The DCIT, KOchi V. M/s.SFO Technologies Digital P. Ltd, Ernakulam

ITA 398/COCH/2020

AI Insights

The case involves two appeals by the Revenue against SFO Technologies Digital Pvt. Ltd., challenging the orders of the Commissioner of Income Tax (Appeals)-1, Kochi, which had dismissed the Revenue's appeals contesting the assessments under section 143(3) of the Income Tax Act, 1961 for the assessment years 2010-11 and 2011-12. The primary issue in both appeals was the validity of the disallowance of expenditure on salary and wages. The AO had initially disallowed a significant portion of the claimed expenditure due to an abnormal increase compared to the previous year, which was later restored by the Tribunal for AY 2010-11 but set aside for AY 2011-12 for lack of sufficient substantiation by the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 115472 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2023
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 31-12-0000
• Assessment Year: 2011-2012
• Appeal Filed On: 17-12-2020
• Other Referred Cases: S.A. Builders vs. CIT, Agarwal Global Steels Ltd vs. the Department of Income Tax, Lakshminarayan Madan Lal vs CIT, Swaseshi Cotton Mills Co Ltd vs. CIT, Lakshmiratan Cotton Mills Co Ltd vs. CIT, CIT v. Calcutta Agency Ltd, Travancore Titanium Product Ltd. v. CIT, Ram Bahadur Thakur Ltd. v. CIT, CIT v. Pilliah (K.Y.), Vrajlal Manilal& Co. v. CIT, CIT v. Raman & Co., Lakshminarayan Madan Lal vs. CIT, S.A. Builders Ltd. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Additional evidence; Cost of acquisition; Commercial expediency; Onus to prove; Revenue expenditure; Capital expenditure; Set aside
• Section: 143(3); 37(1); 191; 73

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri Sanjay Arora, Accountant Member and Shri Sandeep Gosain, Judicial Member ITA Nos. 397 & 398/Coch/2020 (Assessment Years: 2010-11 & 2011-12) Dy. CIT, Corporate Circle 2(1), 3 rd Floor, C.R. Building I.S. Press Road Kochi – 682018 vs. SFO Technologies Digital Pvt. Ltd. XIX/346, Stone House Aluva, Ernakulam - 682018 [PAN:AALCS0315E] (Appellant) (Respondent) Appellant by: Shri Anil D. Nair, Advocate Respondent by: Smt. J.M. Jamuna Devi, Sr. D.R. Date of Hearing: 31.01.2023 Date of Pronouncement: 28.04.2023 O R D E R PER BENCH: This is a set of two Appeals by the Revenue challenging the Orders by the Commissioner of Income Tax (Appeals)-1, Kochi [‘CIT(A)’ for short] dismissing the appeals contesting it’s assessments under section 143(3) of Income Tax Act, 1961 (‘the Act’ hereinafter) dated 25.3.2013 and 25.3.2014 for assessment years (AYs.)2010-11 and 2011-12 respectively, vide order of even date (18.9.2020).The subject matter of the two appeals being largely the same, the same were heard together, and are being disposed off vide this common order for the sake of convenience. 2. The issue arising in both the appeals is the validity of the disallowance of expenditure on salary and wages effected in assessment(s) by the Assessing Officer (AO), since deleted by the ld. CIT(A) on finding it as not sustainable in law. 3. The facts in brief for the first year are that the assessee is a company located in Cochin Special Economic Zone, Kochi, engaged in the manufacture of electronic ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 2 components since 01.12.2007. It filed it’s return of income for AY 2010-11 on 14.10.2010 at an income of Rs.186.01 lakhs after claiming exemption u/s.10AA of the Act at Rs.199.33 lakhs, and set off of brought forward business loss of Rs.124.56 lakhs. A scrutiny of it’s Profit and Loss Account (operating statement) revealed the expenditure on salary and wages, claimed at Rs.245.33 lakhs, to be at an increase of 238% over that for the immediately preceding year, i.e., AY 2009-10, even as the increase in turnover, vis-a-vis the said year, was, at 18%, much lesser. Sure, the said expenditure may not be in direct proportion to the sale (output), the increase therein, at over 18 times the increase in output, was abnormal and, in any case, warranted being examined. The situation in fact becomes all the more quizzical considering that the expenditure on electricity and water charges witnessed a decline by 15% over the preceding year, indicating lower consumption with reference thereto inasmuch as the price of these amenities does not normally experience a decline, but only an increase, suggestive of a fall in output, i.e., in quantitative terms. Explanation and details were accordingly sought from the assessee, who did not furnish any. The AO, constrained for want of any explanation, much less materials justifying the abnormal increase, allowed an increase of 20% over the claim of expenditure for the preceding year, disallowing