ACCORD FINTECH P.LTD, MUMBAI V. DCIT CIR 6(1), MUMBAI

ITA 3364/MUM/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1394 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2016
• Appeal Filed By: Assessee
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 13-05-2016
• Court: TRIBUNAL
• Department Lawyers: MAHUVA SARKAR
• Assessee Lawyers: RONAK G DOSHI SHRI FENIL BHATT
• Keywords: Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH MUMBAI BEFORE SHRI C.N.PRASAD,JM & SHRI N. K . PRADHAN , AM INCOME TAX APPEAL NOS. 3364 & 3 365 /MUM/201 6 ( / ASSESSMENT YEARS : 20 1 0 - 1 1 AND 2011 - 12 ) M/S ACCORD FINTECH PVT. LTD 4 TH FLOOR, SADHANA HOUSE, 570, PANDURANG BUDHKAR MARG, WORLI, MUMBAI - 4000 18 ( / APPELLANT) VS. ITO 6(1) (1) ROOM NO.503, 5 TH FLOOR AAYKAR BHAVAN MAHARSHI KARVE ROAD MUMBAI 400 020 ( / RESPONDENT ) ./ ./ PAN/GIR NO. : AA D C B 2159 B / A PPELLANT BY : SHRI RONAK G DOSHI SHRI FENIL BHATT / REVENUE BY : MS. MAHUVA SARKAR / DATE OF HEARING : 04 /1 0 /2016 / DATE OF PRONOUNCEMENT : 28 / 1 2 / 2016 / O R D E R PER C.N.PRASAD (J.M.) : BOTH THESE APPEALS ARE FILED BY THE ASSESSEE FOR THE ASSESSMENT YEARS 2010 11 AND 2011 12 AGAINST THE ORDERS OF THE CIT(APPEALS) - 12/MUM DATED 12.04.2013 AND 18.03.14 RESPECTIVELY. 2. THE ASSESSEE HAS RAISED THE FOLLOWING COMMON GROUNDS OF APPEAL IN BOTH THESE ASSESSMENT YEARS EXCEPT FOR THE CHANG E IN FIGURES. 2 M/S ACCORD FINTECH PVT. LTD ITA NOS. 3364 & 3365/MUM/2016 ( I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN CONFIRMING THE DISALLOWNCE MADE BY THE INCOME TAX OFFICE, RANGE 6(1) - 1, MUMBAI ( THE AO ) OF RS.86,29,211/ - AS CAPITAL IN NATURE. (II) IN DOING SO THE CIT (A) FURTHER ERRED IN CONFIRMING IN ACTION OF THE AO OF ADOPTING BLANKET RATE FOR APPORTIONMENT OF VARIOUS EXPENDITURES IN BETWEEN REVENUE AND CAPITAL EXPENDITURE. (III) THE LD. CIT (A) FURTHER ERRED AND OUGHT TO HAVE HELD THAT : (A) T HE SALARY OF TH E EMPLOYEES INVOLVED IN DEVELOPMENT OF NEW SOFTWARE HAS BEEN CAPITALIZED BY APPELLANT PROPORTIONATELY ON THE BASIS OF TIME DEVOTED. (B) THE BASIS ADOPTED BY THE APPELLANT FOR APPORTIONMENT / ALLOCATION OF VARIOUS OTHER EXPENSES ARE REASONABLE AND LOGICAL. (C) ADD ITION MADE ON ACCOUNT OF APPORTIONMENT OF EXPENSES ON A BLANKET MANNER MERELY ON THE BASIS OF EMPLOYEES OF RS.86,29,211/ - TO BE DELETED OR APPROPRIATELY REDUCED. 3. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSING OFFICER WHILE COMPLETING ASSESSMENTS FO R THE ASSESSMENT YEARS 2010 - 11 AND 2011 - 12 NOTICED THAT THE ASSESSEE HAS INCURRED TOTAL EXPENSES OF RS.6.36 CRORES AND RS.5.83 CRORES OUT OF WHICH ASSESSEE HAS CLAIMED RS. 2.9 CRORES AND RS. 2.6 CRORES IN THE PROFIT AND LOSS ACCOUNT AND REMAINING RS.3.4 6 CRORES AND RS. 3.23 CRORES HAS BEEN TRANSFERRED TO CAPITAL WORK IN PROGRESS FOR THESE TWO ASSESSMENT YEARS I.E. 2010 - 11 AND 2011 - 