT FROM PROFIT & LOSS ACCOUNT WITHOUT APPORTIONMENT. THE ASSESSEE QUOTED SECTION 37(1) OF THE ACT AND TERMED THE SAID - - I.T.A. NO. 3094/MDS/2014 3 OUTGO AS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE ASSESSING OFFICER IN REASSESSMENT FRAMED ON 12. 12.2008 OBSERVED THAT THE ASSESSEE SOLD THE SAME SOFTWARE I N DOMESTIC AND EXPORT SALES, IT HAD DEBITED THE IMPUGNED EXPEN SES WRITTEN OFF IN THE PROFIT & LOSS ACCOUNT OF THE DOMESTIC UN ITS ONLY. HE HELD THAT THE SAID EXPENDITURE HAD TO BE ALLOCATED BETWEEN THESE TWO DIVISIONS. THE NUMBER OF ITEMS SOLD IN DOMESTI C MARKET AND EXPORTED WAS TAKEN FOR EQUAL APPORTIONMENT OF THE E XPENDITURE IN 50:50 RATIO @ ` 1,23,710/- EACH. THE ASSESSEES TOTAL INCOME STOOD ASSESSED AS ` 4,19,920/-. 4. THE CIT(APPEALS) AFFIRMED THE ASSESSING OFFICER S ACTION IN ALLOCATING THE IMPUGNED EXPENDITURE AS UNDER:- THE ASSESSEE BEFORE THE UNDERSIGNED SUBMITTED THAT THE ENTIRE EXPENDITURE OF RS.2,47,420/- WRITTEN OFF IN THE P&L ACCOUNT OF DOMESTIC DIVISION IS THE EXPENDITURE PERTAINING TO THE DOMESTIC DIVISION ONLY. WHILE ALL OCATING THE SALARY COST TO THE EXPORT DIVISION, IT HAD ALREADY ALLOCATED 80.03% OF THE SALARIES TO THE EXPORT DIVISION. HENCE, FURTHER ALLOCATION OF SOFTWARE DEVELOPMENT CO ST WRITTEN OFF OF RS.2,47,420/- AT 50-50 RATIO IS NOT REQUIRED. THE RELEVANT PORTION OF THE ASSESSEE'S SUBMISSIONS DATED 12.08.2014 ARE AS UNDER: THE APPELLANT, ECO TECH SOFTWARE PVT LTD 'ECO TECH' OR 'THE APPELLANT') DURING AY 200.1-02 IN ITS RETURN OF INCOME DECLARED GROSS TOTAL INCOME OF ` 4,80,856/' AFTER CLAIMING DEDUCTION OF LOB UNIT AT RS. 237,134/- AND THEREBY DETERMINED THE TAXABLE INCOME AT RS.243,722/. THE ASSESSMENT WAS RE-OPENED UNDER 147 FOR THE RELEVANT YEAR AND DURING THE ASSESSMENT PROCEEDING, AO TAKEN ONE LINE ITEM EXPENDITURE TOWARDS SOFTWARE DEVELOPMENT WRITTEN OFF - - I.T.A. NO. 3094/MDS/2014 4 OF RS. 247,420/- CONSIDERED I N EXPORT DIVISION, AND REALLOCATED 50/50 BASIC TO DOMESTIC DIVISION AND EXPORT DIVISION. THEREBY SOUGHT TO DISALLOW SOFTWARE DEVELOPMENT EXPENSES OF RS: 123.710/ - ALLOCATED TO DOMESTIC UNIT BY THE APPELLANT. THE APPELLANT SUBMITS THAT THE COST ALLOCATION WAS CARRIED OUT BASED ON THE TIME CLOCKED BY THE TECHNICAL TEAM IN RESPECT OF EACH PROJECT -DOMESTIC DIVISION! EXPORT DIVISION. T HE ASSESSING OFFICER CANNOT PULL OUT ONE LINE OF EXPENDITURE AND WITHOUT ANY BASIS CANNOT ALLOCATE THE EXPENSES AT THE RATIO OF 50/50. THE SOFTWARE DEVELOPMENT EXPENSES REPRESENTS MOSTLY THE SALARY EXPENSES OF THE TECHNICAL PEOPLE INVOLVED WITH THE DEVELOPMENT OF SOFTWARE IN THE EARLIER YEARS, WHICH HAS BEEN CH ARGED TO PROFIT AND LOSS ACCOUNT ON DEFERRED BASIS