the balance Rs. 176.49 lakhs (para 5.1of the assessment order). In the first appeal, the ld. CIT(A) allowed the assessee’s claim, holding as under: ‘The Appellant in the course of hearing and submissions has explained in detail the reasons for which the increased ratio of salary expenditure has been incurred. Further the Assessing Officer has nowhere disputed the fact whether the expense was incurred or not but the disallowance was merely on the ground of whether it is reasonable or not. It is no dispute to the fact that the appellant has earned higher profits on account of such prudent decision taken for increased profits though profits are not merely the matrix for measurement. The Hon'ble Supreme Court in the case of S.A. Builders vs. CIT (supra) have observed in no uncertain terms that what is relevant is whether the amount advanced by an assessee is as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profit. Once the assessee establishes that there is a nexus between the expenditure and the purpose of business, the Department will not be empowered to sit in ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 3 judgment over the decision taken by the business man to decide whether the expenditure incurred is correct or not. In the matter of Agarwal Global Steels Ltd vs. the Department of Income Tax, the ITAT Hyderabad Pronounced that as long as there is a nexus between the expenditure incurred and the business of the assessee, the Assessing Officer cannot step into the shoes of a businessman to say that the expenditure incurred is not required in the interests of the business. Accordingly, I hereby delete the disallowance of Rs.1,76,49,417/-. The Ground of Appeal is hence Allowed. Aggrieved, Revenue is in appeal, raising the following Grounds: - 1. The orders of the Commissioner of Income Tax (Appeals)-I, Kochi are opposed to the facts and circumstances of the case. 2. The CIT(A) failed to consider that the question of law answered in Supreme Court judgment in SA Builders Vs CIT is "Whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency?". 3. The CIT(A) failed to consider the fact that the question raised by the AO was not regarding the commercial expediency but related to the genuinity of the transactions. 4. The CIT(A) ought to have considered the case laws relied on by the AO i. Lakshminarayan Madan Lal vs CIT(SC) 86 ITR 439 ii. Swaseshi Cotton Mills Co Ltd vs. CIT (SC) 63 ITR 57 iii. Lakshmiratan Cotton Mills Co Ltd Vs. CIT (SC) 73 ITR 634 5. The CIT(A) failed to consider the fact that AO has reason to believe that the assessee has inflated the expenses on salaries, wages and Non-Recurring Engineering charges. 6. The CIT(A) failed to consider that assessee had not fully and truly disclosed all material facts necessary for the assessment u/s 143(3) which forced AO to disallow the unreasonable claims. 7. The CIT(A) failed to consider that the onus to prove the claim for expenses lies on the claimant. 8. It is prayed that the orders of the learned Commissioner of Income Tax (Appeals)-I, Kochi be reversed and that of the Assessing Officer restored. 9. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the Commissioner of Income Tax(Appeals) may be set aside and that of the Assessing Officer restored. ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 4 For the following year, it was the common contention of the parties that the facts being largely similar, our adjudication for the first year would apply for the following year as well. 4. Before us, each side reiterated it’s case, i.e., as before the Revenue authorities, relying on the order favourable to it. 5. We have heard the parties, and perused the material on record. The respective cases 5.1 The assessee’s case is that the AO has not doubted the incurring of the impugned expenditure, but only regarded it as unreasonable, i.e., in relation to sales, even as there is admittedly no direct correlation thereof with the expenditure under reference. The assessing authority cannot sit in judgement on the reasonability of expenditure, stepping into the shoes of a businessman as it were. In SA Builders Ltd. vs. CIT [2007] 288 ITR 1 (SC);the expenditure under reference in that case being interest u/s. 36(1)(iii), it explained that what was relevant was if the amount was advanced as a measure of commercial expediency, and not from the point of view of whether it was so advanced for earning profits. Once it is established that there is a nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably put itself in the arm-chair of the businessman and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The Revenue’s case, on the other hand, is that the claim of expenditure is wholly unsubstantiated. Discussion / Findings 