ECO TECH SOFTWARE PVT LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश /O R D E R

PER S.S. GODARA, JUDICIAL MEMBER:

This assessee’s appeal for assessment year 2001-02

arises from order of the Commissioner of Income Tax (Appeals)-

II, Chennai, dated 12.08.2014 passed in ITA No.944/2013-14

affirming the A.O.’s action apportioning software development

- - 2 I.T.A. No. 3094/Mds/2014 expenses of ` 2,47,420/- to domestic and export units in ad hoc

manner in 50-50 ratio, in proceedings under Section 143(3) r.w.s.

147 of the Income-tax Act, 1961 (in short 'the Act').

software. It is engaged in both export and domestic sales. It had filed its return on 31.03.2001 admitting income of `1,20,322/-.

The same was ‘summarily’ processed resulting in a demand of `

26,895/-. Thereafter, the Assessing Officer formed an opinion on

reasons to believe that the assessee’s expenditure written off

had to be apportioned between its export and domestic units and

failure thereof resulted in escapement of income from being assessed. This culminated in a Section 148 notice dated

31.03.2008. The assessee reiterated with the income already

returned.

noticed the assessee to be having domestic as well as export

sales. It was found to have written off the impugned software development expenditure amounting to ` 2,47,420/- by debiting it

from Profit & Loss account without apportionment. The assessee quoted section 37(1) of the Act and termed the said

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outgo as ‘wholly and exclusively for the purpose of business’.

The Assessing Officer in reassessment framed on 12.12.2008

observed that the assessee sold the same software in domestic

and export sales, it had debited the impugned expenses written

off in the Profit & Loss account of the domestic units only. He

held that the said expenditure had to be allocated between these

two divisions. The number of items sold in domestic market and

exported was taken for equal apportionment of the expenditure in

50:50 ratio @ `1,23,710/- each. The assessee’s total income

stood assessed as `4,19,920/-.

in allocating the impugned expenditure as under:-

The assessee before the undersigned submitted that the entire expenditure of Rs.2,47,420/- written off in the P&L account of domestic division is the expenditure pertaining to the domestic division only. While allocating the salary cost to the export division, it had already allocated 80.03% of the salaries to the export division. Hence, further allocation of software development cost written off of Rs.2,47,420/- at 50-50 ratio is not required. The relevant portion of the assessee's submissions dated 12.08.2014 are as under: The Appellant, Eco Tech Software Pvt Ltd "Eco Tech" or "the Appellant') during AY 200.1-02 in its return of income declared gross total income of ` 4,80,856/" after claiming deduction of lOB unit at Rs. 237,134/- and thereby determined the taxable income at Rs.243,722/. The assessment was re-opened under 147 for the relevant year and during the assessment proceeding, AO taken one line item expenditure towards Software Development written off

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of Rs. 247,420/- considered in Export Division, and reallocated 50/50 basic to domestic division and division. export Thereby sought to disallow software development expenses of Rs: 123.710/ - allocated to domestic unit by the Appellant. The Appellant submits that the cost allocation was carried out based on the time clocked by the technical team in respect of each project -Domestic Division! Export Division. The Assessing Officer cannot pull out one line of expenditure and without any basis cannot allocate the expenses at the ratio of 50/50. The Software Development Expenses represents mostly the Salary expenses of the technical people involved with the development of software in the earlier years, which has been charged to profit and loss account on deferred basis amounting to (one seventh in the current year Rs.245,462/-). The Appellant submits that the work carried out for domestic division during the year mostly from these base work created in the earlier year. (the assessing officer were to conclude that the amount charged in the current year should be allocated between the domestic division and the export division at 50/ 50 basis, he should also allocate the current year total salary cost on the same basis. He cannot pull one string of the expenditure and allocate at 50/50.

The Appellant further submits that in 147 proceeding the AO has to identify the income escaped assessment On all adhoc allocation of expenditure the courts have always held that there is no concealment on an estimation or surmise or conjuncture. Therefore the following table explains as to how the Appellant has treated the total salary cost in the current year. (Amount in Indian Rupees) Description Domestic Division Export Total Division Software Development 4,021,770 5,554,030 9,575,800 Turnover Expenses towards software 546,474 2,190,220 2,736,694 development salary paid Refer Schedule 14 Expenses towards Software 245,462 - 245,462 Development –Written off

From the above table it am be seen that the Appellant has allocated 80.03% of the Salary cost to export division. With the allocation of the 1/7 charged amount the salary cost debited to the export division is 73.44%. From the above table and the figures. It can be seen that the Appellant never had any concealment of income. The Appellant has allocated higher percentage of salary to the tax exempted export division. Unless there has been concealment (provable), there cannot be 147 proceedings.

