ITO 9(2)(1), MUMBAI V. BLUE STAR INFOTECH LTD, MUMBAI

ITA 4603/MUM/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 7675 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 29-11-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 06-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIDISHA KALRA; N HEMALATHA
• Assessee Lawyers: S C TIWARI; RUTUJA PAWAR
• Keywords: Reopening of assessment; Reason to believe
• Section: 143(3); 147; 148; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE S/ SHRI B.R. BASKARAN (AM) & SANDEEP GOSAIN (JM) I.T.A. NO. 4603 /MUM/20 1 5 (ASSESSMENT YEAR 20 0 6 - 0 7 ) I.T.A. NO. 60/MUM/2016 (ASSESSMENT YEAR 2010 - 11) DCIT - 1(1)(1) ROOM NO. 579 5 TH FLOOR AAYA KAR BHAVAN M.K. ROAD MUMBAI - 400 020. VS. M/S. BLUE STAR INFOTECH LTD. (NOW MERGED WITH BLUE STAR LTD.) KASTURI BUILDING , J.TATA ROAD M.T. ADVANI CHOWK MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) PAN : AAACB6385J ASSESSEE BY SHRI S.C. TIWARI & MS. R UTUJA PAWAR DEPARTMENT BY MS. VIDISHA KALRA & MS. N. HEMALATHA DATE OF HEARING 28 . 1 1 . 201 8 DATE OF PRONOUNCEMENT 09 . 1 . 201 9 O R D E R PER B.R. BASKARAN (AM) : - BOTH THE APPEALS FILED BY THE REVENUE ARE DIRECTED AGAINST THE ORDERS PASSED B T LD CIT(A) AND THEY RELATE TO THE ASSESSMENT YEARS 2006 - 07 AND 2010 - 11. SINCE THE ISSUES URGED IN BOTH THE APPEALS ARE IDENTICAL IN NATURE, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. IN BOTH THE YEARS, THE ASSESSING OFFICER REDUCED THE DEDUCTION ALLOWABLE TO THE ASSESSEE U/S 10A OF THE ACT BY ALLOCATING MORE SALARY EXPENSES TO10A UNIT, THEREBY REDUCING THE PROFIT OF 10A UNIT. THE SAID DISALLOWANCE WAS DELETED BY THE LD CIT(A) IN BOTH THE YEARS. HENCE THE REVENUE IS AGGRIEVED BY THE DECISION RENDERED BY LD CIT(A) ON THIS ISSUE IN BOTH THE YEARS. M/S. BLUE STAR INFOTECH LTD. (NOW MER GED WITH BLUE STAR LTD.) 2 3. WE SHALL FIRST TAKE UP THE APPEAL FILED BY THE REVENUE FOR AY 2006 - 07. THE ORIGINAL ASSESSMENT WAS COMPLETED BY THE AO FOR THIS YEAR ON 02 - 12 - 2009 U/S 143(3) OF THE ACT. THEREAFTER, THE AO REOPENED THE ASSESSMENT U/S 147 OF THE ACT AND THE ORDER WAS PASSED ON 29.12.2010. THERAFTER, THE AO AGAIN RE - OPENED THE ASSESSMENT FOR THE SECOND TIME BY ISSUING NOTICE U/S 148 OF THE ACT ON 21 - 03 - 20 13 AND PASSED THE IMPUGNED ASSESSMENT ORDER. 4. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND ALLIED ACTIVITIES OF SALE OF LICENCED SOFTWARES AND ALSO HARDWARES. IT HAS GOT SEVERAL UNDERTAKINGS, OUT OF WHICH FOUR UNDERTAKINGS AR E ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT (10A UNITS) AND FOUR UNDERTAKINGS ARE NOT ELIGIBLE FOR THE SAME (NON - 10A UNITS). THE ASSESSEE IS HAVING TWO UNITS IN BANGALORE ON THE VERY SAME BUILDING. ONE