5.2 We shall begin by setting out, albeit briefly, the law in the matter. It is, to begin with, trite law that the burden to prove it’s return, and the claim/s preferred thereby, is on the assessee, who only is in the intimate know of his affairs (CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC); Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 5 634 (SC)). Two, section 37(1) of the Act, under which the impugned claim is preferred, reads as under: General 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. To be a permissible deduction, there has to be a direct and intimate connection between the expenditure and the character of the assessee as a trader. That is, it must be incidental to his business and justified by commercial expediency (Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC)). This is precisely what the Apex Court clarifies, once again, in S.A. Builders Ltd. (supra). The onus to show so, which is on the assessee, is to be discharged before the assessing authority, i.e., the authority designated and charged by law to frame an assessment under the Act. 5.3 The assessee’s claim in the instant case is wholly unsubstantiated. No explanation, much less material, stands furnished before the AO. How, pray, could his action be faulted within law? He was accordingly well within his powers to make a reasonable estimate and disallow what he regarded as excessive or as not explained. Reference in this context will be made to the decisions in Swaseshi Cotton Mills Co. Ltd. vs. CIT [1967] 63 ITR 57 (SC); Lakshmiratan Cotton Mills Co. Ltd. (supra); Lakshminarayan Madan Lal v. CIT [1972] 86 ITR 439 (SC), also relied upon by the Revenue (per Gd. 4 of it’s GoA). We find him to have, acting on the information culled by him from the record, made a reasonable estimate – which is integral to assessment, of the assessee’s claim, allowing the impugned expenditure at an increase of 20% over that for the immediately preceding year, keeping in view the increase in volume. That is, does precisely what he is expected to do in the given facts and circumstances of the case. In the absence of any material being adduced in support of the claim, an estimate ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 6 is to be necessarily made, and objectively, in light of the relevant materials. The previous year’s returns are material, and would furnish good evidence for drawing conclusions, as explained, inter alia, in CIT v. Pilliah (K.Y.) [1967] 63 ITR 411 (SC); Vrajlal Manilal& Co. v. CIT [1973] 92 ITR 287 (MP). The assessee’s challenge before the first appellate authority is, again, sans any material; his order bearing no reference to any. In fact, even if it were, it is doubtful if, given the prescription of Rule 46A (of the Income Tax Rules, 1962) regulating admission of additional evidence before him, mandatory in character, the same may not be liable to be admitted in view of sufficient opportunity to adduce the same having been provided in assessment. Why, even assuming it being admitted, as where the assessee satisfactorily explains the circumstances preventing its furnishing earlier, the same could be relied upon only on allowing the AO opportunity to examine the same as well as to adduce evidences to meet the same (r. 46A (3)).All this is, given the uncontroverted and undisputed fact of no improvement in its case at the first appellate stage, in fact, academic, and is only to bring forth the law in the matter. There has been, thus, a complete failure on the part of the assessee to discharge his onus u/s. 37(1). It is, further, clearly wrong on it’s part to say, accepted by the ld. CIT(A), that the AO had not doubted the incurring of the expenditure, considering which it was therefore not permissible for him (AO) to question the amount that ought to have been reasonably incurred under the circumstances. And, thus, very neatly shifting the burden cast by law on him on the AO. What we wonder led the ld. CIT(A) to buy that? In the facts of the instant case, very clearly the AO, in view of the steep, unexplained increase in expenditure, entertained serious doubts of the assessee having incurred the said expenditure. That is, had valid reasons to doubt the genuineness of the assessee’s claim, which has to satisfy the test of ‘wholly’ and ‘exclusively’. It is well-settled that while ‘exclusively’ concerns the purpose for which the expenditure is incurred, the word ‘wholly’ adverts to its quantum, so that, where called upon to, as in the instant case, the entire of it is shown to have been incurred for purposes of business to merit deduction u/s. 37(1) in its respect. These principles stand enumerated upon in Ram Bahadur ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 