AMOUNTING TO (ONE SEVENTH IN THE CURRENT YEAR RS.245,462/-). THE APPELLANT SUBMITS THAT THE WORK CARRIED OUT FOR DOMESTIC DIVISION DURING THE YEAR M OSTLY FROM THESE BASE WORK CREATED IN THE EARLIER YEAR. ( THE ASSESSING OFFICER WERE TO CONCLUDE THAT THE AMOUNT CHARGED IN THE CURRENT YEAR SHOULD BE ALLOCATED BETWEEN THE DOMESTIC DIVISION AND THE EXPORT DIVISION AT 50/ 50 BASIS, HE SHOULD ALSO ALLOCATE THE CURRENT YEAR TOTAL SALARY COST ON THE SAME BASIS. HE CANNOT PULL ONE STRING OF THE EXPENDITURE AND ALLOCATE AT 50/50. THE APPELLANT FURTHER SUBMITS THAT IN 147 PROCEEDING THE AO HAS TO IDENTIFY THE INCOME ESCAPED ASSESSMENT ON ALL ADHOC ALLOCATION OF EXPENDITURE THE COURTS HAVE ALWAYS HELD THAT THERE IS NO CONCEALMENT ON AN ESTIMATION OR SURMISE OR CONJUNCTURE. THEREFORE THE FOLLOWING TABLE EXPLAINS AS TO HOW THE APPELLANT HAS TREATED THE TOTAL SALARY COST IN THE CURRENT YEAR. (AMOUNT IN INDIAN RUPEES) DESCRIPTION DOMESTIC DIVISION EXPORT DIVISION TOTAL SOFTWARE DEVELOPMENT TURNOVER 4,021,770 5,554,030 9,575,800 EXPENSES TOWARDS SOFTWARE DEVELOPMENT SALARY PAID REFER SCHEDULE 14 546,474 2,190,220 2,736,694 EXPENSES TOWARDS SOFTWARE DEVELOPMENT WRITTEN OFF 245,462 - 245,462 FROM THE ABOVE TABLE IT AM BE SEEN THAT THE APPELLANT HAS ALLOCATED 80.03% OF THE SALARY COST TO EXPORT DIVISION. WITH THE ALLOCATION OF THE 1/7 CHARGED AMOUNT THE SALARY COST DEBITED TO THE EXPORT DIVISION IS 73.44%. FROM THE ABOVE TABLE AND THE FIGURES. IT CAN BE SEEN THAT THE APPELLANT NEVER HAD ANY CONCEALMENT OF INCOME. THE APPELLANT HAS ALLOCATED HIGHER PERCENTAGE OF SALARY TO THE TAX EXEMPTED EXPORT DIVISION. UNLESS THERE HAS BEEN CONCEALMENT (PROVABLE), THERE CANNOT BE 147 PROCEEDINGS. WITHOUT PREJUDICE TO OUR ABOVE SUBMISSION, WE WOULD LIKE TO DRAW YOUR ATTENTION THAT AO DURINQ THE ASSESSMENT PROCEEDING SOUGHT TO DISALLOW EXPENDITURE TOWARDS SOFTWARE DEVELOPMENT WRITTEN OFF OF RS. 123, 710/ ALLOCATED TO DOMESTIC UNIT. WHILE WORKING OUT THE REVISED A SSESSED INCOME, AO INSTEAD OF REDUCING RS.123, 71 0/-, ERRONEOUSLY ADDED BACK THE SAID AMOUNT WHICH HAS RESULTED IN DOUBLE ADJUSTMENT. THE ACTUAL ASSESSED INCOME AND THE ASSESSED INCOME WORKED OUT BY ASSESSING OFFICER IS GIVEN BELOW:- - - I.T.A. NO. 3094/MDS/2014 5 DESCRIPTION ACTUAL INCOME TO BE ASSESSED, RECTIFYING THE ABOVE ASSESSED INCOME WORKED BY AO DOMESTIC INCOME 1,39,534 1,39,534 EXPORT DIVISION INCOME 288,180 535,600 TOTAL 427,714 675,134 ADD:INADMISSIBLE AS PER RETURN 499,589 499,589 TOTAL 9,27, 303 1,174,723 LESS: DEPRECIATION AS PER IT 446,447 446,447 TOTAL 480,856 728,276 LESS: 10B UNIT RELATED PROFIT 1,65,911(**) 308,357( *) ASSESSED INCOME 314,945 419,919 *10B