Netweb Software Pvt. Ltd., Vadodara V. The ACIT, Circle-4, Vadodara

ITA 335/AHD/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8006 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 10-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRASOON KABARA
• Keywords: Corroborative evidences; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH BEFORE: SHR I RAJPAL YADAV , JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER NETWEB SOFTWARE PVT. LTD. NETWEB ASPIRE, NEAR BRIGHT SCHOOL, VASNA - BHAYLI ROAD, VADODARA - 391410 PAN: AAACN7710M (APPELLANT) VS THE ACIT, CIRCLE - 4, AYAKAR BHAVAN, VADODAR - 390007 (RESPONDENT) REVEN UE BY : S H RI PRASOON KABARA , SR. D . R. ASSESSEE BY: S H RI MUKUND BAKSHI , A.R. DATE OF HEARING : 06 - 06 - 2 018 DATE OF PRONOUNCEMENT : 27 - 06 - 2 018 / ORDER P E R : AMARJIT SINGH, ACCOUNTANT MEMBER : - THIS ASSESSEE S APPEAL FOR A.Y. 2011 - 12 , ARIS ES FROM ORDER OF THE CIT(A) - 2, VADODARA DATED 09 - 11 - 2015 , IN PROCEEDINGS UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT . 2. THE ASSESSEE HAS RAI SED FOLLOWING GROUNDS OF APPEAL: - 1. THE LD. CIT(A) - 2, BARODA HAS ERRED IN FACTS AND IN LAW IN DISALLOWING AN AMOUNT OF RS. 12,86,793/ - OUT OF SALARY EXPENSES, HOLDING THAT SUCH AMOUNT IS NOT A REVENUE EXPENDITURE WHICH REQUIRES AMORTIZATION FOR DEVEL OPMENT OF SOFTWARE. THE DISALLOWANCE AS MADE IS IN COMPLETE DISREGARD OF THE FACTS AND THE LAW AND HENCE IS PRAYED TO BE ALLOWED AS CLAIMED. 2. THE LD. CIT(A) - 2, BARODA HAS ERRED IN FACTS AND IN LAW IN DISALLOWING AN AMOUNT OF RS. 68,151/ - OUT OF WELFA RE EXPENSES HOLDING THAT SUCH AMOUNT IS NOT A REVENUE EXPENDITURE. THE FINDING AND DISALLOWANCE AS MADE IS IN COMPLETE DISREGARD OF THE FACTS AND THE LAW AND HENCE IS PRAYED TO BE ALLOWED AS CLAIMED. I T A NO . 335 / A HD/20 16 A SSESSMENT YEAR 2011 - 12 I.T.A NO. 335 AHD/20 16 A.Y. 2011 - 12 PAGE NO NETWEB SOFTWARE PVT. LTD. VS. ACIT 2 3. THE BRIEF FACT OF THE CASE IS THAT ASSESSEE HAS FILE D RETURN OF INCOME DECLARING INCOME OF RS. 7 7 , 53 , 580/ - . SUBSEQUENTLY , THE CASE WAS SELECTED UNDER SECURITY BY ISSUING OF NOTICE U/S. 143(2) OF ACT ON 28 TH SEP, 2012. THE ASSESSE IS ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF SOFTWARE. THE OTHER FACT S OF THE CASE ARE DISCUSSED UNDER THE GROUNDS OF APPEAL AS UNDER: - DISALLOWANCE OF SALARY EXPENSES 4. DURING T HE COURSE OF SCRUTINY ASSESSMENT, THE ASSESSING OFFICER HAS NOTICED THAT THERE IS FALL IN NET PROFIT MARGIN FROM 21.58% TO 11.03% UNDER THE YEAR UNDER CONSIDERATION . ON FURTHER VERIFICATION THE ASSESSING OFFICER HAS NOTICED CLAIM OF NEW EXPENSES OF RECRUITMENT AND PLACEMENT OF RS.1 , 59 , 222/ - SHE HAS ALSO STATED THAT THERE IS INCREASED IN THE SALARY AND WAGES EXPENSES , WELFARE EXPENSES AN D RE PAIR AND MAINTENANCE CHARGES . REGARDING NEW EXPENSES AS RECRUITMENT AND PLACEMENT EXPENSES OF RS . 