7 Thakur Ltd. v. CIT [2003] 261 ITR 390 (Ker)(FB). It is, thus, in every case a question of fact whether the expenditure was incurred wholly and exclusively for the purpose of trade or business of the assessee, which is to be decided based on evidence. No doubt the Apex Court clarified per the cited decisions – made, presumably considering their primacy, a part of it’s Grounds of Appeal by the Revenue, that an assessing authority was competent to make an assessment of the amount regarded as claimed in excess and disallow the same. This, we clarify, is not the same thing as the AO sitting in judgment qua the expenditure that the assessee, as a business man, ought to have incurred for the purposes of his business. The law in the matter is well-settled, for which reference, inter alia, be made to CIT v. Raman & Co.[1968] 67 ITR 11 (SC), explaining that the law does not oblige a business man to maximize his profit. That, it is only the income which accrues to a trader, and not the income which he could have, but has not, earned, that is taxable. The law, it may be appreciated, could not possibly provide for injunctions to the contrary, unfeasible and subjective at the same time. Business environments are dynamic, subject to constant flux, with new situations continually emerging as a product of external and internal environments of a business. The expenditure must though be shown to have been incurred for the purpose of the trade, in serious doubt in the instant case; the assessee having in fact not even explained as to why ‘wages’ and ‘salary’, which are commonly regarded as toward functional and administrative respectively, constitute as they do direct and indirect expenditure, have been clubbed, as also the component of each. Where an assessee fails to substantiate it’s claim, it becomes incumbent on the AO to estimate, based on the relevant materials on record, the sum that could be considered as admissible in the given facts and circumstances of the case. The ld. CIT(A) as an appellate authority, as indeed the assessing authority himself, could proceed only on the basis of the material on record, while in the instant case the AO, none of whose findings, we reiterate, are controverted, clearly states that the assessee, despite being called upon to, did not furnish any material or explanation, failing to provide even the basic data, viz., the person-wise details. The same, along with their function ought to have been furnished by the assessee at the minimum; rather, ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 8 vis-à-vis the preceding year, explaining the reasons for the quantum increase therein. It is then said that the expenditure on salary and wages is not liable to vary in direct proportion as well. The same does not help the assessee’s case in any manner. It does not, firstly, absolve the assessee from proving the claimed expenditure as having been incurred wholly and exclusively for the purpose of its business. Two, the argument could equally validly be advanced to disallow the entire increase in expenditure (over the preceding year), allowing only that incurred during the preceding year inasmuch as the increase in volume may not translate into an increase in expenditure as well. That is, the argument is neither here nor there, and stands made only to mislead. We may, next, though not required to inasmuch as the same does not form the basis of his adjudication by the ld. CIT(A), nor relied upon before us, yet also consider the explanation advanced by the assessee before the first appellate authority (refer para 3 – pages 10 & 11) of the impugned order. It stands explained that the assessee has effected a substantial saving in material cost by purchasing material at the base level, cost of which, in proportion to sales, stands reduced from 77.1% (for the immediately preceding year) to 71.92% for the current year. This, as stated, was consequent to a strategic decision, entailing purchase of material at an initial level, incurring more expenditure on processing, i.e., making the process more labour intensive. No material substantiating the same though stands brought on record, which perhaps also explains the non-reference thereto by the first appellate authority, even as, as afore-noted, the same would have to meet the test of admission and, further, verified by the AO for its validity. That apart, it does not even tell what was the purchased in the previous year, and what stands purchased, in lieu thereof, during the current year. What are those processes; their cost vis-à-vis when outsourced; if the assessee had the machinery for the same, or was it purchased during the relevant year, i.e., for the relevant processes; whether the labour was technically