IS 10A UNIT AND IS LOCATED IN THE FIRST AND SECOND F LOOR. THE OTHER ONE IS NON - 10A UNIT AND IS LOCATED IN OTHER FLOORS. THE AO ANALYSED THE SALARY EXPENSES CLAIMED BY THESE UNITS WITH REFERENCE TO THE INCOME GENERATED BY THEM. THE AO NOTICED THAT THE SALARY EXPENSES CLAIMED FOR NON - 10A UNIT AS PERCENTAGE OF GROSS RECEIPTS WAS MORE WHEN COMPARED WITH THE 10A UNIT. FOR THE YEAR RELEVANT TO THE ASSESSMENT YEAR 2006 - 07, THE ASSESSEE HAD CLAIMED SALARY EXPENSES OF RS.392.54 LAKHS AGAINST THE GROSS RECEIPTS OF RS.325.02 LAKHS IN RESPECT OF NON - 10A UNIT. IN RE SPECT OF 10A UNIT, THE ASSESSEE HAD CLAIMED SALARY EXPENSES OF RS.757.59 LAKHS AGAINST THE GROSS RECEIPTS OF RS.1809.69 LAKHS. THE AO FURTHER NOTICED THAT THE ASSESSEE HAS BEEN DECLARING LOSS OR LESSER PROFIT FOR NON - 10A UNIT, WHILE IT WAS DECLARING HIGHE R PROFIT FOR 10A UNIT. ACCORDINGLY, THE AO TOOK THE VIEW THAT THERE IS A POSSIBILITY THAT THE ASSESSEE COULD HAVE TRANSFERRED SALARY EXPENSES OF 10A UNIT TO NON - 10A UNIT IN ORDER TO BOOST THE PROFITS OF 10A UNIT WITH THE INTENTION TO CLAIM MORE DEDUCTIO N U/S 10A OF THE ACT. 5. THE AO FURTHER NOTICED THAT THE DETAILS OF SALARY EXPENSES WERE NOT EXAMINED BY HIM DURING THE ORIGINAL ASSESSMENT PROCEEDINGS. THE ASSESSEE HAS ALSO FAILED TO FURNISH DETAILED BIFURCATION FOR CONSIDERATION OF THE AO. M/S. BLUE STAR INFOTECH LTD. (NOW MER GED WITH BLUE STAR LTD.) 3 ACCORDI NGLY THE AO TOOK THE VIEW THAT THE ASSESSEE HAS NOT DISCLOSED FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR THE ASSESSMENT FOR AY 2006 - 07. ACCORDINGLY THE AO ENTERTAINED THE VIEW THAT THERE IS REASON TO BELIEVE THAT THE ASSESSEE HAS INFLATED SALARY EXP ENSES IN RESPECT OF NON - 10A UNIT BY TRANSFERRING SALARY EXPENSES FROM 10 - A UNIT WITH THE INTENTION OF AVAILING HIGHER DEDUCTION U/S 10A OF THE ACT. THE AO ALSO MENTIONED TWO OTHER ISSUES AND ACCORDINGLY REOPENED THE ASSESSMENT OF THE AY 2006 - 07. 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE NON - 10A UNIT WAS HAVING 103 EMPLOYEES AND THE 10A UNIT WAS HAVING 293 EMPLOYEES. THE AO NOTICED THAT THE RATIO OF SALES BETWEEN NON - 10A UNIT AND 10A UNIT WAS 15% : 85%. HOWEVER, THE NON - 10A UNIT HAD EMPLOYED 35% OF THE COMBINED NUMBER OF EMPLOYEES OF BOTH THE UNITS IN BANGALORE CENTRE. THE AO ALSO TOOK THE VIEW THAT THE ASSESSEE HAS FAILED TO OFFER SATISFACTORY EXPLANATION OF THE SAME. THE AO FURTHER NOTICED THAT THE ASSESSEE HAS A LLOCATED CORPORATE EXPENSES AND SUPPORT EXPENSES IN THE RATIO OF TURNOVER OF BOTH THE UNITS. THE AO NOTICED THAT THE NON - 10A UNIT HAS BEEN ALLOCATED 15% OF THE CORPORATE EXPENSES AND SUPPORT EXPENSES, I.E., ON THE BASIS OF SALES RATIO BETWEEN NON - 10A AND 10 - A UNITS. FOLLOWING THE SAME PRINCIPLES, THE