ACIT, Hyderabad V. M/s Magnaquest Solutions(P)Limited, Hyderabad

ITA 522/HYD/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61934 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-07-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 17-05-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 15-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B V PRASAD REDDY
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Capital asset; Depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ITA NO. 522/HYD/2010 ASSESSMENT YEAR: 2005-06 ASSTT. COMMISSIONER OF INCOME-TAX, APPELLANT CIRCLE-6(2), HYDERABAD. VS. M/S MAGNAQUEST SOLUTIONS(P) LTD., RESPONDENT HYDERABAD. (PAN/GIR NO. AABCM 9462E/M-144) APPELLANT BY : MR. B.V. PRASAD REDDY RESPONDENT BY : MR. P. MURALI MOHAN RAO DATE OF HEARING : 30/05/2012 DATE OF PRONOUNCEMENT : /0 7/2012 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-V, HYDERABAD DATED 20/01/2010 FOR THE ASSESSMENT YEAR 2005-06. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND CONSULTANCY SERVICES. IT FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR UNDER CONSIDER ATION ON 28.102.005 DECLARING NIL INCOME. THE AO COMPLETED T HE ASSESSMENT UNDER SECTION 143(3) R.W.S. 147 OF THE A CT. WITH RESPECT TO TAXATION OF UNBILLED REVENUE, THE ASSESS ING OFFICER HELD THAT DURING THE YEAR THE ASSESSEE HAD SHOWN AN AMOUNT ITA NO. 522/HYD/10 M/S MAGNAQUEST SOLUTIONS (P) LTD. 2 OF RS. 68,94,000/- AS COST OF UNBILLED REVENUE IN T HE INCOME PART OF THE P&L A/C. ON BEING ASKED TO FURNISH THE DETAILS, THE ASSESSEE SUBMITTED THAT SINCE THE CONDITIONS PRESCR IBED BY THE CLIENT WERE NOT FULFILLED DURING THE FY 2003-04, TH E AMOUNT HAD ARISEN AND SINCE THE WORK WAS COMPLETED IN THE NEXT YEAR I.E. FINANCIAL YEAR 2004-05 RELEVANT TO ASSESSMENT YEAR 2005- 06, THE SAME WAS COMPLETED AND BILLS HAD BEEN RAISE D SUBSEQUENTLY. THE ASSESSEE ALSO SUBMITTED THAT IT W ILL NOT AFFECT THE TOTAL INCOME IN VIEW OF THE ABOVE. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE ASSESSING OFFI CER OBSERVED THAT THE ASSESSEE COMPANY IS ENGAGED IN TH E BUSINESS OF SOFTWARE DEVELOPMENT, HOWEVER, THE ASSE SSEE HAS NOT SPECIFICALLY DEVELOPED THE SOFTWARE FOR ANY CLI ENT AND THE DEVELOPMENT OF SOFTWARE WAS GENERAL IN NATURE WAITI NG FOR PROSPECTIVE CUSTOMER/CLIENTS. THEREFORE, THE ASSES SING OFFICER HELD THAT THE ASSESSEES CLAIM IS NOT ACCEPTED AND ACCORDINGLY, THE UNBILLED REVENUE HAS TO BE CAPITALIZED. HOWEVER , DEPRECIATION @ 60% IS ALLOWED WHILE CAPITALIZING T HE SAME. ACCORDINGLY, OUT OF AN AMOUNT OF RS. 68,94,000/-, R S. 41,36,400 IS ALLOWED AS DEPRECIATION AND THE BALANC E OF RS. 27,57,600/- IS DISALLOWED. 3. AGGRIEVED THE ASSESSEE FILED AN APPEAL BEFORE CI T(A) . THE CIT(A) PASSED AN EX-PARTE ORDER AND DECIDED THE ISSUE BASED ON THE MERITS OF THE CASE AND BASED ON ARGUME NTS DURING THE COURSE OF APPEAL PROCEEDINGS AND CONSIDE RING THE STATEMENT OF FACTS. THE CIT(A) OBSERVED THAT THE A SSESSING OFFICER WHILE PASSING THE ORDER FOR THE ASSESSMENT YEAR 2005- 06 HAS DISALLOWED THE AMOUNT TOWARDS THE UNBILLED R EVENUE OF ITA NO. 522/HYD/10 M/S MAGNAQUEST SOLUTIONS (P) LTD. 3 RS.68,94,000/- AND AGAINST THAT THE SUM OF RS.27,57 ,600/- HAS