equipped and trained to carry out the said operations. We state so as a mention of these details, along with some supporting material, may have prompted us to, in the interest of justice, restore the matter to the AO, even if imposing a cost on the assessee for non-cooperation before the AO, to ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 9 examine the process-wise details, as also the cost parameters of similarly placed units; the onus to satisfactorily and reasonably prove it’s claim being on the assessee, who had thus made-out semblance of a case for the same. As afore-noted, the assessee’s case, however, is sans any explanation, much less materials, and even as the same does not form part of the impugned order – being supported by the assessee, reference thereto is made only for the sake of a comprehensive examination of the matter by us. In fact, the claim is inconsistent with the fall in the energy input cost, which we find to be lower by nearly 28%, being at 4.76% (Rs. 279.19 lakhs on a sale of Rs.5865.66 lakhs) for the preceding year as against 3.44 % (Rs.237.55 lakhs on a sale of Rs.6908.92 lakhs) for the current year. For the reasons afore-stated, we have no hesitation in, setting aside the impugned order, vacate the findings by the first appellate authority, and restore that of the AO. The impugned disallowance is sustainable in law, and is accordingly, restored in result. Any consequent change in the exemption u/s. 10AA, if and to the extent exigible, shall be made by the AO. We decide accordingly. ITA 398/Coch/2020 (AY 2011-12) 6. The Revenue raising the same Grounds, we though find the facts for AY 2011-12 as somewhat different. For this year, the AO observed a further increase of 371% in the salary and wages expenditure, i.e., w.r.t. AY2010-11, the immediately preceding year, even as the increase in turnover witnessed w.r.t. that year was at 27%. The assessee furnished break-up of the expenditure as under: Particulars Amounts Salaries Paid to employees Rs. 1,80,51,409/- Salaries Paid to Contract Staff Rs.3,37,13,273/- Contract for NRE Rs.6,38,32,157/- Grand Total Rs.11,55,96,839/- The contract labour was for development of tools, moulds, and design and development of protos (prototypes). It is only once a prototype is approved by the customer that it turns out to be a business for the company, increasing it’s sales. This expenditure, ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 10 required to be outsourced for want of sufficient manpower resources with the company, had in fact led to substantial increase in non-recurring energy revenue, being at Rs.611.48 lakhs. The AO duly considered the assessee’s reply. Reducing the contract expenditure (Rs.638.32 crores) from the total labour expenditure (1155.97 lakhs), he found the balance Rs.517.65 lakhs to be at a disproportionate increase of 111% vis-a- vis the sale increase of 27% over the preceding year (AY 2010-11). The material cost, at 72.4% of sales, was in same ratio as that for the preceding year. He, accordingly, allowing an increase of 30% in the expenditure on salary and wages, effected a disallowance for the expenditure incurred in excess, working it at Rs.362.35 lakhs. The order by the first appellate authority is identical to that for AY 2010-11. 7. We have heard the parties, and perused the material on record. 7.1 The case of either party before us was that in view of identity of facts with AY 2010-11, the immediately preceding year, our decision for that year may apply for the current year as well. Though the order of the first appellate authority, a repeat of the order for AY 2010-11, deserves to be reversed for the same reason/s as inform our order for that year, we find the assessment order for the current year as both inconsistent and untenable. Accepting the assessee’s explanation, the expenditure on outsourced contract labour (Rs.683.32 lakhs) was reduced from the total labour expenditure (Rs.1155.97 lakhs) in reckoning the expenditure under the said head for comparison with reference to sales as well that incurred for the preceding year. This is understandable as the out- sourced contract labour is for a different purpose, generating non-recurring energy revenue (Rs.611.48 lakhs). Going by the same, the disallowance works to Rs.198.72 lakhs (and not Rs.362.35 lakhs, as made by the AO), as under: (Amount in Rs. lacs) Sr. No. Particulars/ AY 2011-12 (% age) 2010-11 (% age) Remarks 1 Sales 8109.41 (100.00) 6908.92 (100.00) 2 Cost of material 5871.57 (72.40) 5003.73 (72.40) 3 Salary and Wages 517.65 245.33 (03.55) 4 Increase @ 30% 318.93 245.33 x 130% 5 Excess 198.72 [(3) – (4)] ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 11 7.2 The increase in sales for the preceding year