AO AGGREGATED THE SALARY EXPENSES CLAIMED BY THE ASSESSEE IN BOTH THE UNITS AND THEREAFTER ALLOCATED 15% OF THE AGGREGATE SALARY EXPENSES TO NON - 10A UNIT AND 85% OF THE SAME TO 10A UNIT. ACCORDINGL Y THE AO RE - WORKED THE PROFITS OF 10A UNIT, WHICH HAS RESULTED IN REDUCTION OF ITS PROFIT BY RS.220.02 LAKHS. ACCORDINGLY HE REDUCED THE DEDUCTION ALLOWABLE TO THE ASSESSEE U/S 10A BY THE ABOVE SAID AMOUNT IN AY 2006 - 07. 7. IN AY 2010 - 11 ALSO, THE AO TOOK THE VERY SAME VIEW THAT THE RE - COMPUTED THE PROFIT OF 10 - A UNIT BY ALLOCATING THE AGGREGATE AMOUNT OF SALARY OF BOTH THE UNITS IN THE RATIO OF SALES. THE SAME RESULTED IN REDUCTION OF PROFIT OF 10A UNIT BY RS.130.40 LAKHS AND ACCORDINGLY THE DE DUCTION ALLOWABLE U/S 10A WAS REDUCED BY THE SAME AMOUNT. M/S. BLUE STAR INFOTECH LTD. (NOW MER GED WITH BLUE STAR LTD.) 4 8. IN BOTH THE YEARS, THE LD CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO AND HENCE THE REVENUE HAS FILED THESE APPEALS. 9. WE HEARD THE PARTIES AND PERUSED THE RECORD. WE NOTICE THAT THE AO HAS PROCEEDED ON THE PRESUMPTION THAT THERE WAS A POSSIBILITY FOR THE ASSESSEE TO TRANSFER SALARY EXPENSES OF 10A UNIT TO NON - 10A UNIT WITH THE OBJECTIVE TO DECLARE MORE PROFIT IN 10A UNIT SO THAT IT CAN CLAIM MORE DEDUCTION U/S 10A OF THE ACT. HO WEVER, WE NOTICE THAT THE LD CIT(A) HAS EXAMINED THE SALARY EXPENSES AND HE WAS ABLE TO LINK THE SALARY EXPENSES WITH EXPORT INVOICES. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE OPERATIVE PORTION OF THE ORDER PASSED BY LD CIT(A) IN AY 2006 - 07: - 5. 1 I HAVE GONE THROUGH, THE SAME. THE APPELLANT HAVE STATED THAT THE CONCLUSION THAT THE APPELLANT HAD COMMITTED IRREGULARITIES IN ALLOCATION OF SALARY EXPENSES BETWEEN K UNITS AND NON 1 OA UNITS AND DELIBERATELY CLAIMED LOWER EXPENSES FOR 1OA UNITS AS COMPA RED TO NON 1OA UNITS SO AS TO CLAIM HIGHER EXEMPTION U/S 1OA IS ERRONEOUS. I HAVE GONE THROUGH THE ASSESSMENT ORDER WHEREIN THE AO HAS DEALT WITH THIS ISSUE IN PARA 5. A READING OF THE SAME MAKES IT CLEAR THAT THE SALARY EXPENSES DETAILS WERE ASKED FOR; FR OM WHERE THE AO FOUND THAT THE LIST OF EMPLOYEES CONTAIN TOTAL 103 EMPLOYEE IN RESPECT OF DTA UNITS AND 190 EMPLOYEES IN RESPECT OF STP UNIT AGGREGATING TO TOTAL 293 EMPLOYEES WORKING AT BANGALORE CENTRE. THE AO ALSO NOTED THAT THE SALE OF DTA UNIT IS JUST AROUND 15% OF SALES OF BANGALORE CENTRE BUT THE UNIT EMPLOYED AROUND 35% OF TOTAL EMPLOYEES AT BANGALORE CENTRE FOR WHICH THE ASSESSEE FAILED TO GIVE SATISFACTORY EXPLANATION FOR ALLOCATING MORE SALARY EXPENSES BY ENROLLING MORE EMPLOYEES IN DTA UNIT DISP ROPORTIONATE TO ITS SALES FOR THE UNIT AND THEN THE AO CONCLUDED THAT ONLY BECAUSE SALARY OF A PARTICULAR EMPLOYEE IS DISBURSED FROM