1 , 59 , 222/ - THE ASSESSEE HAS SUBMITTED THAT DURING THE YEAR THE ASSESSEE COMPANY IS ENGAGED IN THE SERVICES OF RECRUITMENT AGENCIES AS WELL AS METHOD LIKE DEVELOPMENT REFERENCE ETC. FURTHER ASSESSEE HAS GIVEN THE NECESSARY SUPPORTING EVIDENCES ON INCURRING THE REPAIR AND WELFARE EXPENSES ETC. T HE ASSESSEE HAS EXPLA INED THAT ASSESSEE COMPANY IS IN THE PROCESS OF DEVELOPMENT OF CERTAIN SOFTWARE WHICH ARE UNDE R THE S T ATE OF DEVELOPMENT. THE PARTICULARS OF SUCH SOFTWARE AS UNDER: - DESCRIPTION OF SOFTWARE AMOUNT (RS.) SOFTWARE DEVELOPMENT - MYC : 1,07,655 SOFTWARE DEVELOPMENMT MYOYANKE 37,818 SOFTWARE DEVELOPMENT - GULBRADSEN 4,327 SOFTWARE DEVELOPMENT - IDENTITY THEFT MONITORING SOFTWARE 2,34,11,558 TOTAL 2,35,61,358 I.T.A NO. 335 AHD/20 16 A.Y. 2011 - 12 PAGE NO NETWEB SOFTWARE PVT. LTD. VS. ACIT 3 THE ASSESSING OFFICER HAS NOT ACCEPTED THE EXPLANATION OF THE ASSESSEE A ND DISALLOWED TH E EXPENSES OF RS . 25 , 99 , 956/ - O N THE ESTIMATED BASIS ON THE ASSUMPTION THAT EMPLOYEES MAY NOT BE DOING WORK RELATED TO NEW SOFTWARE. 5. AGGRIEVED ASSESSEE FILED APPEAL BEFORE T HE LD. CIT(A). THE LD. CIT(A) HAS PARTLY ALLOWED THE APPEAL O F THE ASSESSEE BY OBSERVING AS UNDER: - 4. I HAVE CAREFULLY CONSIDERED THE FACTS ON RECORDS, SUBMISSION OF THE LD. AUTHORIZED REPRESENTATIVE AND REMAND REPORT OF THE ASSESSING OFFICER. IT IS NOTICED THAT THERE ARE AS MANY AS 25 HEADS UNDER WHICH EXPENDITURE HAS BEEN INCURR ED BY THE APPELLANT. HOWEVER, THE EXPENDITURE PERTAINING TO 7 HEADS HAS BEEN CONSIDERED FOR DEVELOPMENT OF THE SOFTWARE AS DISCUSSED ABOVE. UNDISPUTEDLY, THE ASSESSING OFFICER HAS NOT DISTURBED THIS MECHANISM OF THE AMORTIZING THE PART OF 7 EXPENSES ADOPTE D BY THE APPELLANT. IN FACT, THE ASSESSING OFFICER HAS CONSIDERED THREE EXPENSES VIZ. RECRUITMENT AND PLACEMENT EXPENSES/ SALARY EXPENSES AND WELFARE EXPENSES AND AMORTIZED PART OF THEM ON THE GROUND THAT THE SAME WERE PERTAINING TO THE DEVELOPMENT SOFTWAR E. 4.1. DURING THE YEAR UNDER CONSIDERATION 43 EMPLOYEES HAVE RESIGNED AND ACCORDINGLY FRESH RECRUITMENT HAVE BEEN CARRIED OUT BY THE APPELLANT TO BUILD UP THE CAPACITY FOR MANAGING AND MAINTAINING THE KNOWLEDGE BASE AND TO HANDLE FUTURE NEW PROJECT. THE O VERALL INCREASED IN NUMBER OF EMPLOYEES HAS BEEN AFFECTED FROM 80 TO 97. IN THIS PROCESS OF RECRUITMENT AND PLACEMENT, THE APPELLANT HAS INCURRED AN EXPENDITURE OF