12 RESPECTIVELY. THE ASSESSING OFFICER REQUIR ED THE ASSESSEE TO SUBMIT THE DETAILS AND BASIS OF APPORTIONMENT OF THESE EXPENSE S BETWEEN CAPITAL AND REVENUE. THE ASSESSEE FURNISHED THE DETAILS AND THE BASIS FOR ALLOCATION OF EXPENSES TOWARDS CAPITAL AND REVENUE BASED ON THE PERFORMANCE OF THE EMPLOYEES 3 M/S ACCORD FINTECH PVT. LTD ITA NOS. 3364 & 3365/MUM/2016 ETC. HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT THE METHOD OF ALLOCATION BY THE ASSESSEE. HE ALLOCATED THE EXPENSES BASED ON THE NUMBER OF EMPLOYEES TO TOTAL EXPENSES INCURRED BY THE ASSESSEE. ON APPEAL, THE CIT (A) CONFIRMED THE ALLOCATION MADE BY THE ASSESSING OFFICER. 4 . THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE BAS IS OF ALLOCATION OF THE ASSESSEE IS MORE LOGICAL AND IT IS BASED ON RESPONSIBILITIES GIVEN TO THE EMPLOYEES. HE SUBMITS THAT THE APPROACH OF THE ASSESSEE IS MORE RATIONAL AND THE ASSESSING OFFICERS APPROACH IS NOT CORRECT. THE DR VEHEMENTLY SUPPORTS THE ORDERS OF THE AUTHORITIES BELOW IN APPORTIONING THE EXPENSES TOWARDS REVENUE AND CAPITAL ON THE BASIS OF NUMBER OF WORK FORCE TO THE TOTAL EXPENSES INCURRED BY THE ASSESSEE. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE ORDERS OF THE AUTHORITIES BELOW. T HE ASSESSEE SUBMITT ED BEFORE THE ASSESSING OFFICER THAT IT HAD UNDERTOOK DEVELOPMENT OF CERTAIN SOFTWARE PRODUCTS AND THESE PRODUCTS WERE EXPECTED TO GENERATE REVENUE STREAMS IN COMING YEARS. AS SUCH, OUT OF TOTAL EXPENDITURE INCURRED, RELATABLE P ROPORTIONATE EXPENDITURE AMOUNTING TO RS.3,46,78,710/ - AND RS.3,23,47,245/ - HAVE BEEN CAPITALIZED TO ITS SOFTWARE (CAPITAL WORK IN PROGRESS CIP). THE ASSESSEE FURTHER SUBMITTED THAT THE BREAKUP OF THE EXPENSES WHICH WAS TRANSFERRED TO CAPITAL WORK IN P ROGRESS AND TRANSFERRED TO PROFIT AND LOSS ACCOUNT AND THE NATURE OF THE EXPENSES WHICH COME UNDER THE H EAD, E MPLOYEE C OST, FOOD COUPON, STAFF WELFARE, RENT, ELECTRICITY, INTEREST AND FINANCE CHARGES. 6. IN S O FAR AS THE SALARY IS CONCERNED, IT WAS SUBM ITTED BY THE ASSESSEE THAT THIS WAS APPARENT ON THE BASIS OF NATURE OF ACTIVITIES CARRIED OUT BY EACH 4 M/S ACCORD FINTECH PVT. LTD ITA NOS. 3364 & 3365/MUM/2016 EMPLOYEE FOR EACH DAY IN DE VOTING TIME FOR DEVELOPMENT ACTIVITY AND TIME DEVOTED FOR NORMAL BUSINESS ACTIVITIES. IT WAS FURTHER SUBMITTED THAT BASED ON T HE RESPONSIBILITIES GIVEN TO EACH EMPLOYEE, MANAGEMENT HAS CATEGORIZED EMPLOYEES BROADLY INTO THREE CATEGORIES. ONE, SENIOR MANAGEMENT LEVEL EMPLOYEES, WHOSE TIME, DEVOTION IS FOR DEVELOPMENT ACTIVITIES AND FOR MANAGING DAY TO DAY BUSINESS AFFAIRS. TWO, EMPLOYEES WHOSE SUBSTANTIAL TIME (ABOUT 75% TO 50%) IS DEVOTED TOWARDS DEVELOPMENT AND BALANCE IN DAY TO DAY BUSINESS ACTIVITIES. THREE, EMPLOYEES NOT AT ALL INVOLVED IN THE DE VELOPMENT ACTIVITIES, BUT INVOLVED ONLY IN DAY TODAY BUSINESS ACTIVITIES. IT WAS SUBMITTED