BEEN ALLOWED WHICH IS NOT CORRECT AND NOT JUSTIFIED AND BAD IN LAW. H3E FURTHER OBSERVED THAT THE AO HAS ALLOWED ONLY THE DEPRECIATION ON THE UNBILLED REVENUE OF RS.68,94,00 0/- WHICH IS NOT CORRECT. THE CIT(A) POINTED OUT THAT THE ASS ESSEE HAS ALREADY OFFERED THE ABOVE AMOUNT TO INCOME TAX DURI NG THE EARLIER FINANCIAL YEAR. 4. THE CIT(A) HELD THAT THE ASSESSEE HAS NOT PURCH ASED THE SOFTWARE IN QUESTION, IT IS IN FACT IN THE BUSINES S OF SOFTWARE DEVELOPMENT AND THIS FACT HAS BEEN STATED BY THE AO . THE CIT(A) THEREFORE WAS OF THE VIEW THAT THE SOFTWARE DEVELOPED BY THE ASSESSEE IS ACTUALLY STOCK-IN-TRADE OF THE A SSESSEE, BEING A SOFTWARE DEVELOPER AND THE SOFTWARE IN QUES TION IS NOT A CAPITAL ASSET. THE CIT(A) HELD IT WAS A PART OF THE STOCK OF THE APPELLANT AND WAS DECLARED AS SUCH I.E AS CLOSI NG STOCK BY THE APPELLANT IN THE FINANCIAL YEAR 2003-04. FURTHE R, THE CIT(A) OBSERVED THAT THE ASSESSING OFFICER HAS CLEARLY ACC EPTED THE FACT THAT THIS SOFTWARE WAS DEVELOPED BY THE APPELL ANT FOR SALE. HENCE, THE CIT(A) HELD THAT THERE IS NO QUESTION OF CAPITALISING THE STOCK IN TRADE OF THE APPELLANT AND ACCORDINGLY THE CIT(A) DELETED THE ADDITION MADE ON THIS ACCOUNT AMOUNTING TO RS.27,57,600/-. 5. AGGRIEVED THE DEPARTMENT IS ON APPEAL BEFORE US BY RAISING THE 5 GROUNDS. AS 1 ST AND 5TH GROUNDS ARE GENERAL, THE FOLLOWING ARE THE GROUNDS OF APPEAL RAISED ON ISSUE . ITA NO. 522/HYD/10 M/S MAGNAQUEST SOLUTIONS (P) LTD. 4 2. THE CIT(A) ERRED IN IGNORING THAT THE OMISSION OF UNBILLED REVENUE OF RS.27,57,600/- FROM TOTAL INCOME IS CONTRARY TO INCOME RECOGNITION POLICY FOLLOWED BY ASSESSEE. 3. THE CIT(A) ERRED IN IGNORING THAT THE ASSESSEE ACCOUNTED FOR INCOME ON BASIS OF SOFTWARE BILLED TO CUSTOMERS ON ACCEPTANCE OR ON THE BASIS OF MAN DAYS AS PER TERMS OF CONTRACT. 4. THE CIT(A) ERRED IN IGNORING THAT THERE IS NO ACCOUNTING POLICY NOTE ON UNBILLED REVENUE 6. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED DR SHRI B.V. PRASAD REDDY AS WELL AS THE LEARNED COUNSEL FO R THE ASSESSEE SHRI P. MURALI MOHANA RAO AND HAVE BEEN EXAMINED IN DETAIL THE FACTS OF THE CASE. THE FACT IS THAT T HE ASSESSEE IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT, WHICH HAS BEEN ACCEPTED BY THE ASSESSING OFFICER, HENCE, THE SOFTW ARE DEVELOPED BY THE ASSESSEE IS ACTUALLY STOCK-IN-TRAD E OF THE ASSESSEE. THE ASSESSEE HAS ALSO DECLARED AS CLOSING STOCK IN THE FY 2003-04 FOR THIS AMOUNT. HENCE, WE CONFIRM T HE ORDER OF THE CIT(A) THAT THE ASSESSING OFFICER HAS WRONGL Y CAPITALIZED THE STOCK-IN-TRADE OF THE ASSESSEE, THEREFORE, THE REVENUES APPEAL IS DISMISSED. ITA NO. 522/HYD/10 M/S MAGNAQUEST SOLUTIONS (P) LTD. 5 7. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. PRONOUNCED IN THE OPEN COURT ON 05/07/2012. SD/- SD/- (D. KARUNAKARA RAO) (ASHA VIJAYARAGHAVAN ) ACCOUNTANTMEMBER JUDICIAL MEMBER HYDERABAD, DATED: 5 TH JULY, 2012 KV COPY TO:- 1) THE ASSTT.. COMMISSIONER OF INCOME-TAX, CIRCLE 16(2), 6 TH FLOOR, AAYAKAR BHAVAN, , HYDERABAD 2) M/S MAGNAQUEST SOLUTIONS (P) LTD., 8-2-684/BP, PLOT NO. 1523 & 1524, ROAD NO.12, BANJARA HILLS, HYDERABAD. 3) THE CIT (A)-V!, HYDERABAD 4) THE CIT-IV HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HDERABAD