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

The Assessee has raised the following common grounds of appeal in both these assessment years except for the change in figures.

2 M/s Accord Fintech Pvt. Ltd & 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. The Ld. CIT (A) further erred and ought to have held that : (iii) (a) The salary of the 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) Addition 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.”

Briefly stated the facts are that the Assessing Officer while completing assessments for 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.3.46 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 required the Assessee to submit the details and basis of apportionment of these expenses 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

The Ld. Counsel for the Assessee submits that the basis 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 Officer’s 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.

We have heard the rival submissions, perused the orders of the authorities below. The Assessee submitted 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 proportionate expenditure amounting to Rs.3,46,78,710/- and Rs.3,23,47,245/- have been capitalized to it’s software (capital work in progress – CIP). The Assessee further submitted that the breakup of the expenses which was transferred to capital work in progress and transferred to Profit and Loss Account and the nature of the expenses which come under the head, employee cost, food coupon, staff welfare, rent, electricity, interest and finance charges.

In so far as the salary is concerned, it was submitted by the Assessee that this was apparent on the basis of nature of activities carried out by each

Coming to food coupon and staff welfare others, it is submitted that out of total expenses incurred on food coupon and staff welfare others 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 & 3365/Mum/2016 industry practice. It was submitted 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 is submitted that several welfare expenses 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 is submitted that gratuity 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 is further submitted that leave travel allowance 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 fact 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 capitalized.

Coming to rent expenses, it is 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 involved in development activities. Therefore 70% of rent expenses were capitalized. Coming to electricity expenses, it is submitted that 2/3rd of the electricity expenses was capitalized considering that some minimum electricity bill will always be chargeable whether premises are used or not and therefore, the minimum bill was 6 M/s Accord Fintech Pvt. Ltd & 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 proportion of electricity expenses to be capitalized. Thus 70% of 95% was computed at 2/3rd and this was capitalized.

Coming to interest expenses, it is submitted that the overdraft facility is available to the Assessee company at the interest rate of 2% more 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.

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 involved in development activity, therefore, 71% of the Assessee’s 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 Assessing Officer.

In the result, both the appeals of the Assessee are allowed.