is at 17.38%, and not 27%, as stated by the AO. As such, there is no basis to allow an increase of 30%.A 20% increase would result in the disallowance of Rs.223.25 lakhs, which is still lower than that made (Rs.362.35 lakhs). Two, the material cost is, as a percentage of sale for the current year, at the same rate as for the preceding year. This constancy of cost (ratio) across years implies that for the processing cost as well. That is, speaking broadly, as labour and sales rates are without doubt subject to variation with time, which may not be to the same extent across years. The obtaining labour expenditure for AY 2010-11 is 3.55%. This expenditure, however, has been found to be in excess by Rs.176.49 lakhs, i.e., by 2.52%. Adopting the said expenditure for the current year as a basis, as the AO does, would thus be inconsistent with the fact of the disallowance of the said expenditure. Sure, the said disallowance was for the reason of non-substantiation of claim, a ground sufficient for the disallowance. The same in fact continues for the current year as well; the assessee’s explanation being only in respect of contract labour, i.e., as being for development of moulds and prototypes, and which stands, accordingly, giving credence thereto, removed by the AO in working the claim of expenditure vis-a-vis the sales. Our third observation in the matter is that the expenditure on outsourced labour, as explained, is only for the reason of shortage of manpower with the assessee. A part of the work in its respect, and thus expenditure in its respect, stands understandably undertaken by the assessee through in-house labour, and which, on parity, would also stand to be similarly reduced. Further still, how we wonder could the expenditure on development of moulds, etc. and prototypes, a part of cost thereof; a capital expenditure, could be claimed as a revenue expenditure? 7.3 We have up to now stated four things germane the assessee’s claim for salary and labour expenditure of Rs.1155.97 lakhs for the current year, as under: (a) the increase in sales vis-a-vis the preceding year is at 17.38%, and not at 27%; (b) a constancy of material cost w.r.t. the preceding year leads to a presumption of constancy of manufacturing operations; ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 12 (c) the increase in labour cost, claimed at ~ 1% of sales for AY 2009-10, would require being justified on the basis of new processes added, besides of course the increase in labour rate over time, which may be more or less of that obtaining for the goods sold; (d) the cost of tools, moulds and prototypes, including material and labour cost thereon; with the latter including that incurred in-house as well, may require being capitalised as part of cost of acquisition thereof, where not held as stock-in-trade but as capital asset/s. In view of the foregoing, we only consider it proper to, in the interest of justice, restore the matter of allowance of the assessee’s claim for salary and wages for this year (AY 2011-12) back to the file of the AO for fresh determination. The assessee, who shall have to prove the same on the anvil of s. 37(1), would be at liberty to adduce materials in support of it’s contentions, as indeed the AO to cause verification, including adducing that in contradiction thereof. The incidental claim for depreciation, where the moulds, prototypes, etc., where found as held as capital assets, shall also be considered as per law. Needless to add, the assessee shall cooperate in the proceedings, furnish explanation, details and material in substantiation and justification of it’s claim/s, if any, made. The same is to be regarded as an open set aside qua this matter, including related aspects. The AO, who is obliged to decide per a speaking order, would be at liberty to draw all reasonable inferences in case non-furnishing of relevant details or non-cooperation by the assessee, and adjudicate in accordance with law, allowing the assessee a reasonable opportunity of presenting it’s case. As for AY 2010-11, any consequent change in the exemption u/s. 10AA, if and to the extent exigible, shall be made by the AO. We decide accordingly. 8. In the result, the Revenue’s appeal for AY 2010-11 is allowed, and that for AY 2011-12 is allowed for statistical purposes, on the fore-going terms. Order pronounced under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963 Sd/- Sd/- (Sandeep Gosain) (Sanjay Arora) Judicial Member Accountant Member Dated: April 28, 2023 ITA Nos. 397 & 398/Coch/2020 Dy. CIT v. SFO Technologies Digital Pvt. Ltd. 13 Copy to: 1. The Appellant 2. The Respondent 3. The Pr. CIT concerned 4. The Sr. DR, ITAT, Cochin 5. Guard File By Order Assistant Registrar /n.p. ITAT, Cochin