NETWEB SOFTWARE PVT. LTD.,VADODARA vs. THE ACIT, CIRCLE-4, VADODARA

The assessee has raised 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 development 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 welfare 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.”

The brief fact of the case is that assessee has filed return of income declaring income of Rs. 77,53,580/-. Subsequently, the case was selected under security by issuing of notice u/s. 143(2) of act on 28th Sep, 2012. The assesse is engaged in the business of development and export of software. The other facts of the case are discussed under the grounds of appeal as under:-

Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of 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 incurred 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 adopted 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 software. 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 overall 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 pertained 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 business 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 total 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 under 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 take 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. Consequently a sum of Rs. 12,86,793/- needs to be amortized further from the salary and wages expenses instead of Rs.23,72,583/-amortized 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 expenses 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 salary 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

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 the addition made by the assessing officer without considering the relevant material which demonstrates that assessee has genuinely incurred the expenses. On the other hand, ld. departmental representative has supported the order of ld. CIT(A).

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 the disallowance out of staff welfare expenses to Rs. 68,151/- We observe that the 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 observe 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. 5,29,40,261/- compared to income of Rs. 4,28,99,230/- reported in the 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 recruitment of new employees and also replacement of the employee who had been registered. However, there is increase in the income from software development of more than Rs. 1 crore as against increase in the salary related expenses of Rs. 79 lacs during the year under consideration. We find that the net profit was declined because of increase in legal and professional charges to Rs. 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 year under consideration. The above facts demonstrate that the ld. CIT(A) is not justified in

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 27-06-2018