A PARTICULAR UNIT THAT DOES NOT MEAN THAT EMPLOYEE WAS WORKING FOR THAT UNIT, SPECIALLY IN THE GIVEN BACKGROUND THAT THE TO P MANAGEMENT FOR THE BOTH THE UNITS IS SAME. FOR THIS, THE AO ALLOCATED THE 'CORPORATE COST' AND 'SUPPORT COST' ON PROPORTIONATE BASIS ACCORDING TO THE SALES RESULTING INTO INCREASE IN SALARY EXPENSES TO THE 10A UNIT AND THUS FINALLY RESULTING INTO DISALLO WANCE OF RS 2,20,02,063/ - U/S 10A(7) R.W.S. 80 IA(8) OF THE ACT. 5.2. DURING THE APPELLATE PROCEEDINGS, THE APPELLANT HAVE SUBMITTED COPY OF TAX AUDIT REPORT, AUDITED FINANCIAL STATEMENT, COPY OF FORM 56F, DETAILS OF BIFURCATION OF SALARY COST, DETAILS OF EMPLOYEES, NAME, M/S. BLUE STAR INFOTECH LTD. (NOW MER GED WITH BLUE STAR LTD.) 5 DESIGNATION, SALARY COST WITH RESPECT OF STP UNIT AND DTA UNIT IN BANGALORE. I HAVE GONE THROUGH THE SAME AND NOTED THAT THESE VERY DETAILS WERE FURNISHED BEFORE THE AO ALSO IN REOPENED ASSESSMENT PROCEEDINGS. IT IS FURTHER NOTED FROM THE NOTINGS MADE IN THIS CASE IN EARLIER APPELLATE PROCEEDINGS THAT THE APPELLANT WAS ASKED TO FILE FACT SHEET AND THE SAME WAS FILED BY THE APPELLANT. I HAVE GONE THROUGH THE SAME AND NOTED THAT THIS FACT SHEET IS ATTACHED ALONGWITH THE EXPORT INVOICE BY THE APPELLANT RAISED UPON THEIR CUSTOMER WHEREIN OFFSHORE SOFTWARE DEVELOPMENT SERVICES SO RENDERED HAVE BEEN ALSO MENTIONED EVERYTIME BY GIVING THE NAME OF THE EMPLOYEE, THE HOURS PUT IN BY THEM ALONGWITH RATE FURTHER MENTIONING BILLABLE HOURS RESULTING INTO FINAL BILL AMOUNTS. AS THE DETAILS OF EMPLOYEES FOR STP AS WELL AS DTP HAS ALREADY BEEN FILED BY THE APPELLANT AND THE FACT SHEET ATTACHED WITH BILLS RAISED BY THE APPELLANT WERE ALSO FILED, I HAVE CROSS CHECKED GOOD NUMBER OF ENTRIES AND FOUND THAT THE N AMES OF THESE EMPLOYEES ARE APPEARING IN THE LIST OF 10A UNITS. IN VIEW OF THIS, IT CANNOT BE SAID THAT THE EXPORT INVOICES ACCOMPANIED DETAILS OF SUCH EMPLOYEES WHO ALL ARE ALREADY APPEARING IN THE LIST OF EMPLOYEES IN THE 10A UNITS, IS PURPOSELY KEPT SMA LLER UNDER THE HEAD SALARY BY THE APPELLANT IN ORDER TO INCREASE THE PROFIT OF EXEMPTED UNIT. ON THESE GIVEN FACTS, THE CONCLUSION DRAWN BY THE AO THAT THE APPELLANT HAS TRANSFERRED SALARY COST BELONGING TO 10A UNITS TO NON IDA UNITS THUS REMAIN UNSUPPORTE D AND HENCE THE CONSEQUENT ACTION OF APPORTIONING COST I.E. CORPORATE COST' AND 'SUPPORT COST' IS NOT SUSTAINABLE FOR THE REASON THAT ACTUAL EXPENDITURE INCURRED IS SUPPORTED BY THE ACTUALLY AVAILABLE DETAILS. IN VIEW OF THIS, THE DISALLOWANCE OF DEDUCTION MADE U/S 10A(7) R.W.S. 80IA(8) OF THE ACT FOR AN AMOUNT OF RS 2,20,02,063/ - BEING NOT SUSTAINABLE IS DELETED HEREWITH. THE GROUND NO. 5 TAKEN BY THE APPELLANT IS ALLOWED. 