THAT THE SALARY TO BE CAPITALIZED IN RESPECT OF EACH EMPLOYEE IN CATEGORY ONE HAS BEEN DONE BASED ON THE ESTIMATION OF THEIR TIME, DEVOTION FOR DEVELOPMENT ACTIVITI ES AND TOTAL NUMBER OF EMPLOYEES IN THIS CATEGORY IS 7. THE AMOUNT OF SALARY TO BE CAPITALIZED IN RESPECT OF EMPLOYEES IN CATEGORY 2 HAS BEEN DONE ON THE BASIS OF THEIR SUBSTANTIAL TIME DEVOTED TOWARDS DEVELOPMENTAL ACTIVITIES AND BALANCE IN DAY TO DAY BU SINESS ACTIVITIES. THE ENTIRE SALARY OF SUCH EMPLOYEES HAS BEEN CAPITALIZED. THE TOTAL NUMBER OF SUCH EMPLOYEES IN THIS CATEGORY IS 148. IT I S SUBMITTED THAT AS REGARDS SALARY OF EMPLOYEES BELONG TO CATEGORY 3, I.E. WHO ARE NOT INVOLVED IN DEVELOPMENT A CTIVITIES HAVE BEEN CHARGED TO PROFIT AND LOSS ACCOUNT AND THE TOTAL NUMBER OF SUCH EMPLOYEES IN THIS CATEGORY IS 63. 7 . COMING TO FOO D COUPON AND STAFF WELFARE OTHERS, IT I S SUBMITTED THAT OUT OF TOTAL EXPENSES INCURRED ON FOOD COUPON AND STAFF WELFARE O THERS ABOUT 25% EXPENSES HAVE BEEN CAPITALIZED AND THESE EXPENSES TOWARDS STAFF WELFARE OTHERS INCLUDE TEA AND COFFEE EXPENSES PROVIDED TO THE STAFF DURING THE WORKING HOURS. PROVIDING FOOD COUPON, TEA AND COFFEE COUPON IS ANY 5 M/S ACCORD FINTECH PVT. LTD ITA NOS. 3364 & 3365/MUM/2016 INDUSTRY PRACTICE. IT WAS S UBMITTED THAT MANAGEMENT ESTIMATED ABOUT 25% OF SUCH EXPENSES TO HAVE BEEN INCURRED ON ACCOUNT OF LATE SITTING BY EMPLOYEES FOR THE DEVELOPMENT PROJECT AND THEREFORE 25% OF SUCH EXPENSES HAVE BEEN CAPITALIZED. IT I S SUBMITTED THAT SEVERAL WELFARE EXPENSE S ON ACCOUNT OF HOLDING ANNUAL EMPLOYEES CONVENTION ON DIWALI FESTIVAL OR ONCE IN A YEAR TYPE EXPENSES, INCURRED AS PER PREVALENT INDUSTRY AND CUSTOMARY PRACTICE AND HENCE NO PROPORTION HAS BEEN CAPITALIZED FROM THE SAID EXPENSES. IT I S SUBMITTED THAT GR ATUITY AND LEAVE SALARY EXPENSES WHICH HAVE BEEN DISALLOWED IN COMPUTATION OF INCOME ARE ALSO NOT CONSIDERED BY MANAGEMENT FOR CAPITALIZING AND THEREFORE NO PROPORTION OF THESE EXPENSES HAVE BEEN CAPITALIZED. IT I S FURTHER SUBMITTED THAT LEAVE TRAVEL ALLO WANCE AND MEDICAL ALLOWANCE HAS NOT BEEN CONSIDERED AS SALARIES OF THE 148 EMPLOYEES WHO DEVOTED ABOUT 75% TO 80% OF THEIR TIME IN DEVELOPMENT ACTIVITIES HAS BEEN CAPITALIZED IN TOTAL AND NOTHING HAS BEEN CHARGED TO PROFIT AND LOSS ACCOUNT INSPITE OF THE F ACT THAT 20% TO 25 % OF THE TIME OF THE 148 EMPLOYEES IS ESTIMATED TO HAVE BEEN SPENT ON DAY TODAY BUSINESS ACTIVITIES. MOTOR CAR RUNNING REIMBURSEMENT EXPENSES ARE INCURRED FOR DAY TO DAY BUSINESS ACTIVITIES AND THEREFORE NO PROPORTION HAS BEEN CAPITALIZ ED. 8 . COMING TO RENT EXPENSES, IT I S SUBMITTED THAT 70% OF THE RENT EXPENSES HAS BEEN CAPITALIZED AND THE RATIONALE BEHIND THE SAME IS THAT TOTAL OFFICE SPACE WAS OCCUPIED BY 218 EMPLOYEES AND OUT OF 218 EMPLOYEES 155 EMPLOYEES I.E. ABOUT 70% WERE INVO LVED IN DEVELOPMENT ACTIVITIES. THEREFORE 70% OF