RS.1,59,222/ - WHICH HAS BEEN DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT IT PERTA INED TO DEVELOPMENT OF THE SOFTWARE AND HENCE NEEDS TO BE AMORTIZED IN ENTIRELY. I FIND THAT RECRUITMENT AND PLACEMENT IS A REGULAR FEATURE IN THE INFORMATION AND TECHNOLOGY INDUSTRIES AND EMPLOYEES RECRUITED WOULD ALSO TO BE DOING THE WORK OF REGULAR BUSI NESS ACTIVITY OF THE APPELLANT. THEREFORE, IN MY CONSIDERED VIEW, IT IS A REVENUE EXPENDITURE AND CANNOT BE CONSIDERED AS PERTAINING TO THE DEVELOPMENT OF NEW SOFTWARE. THUS, THE DISALLOWANCE IS DIRECTED TO BE DELETED AND APPELLANT ACCORDINGLY SUCCEEDS IN RESPECT OF GROUND NO. 1. 4.2. UNDER THE HEAD SALARY AND WAGES, THE APPELLANT HAS INCURRED TOTA L EXPENDITURE OF RS.3,36,44,487/ - AS AGAINST EXPENSES OF RS.2,57,35,873/ - INCURRED IN THE IMMEDIATE PRECEDING YEAR. I FIND THAT THE INCREASE IN THE EXPENSES UNDE R THIS HEAD IS 30.73%. THE TURNOVER OF THE APPELLANT HAS INCREASED FROM RS. 4.29 CRORES TO RS. 5.29 CRORES AS COMPARED TO LAST YEAR REGISTERING AN INCREASE OF 23.31%. AS A MATTER OF FACT, THE INCREASE/DECREASE OF THE EXPENSES AS WELL AS TURNOVER DOES NOT T AKE PLACE IN A MECHANICAL MANNER SINCE VARIOUS FACTORS RESULT IN FLUCTUATION. THUS, KEEPING IN VIEW THE INCREASE IN THE TURNOVER, I AM OF THE CONSIDERED VIEW THAT THE INCREASE UNDER THE HEAD SALARY AND WAGES BY 25% IS CERTAINLY JUSTIFIED. THUS, ONLY 5% OF INCREASE IN THE SALARY AND WAGES APPEARS TO BE EXCESSIVE WHICH FURTHER NEEDS TO BE AMORTIZED FOR DEVELOPMENT OF THE SOFTWARE. CONS EQUENTLY A SUM OF RS. 12,86,793/ - NEEDS TO BE AMORTIZED FURTHER FROM THE SALARY AND WAGES EXPENSES INSTEAD OF RS.23,72,583/ - AM ORTIZED BY THE ASSESSING OFFICER. IN THE RESULT DISALLOWANCE IS RESTRICTED TO RS. 12,86,793/ - . THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CONSEQUENTIAL RELIEF. THUS, APPELLANT SUCCEEDS PARTLY IN RESPECT OF GROUND NO. 2. 4.3. THE INCREASE IN WELFARE EXP ENSES HAS BEEN CLAIMED TO HAVE BEEN ON ACCOUNT OF INCREASE IN THE SALARY AND WAGES. UNDISPUTEDLY THERE IS INCREASE OF 51% UNDER THIS HEAD AS COMPARED TO LAST YEAR. IN MY CONSIDERED VIEW,, THIS INCREASE IS DISPROPORTIONATE. KEEPING IN VIEW THE INCREASE IN S ALARY AND WAGES AS WELL AS TURNOVER, THE ASSESSING OFFICER HAS DISALLOWED A SUM OF RS.68,151/ - BEING 30% OF THE INCREASE AND AMORTIZED THE SAME ON ACCOUNT OF SOFTWARE DEVELOPMENT. IN MY CONSIDERED VIEW, THE DISALLOWANCE IS I.T.A NO. 335 AHD/20 16 A.Y. 2011 - 12 PAGE NO NETWEB SOFTWARE PVT. LTD. VS. ACIT 4 REASONABLE AND HENCE THE SAME IS CONFIRMED. ACCORDINGLY, THE APPELLANT FAILS IN RESPECT OF GROUND NO. 3. 6. DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE US, THE LD. COUNSEL HAS SUBMITTED THE PAPER BOOK CONTAINING COPY OF AUDIT REPORT AND SUBMISSION MADE BEFORE THE LOWER AUTHORITIES . LD. COUNSEL HAS CONTENDED THAT LD. CIT(A) HAS ERRED IN SUSTAINING THE PART OF T HE ADDITION MADE B Y THE ASSESSING OFFICER WITHOUT CONSIDERING THE RELEVANT MATERIAL WHICH DEMONSTRATES THAT ASSESSEE HAS GENUINELY INCURRED THE EXPENSES. ON THE OT H ER HAND, LD. DEPARTMENTAL REPRESENTATIVE HAS SUPPORTED THE ORDER O F LD. CIT(A). 7. WE HAVE HEARD BOTH THE SIDE AND PERUSED THE MATERIAL ON RECORD CAREFULLY. THE LD. CIT(A) HAS RESTRICTED THE SAID ADDITION TO THE EXTENT OF RS. 12 , 86 , 793/ - AND ALSO SUSTAINED T HE DISALLOWANCE OUT OF STAFF WELFARE EXPENSES TO RS. 68 , 151/ - WE OBSERVE THAT T HE ASSESSING OFFICER HAS MADE THE ABOVE DISALLOWANCE ON THE GROUND THAT NET PROFIT OF THE ASSESSEE DECLINED TO 11.03% COMPARED TO 21.58% IN THE PRECEDING YEAR. AFTER PERUSAL OF THE P & L A/C OF THE ASSESSEE, WE OBSERV E THAT THE LOWER AUTHORITIES HAVE NOT CONSIDERED THE ACCOUNTING RESULT IN RIGHT PERSPECTIVE. DURING THE YEAR UNDER CONSIDERATION , THE ASSESSEE HAS SHOWN INCOME FROM SOFTWARE DEVELOPMENT TO THE AMOUNT OF RS. 5 ,2 9 , 40, 261/ - COMPARED TO INCOME OF RS. 4 , 28 , 99 ,230/ - REPORTED IN T HE PRECEDING YEAR. THERE IS INCREASE IN THE INCOME BY MORE THAN RS. 1 CRORE DURING THE YEAR UNDER CONSIDERATION FROM THE SOFTWARE DEVELOPMENT . DURING THE YEAR, THERE WAS INCREASE IN THE RECR UITMENT OF NEW EMPLOYEES AND ALSO REPLACEMENT OF THE EMPLOYEE WHO HAD BEEN REGISTERED. HOWEVER, TH E RE IS INCREASE IN THE INCOME FROM SOFTWARE DEVELOPMENT OF MORE THAN RS. 1 CRORE AS AGAINST INCREASE IN T HE SALARY RELATED EXPENSES OF RS . 79 LACS DURING THE YEAR UNDER CONSIDERATION . W E FIND THAT THE NET PROFIT WAS DECLINED BECAUSE OF INCREASE IN LE GAL AND PROFESSIONAL CHARGES TO R S. 12,48,981/ - FROM RS. 1,95,453 / - AND SELLING AND ADMINISTRATIVE EXPENSES TO RS. 74 , 63 ,597/ - FROM RS . 54 , 55 , 169/ - DURING THE YEA R UNDER CONSIDERATION . THE ABOVE FACTS DEMONSTRATE THAT THE LD. CIT(A) IS NOT JUSTIFIED IN I.T.A NO. 335 AHD/20 16 A.Y. 2011 - 12 PAGE NO NETWEB SOFTWARE PVT. LTD. VS. ACIT 5 EVEN PARTLY SUSTAINING THE ADDITION MADE BY THE ASSESSING OFFICER. THEREFORE, WE ARE NOT INCLINED WITH THE DECISION OF LD . CIT(A) . T HEREFORE, THE APPEAL O F THE A SSESSEE IS ALLOWED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PR ONOUNCED IN THE OPEN C OURT ON 27 - 06 - 201 8 SD/ - SD/ - ( RAJPAL YADAV ) ( AMARJIT SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD : DATED 27 /06 /2018 / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,