10. WE NOTICE THAT THE ASSESSING OFFICER HAS PROCEEDED ON PRESUMPTIONS, WHILE T HE LD CIT(A) HAS GRANTED RELIEF TO THE ASSESSEE BY EXAMINING THE SALARY EXPENSES WITH THE CORRESPONDING SALES. HE HAS RECORDED A FINDING THAT THE BILLING TO CUSTOMERS IS BEING DONE ON THE BASIS OF MAN HOURS PUT IN BY THE EMPLOYEES OF THE ASSESSEE. ACCORD INGLY THE LD CIT(A) HAS OBSERVED THAT THE AO WAS NOT RIGHT IN PRESUMING THAT THE ASSESSEE HAS TRANSFERRED SALARY EXPENSES FROM 10A UNIT TO NON - 10A UNIT. BEFORE US, THE LD D.R PLACED HER RELIANCE ON THE ORDER PASSED BY THE AO, BUT THE REVENUE COULD NOT PRODUCE ANY MATERIAL TO CONTRADICT THE FINDINGS GIVEN BY LD CIT(A). ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY LD CIT(A) IN AY 2006 - 07. M/S. BLUE STAR INFOTECH LTD. (NOW MER GED WITH BLUE STAR LTD.) 6 11. IN AY 2010 - 11, AS OBSERVED EARLIER, THE AO HAD MADE IDENTICAL DISALLOWANCE. THE LD CIT(A) NOTICED THAT IDENTICAL DISALLOWANCE MADE IN AY 2006 - 07 HAS BEEN DELETED BY HIM. FURTHER, HE NOTICED THAT THE AO DID NOT MAKE ANY SUCH DISALLOWANCE IN AY 2007 - 08 TO 2009 - 10, I.E., THE DEDUCTION U/S 10A OF THE ACT, AS CLAIMED BY THE ASSESSEE, HAS BEEN ALLO WED BY THE AO IN THOSE YEARS. ACCORDINGLY, FOLLOWING THE DECISION RENDERED IN AY 2006 - 07, THE LD CIT(A) DELETED THE DISALLOWANCE MADE IN AY 2010 - 11 ALSO. 12. WE HEARD THE PARTIES AND PERUSED THE RECORD. IN THE EARLIER PARAGRAPHS, WE HAVE UPHELD THE DECISION TAKEN BY LD CIT(A) IN AY 2006 - 07 ON AN IDENTICAL ISSUE. IN THE INSTANT YEAR, THE LD CIT(A) HAS FOLLOWED HIS DECISION RENDERED IN AY 2006 - 07. AS THE FACTS AND CIRCUMSTANCES SURROUNDING THE IMPUGNED DISALLOWANCE REMAIN THE SAME, FOLLOWING THE DEC ISION TAKEN BY US IN AY 2006 - 07, WE UPHOLD THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE IN AY 2010 - 11 ALSO. 13. IN AY 2006 - 07, THE ASSESSEE HAS CHALLENGED THE VALIDITY OF REOPENING OF ASSESSMENT UNDER RULE 27 OF APPELLATE TRIBUNAL RULES. THE LD D.R S TRONGLY OBJECTED TO THE ADMISSION OF THE SAME, WHILE THE LD A.R VEHEMENTLY ARGUED THAT THE SAME SHOULD BE ADMITTED. HE ALSO ADVANCED HIS ARGUMENTS ON THE VALIDITY OF REOPENING OF ASSESSMENT. SINCE WE HAVE UPHELD THE DECISION OF LD CIT(A) IN DELETING THE DISALLOWANCE MADE BY THE AO IN AY 2006 - 07 ON MERITS, WE DO NOT FIND IT NECESSARY TO ADJUDICATE THE LEGAL ISSUE URGED BY THE ASSESSEE. 14. IN THE RESULT, BOTH THE APPEALS OF REVENUE ARE DISMISSED. ORDER HAS BE E N PRONOUNCED IN THE COURT ON 09 . 1 .201 9 . SD/ - SD/ - (SANDEEP GOSAIN ) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 09 / 1 / 20 1 9 M/S. BLUE STAR INFOTECH LTD. (NOW MER GED WITH BLUE STAR LTD.) 7 COPY OF THE ORDER FORWARDED TO : 1. TH E APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( SENIOR PRIVATE SECRETARY ) PS ITAT, MUMBAI