UNIT PROFIT WORKED OUT BY ASSESSING OFFICER PROFIT OF THE EOU X EXPORT TURNOVER OF UNDERTAKING (AMT.REALIZED IN CONVERTIBLE FOREIGN CURRENCY TOTAL TURNOVER OF THE UNDERTAKING = 535,600 X 3,197,578 = RS 308,357/- 5,554,030 **10B UNIT PROFIT ACTUAL PROFIT OF THE EOU X EXPORT TURNOVER OF UNDERTAKING (AMT.REALIZED IN CONVERTIBLE FOREIGN CURRENCY TOTAL TURNOVER OF THE UNDERTAKING = 288,180 X 3,197,578 = ` 1,65,911/- 5,554,030 AS DETAILED ABOVE, THE ASSESSED INCOME HAS BEEN OVE RSTATED TO THE TUNE OF ` 1,04,974/- THIS MAY BE TAKEN CARE WHILE PASSING OR DER BY OUR HONOUR. THE APPELLANT OMITTED TO INCLUDE THE ABOVE GROUND W HILE FILING THE ABOVE APPEAL. THEREFORE THE APPELLANT REQUEST YOUR HONOUR TO CONSIDER THE ABOVE AS ADDITIONAL GROUND. I HAVE CONSIDERED THE ASSESSEE'S SUBMISSIONS CAREFU LLY. THE ABOVE SOFTWARE DEVELOPMENT COST WRITTEN OFF PER TAINS TO DOMESTIC AS WELL AS THE EXPORT DIVISIONS. THE PR ODUCT DEVELOPED IS COMMON FOR DOMESTIC AS WELL AS EXPORT ACTIVITIES. THEREFORE, IRRESPECTIVE OF THE ALLOCATI ON OF THE OTHER EMPLOYEE COST, THE ABOVE COMMON EXPENSES OF R S 2,47,420/- NEEDS TO BE APPORTIONED BETWEEN THE DOME STIC AND EXPORT DIVISIONS. THE ASSESSING OFFICER HAS RIG HTLY APPORTIONED THE EXPENSES. THE ASSESSING OFFICER'S A CTION IS JUSTIFIED AND CONFIRMED. HOWEVER, AFTER APPORTIONING THE ABOVE DEVELOPMENT EXPENSES OF RS.2,47,420/-, EQUALLY AMONG THE DOMEST IC AND EXPORT DIVISIONS, THE ASSESSING OFFICER SHOULD REDUCE THE SO-APPORTIONED EXPENSES FROM THE INCOME OF THE EXPORT DIVISION. INSTEAD, THE ASSESSING OFFICER ERRONEOUSLY ADDED IL TO THE INCOME OF THE EXPORT DIVISION, - - I.T.A. NO. 3094/MDS/2014 6 WHICH IN TURN, RESULTED IN INFLATION OF THE INCOME OF THE EXPORT DIVISION. THIS ALSO RESULTED IN ENHANCED DEDUCTION U/ S. 10B OF THE ACT. THEREFORE, THE ASSESSING OFFICER IS DIRECTED TO REDUCE THE ABOVE APPORTIONED EXPENSES FROM THE INCOME OF THE EXPORT DIVISION AS UNDER:- INCOME OF THE EXPORT DIVISION, AS SHOWN BY THE ASSESSEE : 4,11,890 LESS: APPORTIONED EXPE NSES AS ABOVE : 1,23,710 NET INCOME OF THE EXPORT DIVISION : 2,88,180 LESS: DEDUCTION U/S 10B: TURNOVER OF EXPORT UNIT : ` 55,54,030 EXPORT TURNOVER REALIZED : ` 31,97,578 REVISED NET INCOME AS ABOVE: ` 2,88,180 DEDUCTION U/S.10B PROFIT OF THE EOU X EXPORT TURNOVER TOTAL TURNOVER I.E. 2,88,180 X 31,97,578 = ` 1,65,911/- 55,54,030 NET INCOME FROM EXPORT UNIT AFTER 10B DEDUCTION: ` 1,22,268/- THEREFORE, THE ASSESSING OFFICER IS DIRECTED TO DET ERMINE THE NET INCOME FROM THE EXPORT DIVISION (BEFORE ALL OWING DEDUCTION U/S.L0B) AT RS.2,88,180/- AS AGAINST RS.5 ,33,600/- DETERMINED BY HIM IN HIS ORDER. SIMILARLY, THE ALLOWABLE DEDUCTION U/S.L0B IS TO BE DETERMINED AT R.1,65,912 J-. AS AGAINST RS.3,08,537/- DETERMINED IN THE ASSESSMENT ORDER. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. IN RESULT, THE ASSESSEE'S APPEAL IS TREATED AS PA RTLY ALLOWED. 5. WE HAVE HEARD BOTH SIDES AND PERUSED THE CASE FI LE. THE ASSESSEE CHALLENGES APPORTIONMENT OF THE IMPUGNED S OFTWARE DEVELOPMENT EXPENDITURE INTO DOMESTIC AND EXPORT DI VISIONS @ 50:50 EACH BY THE ASSESSING OFFICER AND AFFIRMED IN THE LOWER APPELLATE ORDER. IT FILES A CORRESPONDENCE FROM SO FTWARE - - I.T.A. NO. 3094/MDS/2014 7 TECHNOLOGY PARKS OF INDIA DATED 29.03.2000 GRANTING 100% EXPORT ORIENTED PERMISSION UNDER STP SCHEME, ITS LE TTER DATED 16.12.2008, DETAILS OF SALARY COSTS IN THE TWO DIVI SIONS FOR FINANCIAL YEAR ENDED 31.03.2002 AND ITS WORKING, AU DITORS REPORT COMPRISING BALANCE SHEET OF THE IMPUGNED ASS ESSMENT YEAR, TRADING AND PROFIT & LOSS ACCOUNT OF THE SALE S WITH ACCOUNTING POLICIES, NOTES ON ACCOUNTS, ENTRIES IN EXPORT AND DOMESTIC DIVISIONS AND SEEKS TO REVERSE THE IMPUGNE D ALLOCATION. THE REVENUE SUPPORTS THE LOWER AUTHORITIES ORDERS. THE CASE FILE REVEALS THAT THESE DOCUMENTS HAVE NOWHERE BEEN SPECIFICALLY DISCUSSED IN REASSESSMENT OR IN THE LOWER APPELLATE ORDER. THE DISPUTE BEFORE US IS ESSENTIALLY A FACTUAL ONE, I.E . WHETHER OR NOT THE IMPUGNED ALLOCATION OF SOFTWARE DEVELOPMENT EXP ENDITURE IN EXPORT AND DOMESTIC SALES DIVISION IS JUSTIFIED. T HE ASSESSING OFFICER HAS BASED HIS FINDINGS ON THE SALES QUANTIT IES OF THE SOFTWARE TO OBSERVE THAT THE VERY SOFTWARE HAS BEEN SOLD IN DOMESTIC AND EXPORT MARKET. THE ASSESSEES BOOKS T REATING THE IMPUGNED EXPENDITURE ONLY FOR DOMESTIC DIVISION HAV E NOWHERE BEEN REJECTED. THEREFORE, WE DEEM IT APPROPRIATE T HAT THE ASSESSING OFFICER NEEDS TO RE-EXAMINE THE ENTIRE IS SUE AFRESH AS PER LAW. THE ASSESSEE SHALL BE AT LIBERTY TO PRODU CE ALL ITS - - I.T.A. NO. 3094/MDS/2014 8 RELEVANT DETAILS WITHIN THREE EFFECTIVE OPPORTUNITI ES OF HEARING. WE FIND THAT A LOT OF WATER HAS FLOWN DOWNSTREAM SI NCE THE END OF THE RELEVANT ASSESSMENT YEAR 2001-02. IT WOULD BE APPRECIATED IF THE LEARNED ASSESSING OFFICER PASSES HIS CONSEQUENTIAL ORDER WITHIN A PERIOD OF FOUR MONTHS FROM GETTING COPY OF THIS ORDER. 6. THIS ASSESSEES APPEAL IS ALLOWED FOR STATISTICA L PURPOSES. ORDER PRONOUNCED ON THURSDAY, THE 5 TH OF MARCH, 2015 AT CHENNAI. SD/- SD/- (A. MOHAN ALANKAMONY) (S.S. GODARA) ( . ) ( . . ') / ACCOUNTANT MEMBER # /JUDICIAL MEMBER /CHENNAI, 3 /DATED, THE 5 TH MARCH, 2015. KRI. 4 - +#056 76&0 /COPY TO: 1. () /APPELLANT 2. +,() /RESPONDENT 3. / 80 () /CIT(A)-II, CHENNAI 4. / 80 /CIT, CHENNAI-II, CHENNAI 5. 6!9' +#0# /DR 6. ':% ; /GF.