RENT EXPENSES WERE CAPITALIZED. COMING TO ELECTRICITY EXPENSES, IT I S SUBMITTED THAT 2/3 RD OF THE ELECTRICITY EXPENSES WAS CAPITALIZED CONSIDERING THAT SOME MINIMUM ELECTRICITY BILL WILL ALWAYS BE CHARGEAB LE WHETHER PREMISES ARE USED OR NOT AND THEREFORE, THE MINIMUM BILL WAS 6 M/S ACCORD FINTECH PVT. LTD ITA NOS. 3364 & 3365/MUM/2016 CONSIDERED AS 5% AND OUT OF BALANCE 95% OF ELECTRICITY EXPENSES, 70% WAS CONSIDERED AS BEING FAIR AMOUNT TO BE CAPITALIZED AS 70% OF ELECTRICITY EXPENSES WERE CONSIDERED AS BEING PROPO RTION OF ELECTRICITY EXPENSES TO BE CAPITALIZED. THUS 70% OF 95% WAS COMPUTED AT 2/3 RD AND THIS WAS CAPITALIZED. 9 . COMING TO INTEREST EXPENSES, IT IS SUBMITTED THAT THE OVERDRAFT FACILITY IS AVAILABLE TO THE ASSESSEE COMPANY AT THE INTEREST RATE OF 2% M ORE THAN THE INTEREST PAYABLE BY THE BANK ON FIXED DEPOSIT. AND THE RATE OF INTEREST ON VARIOUS FIXED DEPOSITS OUTSTANDING AS ON 31.03.2010 WAS RANGING FROM 4% TO 7.75%. THUS THE AVERAGE RATE OF INTEREST WORKS OUT TO 5.87% AND THE OVERDRAFT LOAN INTEREST WAS CONSIDERED AT 2% HIGHER I.E. 7.87% FOR THE PURPOSE OF COMPUTING AMOUNT OF INTEREST EXPENSES TO BE CAPITALIZED. 10. THE ASSESSING OFFICER HOWEVER REJECTED THE SUBMISSIONS OF THE ASSESSEE AND HE HAS ALLOCATED THE EXPENSES BASED ON THE NUMBER OF EMPLOYEES TO TOTAL EXPENSES INVOLVED IN THE DEVELOPMENT ACTIVITIES FOR THE ASSESSMENT YEAR 2010 - 11. ASSESSING OFFICER CONSIDERED ALMOST 71% OF OPERATIONAL WORK FORCE AND THE ASSESSEE COMPANY WAS IN VOLVED IN DEVELOPMENT ACTIVITY, THEREFORE, 71% OF THE ASSESSEES TOTAL EXPENSES WAS ALLOCATED TOWARDS CAPITAL. SIMILARLY, FOR THE ASSESSMENT YEAR 2011 - 12, THE ASSESSING OFFICER NOTICED THAT ALMOST 59% OF OPERATIONAL WORK FORCE OF THE ASSESSEE COMPANY WAS INVOLVED IN THE DEVELOPMENT ACTIVITY, THEREFORE, HE ALLOCATED 59% OF THE TOTAL EXPENSES TOWARDS CAPITAL AND MADE ADDITIONS ACCORDINGLY. ON APPEAL, CIT (APPEALS) SUSTAINED THE APPORTIONMENT OF EXPENSES BASED ON THE NUMBER OF WORK FORCE AS WAS DONE BY THE A SSESSING OFFICER. 7 M/S ACCORD FINTECH PVT. LTD ITA NOS. 3364 & 3365/MUM/2016 1 1 . ON ANALYZING THE CONTENTIONS OF THE ASSESSEE AND THE STAND OF THE ASSESSING OFFICER WE FIND CONSIDERABLE SUBSTANCE IN THE METHOD OF ALLOCATION ADOPTED BY THE ASSESSEE. THE METHOD FOLLOWED BY THE ASSESSEE IS MORE LOGICAL AND RATIONA LE THAN THE METHOD ADOPTED BY THE ASSESSING OFFICER. THUS, REVERSING THE ORDER OF THE CIT (A), WE ALLOW THE GROUNDS OF APPEAL OF THE ASSESSEE IN ITS FAVOUR. 12 . IN THE RESULT, BOTH THE APP EAL S OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 28 TH D AY OF DECEMBER 2016. SD/ - SD/ - N.K.PRADHAN C.N.PRASAD / / ACCOUNTANT MEMBER JUDICIAL MEMBER / MUMBAI; / DATED 28 / 1 2 / 2016 LR, SPS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, (ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. // TRUE COPY / /