Without prejudice to our above submission, we would like to draw your attention that AO durinq the Assessment proceeding sought to disallow expenditure towards software development written off of Rs. 123,710/· allocated to domestic unit. While working out the revised assessed income, AO instead of reducing Rs.123, 71 0/-, erroneously added back the said amount which has resulted in double adjustment. The actual assessed income and the assessed income worked out by Assessing Officer is given below:-

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Description Actual income to be Assessed income assessed, rectifying worked by AO the above Domestic income 1,39,534 1,39,534 Export Division income 288,180 535,600 Total 427,714 675,134 Add:Inadmissible as per return 499,589 499,589 Total 9,27,303 1,174,723 Less: Depreciation as per IT 446,447 446,447 Total 480,856 728,276 Less: 10B Unit related profit 1,65,911(**) 308,357(*) Assessed income 314,945 419,919 *10B Unit profit worked out by Assessing Officer Profit of the EOU x Export Turnover of undertaking (Amt.realized in Convertible Foreign currency Total Turnover of the undertaking = 535,600 x 3,197,578 = rs 308,357/- 5,554,030 **10B Unit profit actual Profit of the EOU x Export Turnover of undertaking (Amt.realized in Convertible Foreign currency Total Turnover of the undertaking = 288,180 x 3,197,578 = ` 1,65,911/- 5,554,030 As detailed above, the assessed income has been overstated to the tune of ` 1,04,974/- this may be taken care while passing order by our honour. The appellant omitted to include the above ground while filing the above appeal. Therefore the appellant request your honour to consider the above as additional ground. I have considered the assessee's submissions carefully. The above software development cost written off pertains to domestic as well as the export divisions. The product developed is common for domestic as well as export activities. Therefore, irrespective of the allocation of the other employee cost, the above common expenses of Rs 2,47,420/- needs to be apportioned between the domestic and export divisions. The Assessing Officer has rightly apportioned the expenses. The Assessing Officer's action is justified and confirmed. However, after apportioning the above development expenses of Rs.2,47,420/-, equally among the domestic and export divisions, the Assessing Officer should reduce the so-apportioned expenses from the income of the export division. Instead, the Assessing Officer erroneously added iL to the income of the export division,

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which in turn, resulted in inflation of the income of the export division. This also resulted in enhanced deduction u/s. 10B of the Act. Therefore, the Assessing Officer is directed to reduce the above apportioned expenses from the income of the export division as under:-

Income of the export division, as : 4,11,890 shown by the assessee Less: Apportioned expenses as : 1,23,710 above Net income of the export division : 2,88,180

Less: Deduction u/s 10B: Turnover of export unit : ` 55,54,030 Export turnover realized : ` 31,97,578 Revised net income as above: ` 2,88,180 Deduction u/s.10B

Profit of the EOU x Export Turnover Total Turnover i.e. 2,88,180 x 31,97,578 = ` 1,65,911/- 55,54,030 Net income from export unit after 10B deduction: ` 1,22,268/- Therefore, the Assessing Officer is directed to determine the net income from the export division (before allowing deduction u/s.l0B) at Rs.2,88,180/- as against Rs.5,33,600/- determined by him in his order. Similarly, the allowable deduction u/s.l0B is to be determined at R.1,65,912j-. as against Rs.3,08,537/- determined in the assessment order. The Assessing Officer is directed accordingly.

In result, the assessee's appeal is treated as partly allowed.”

assessee challenges apportionment of the impugned software

development expenditure into domestic and export divisions @

50:50 each by the Assessing Officer and affirmed in the lower

appellate order. It files a correspondence from Software

- - 7 I.T.A. No. 3094/Mds/2014 Technology Parks of India dated 29.03.2000 granting 100%

export oriented permission under STP Scheme, its letter dated

16.12.2008, details of salary costs in the two divisions for

financial year ended 31.03.2002 and its working, Auditors’

Report comprising balance sheet of the impugned assessment

year, trading and Profit & Loss Account of the sales with

accounting policies, notes on accounts, entries in export and

domestic divisions and seeks to reverse the impugned allocation.

The Revenue supports the lower authorities orders. The case

file reveals that these documents have nowhere been specifically

discussed in reassessment or in the lower appellate order. The

dispute before us is essentially a factual one, i.e. whether or not

the impugned allocation of software development expenditure in

export and domestic sales division is justified. The Assessing

Officer has based his findings on the sales quantities of the

software to observe that the very software has been sold in

domestic and export market. The assessee’s books treating the

impugned expenditure only for domestic division have nowhere

been rejected. Therefore, we deem it appropriate that the

Assessing Officer needs to re-examine the entire issue afresh as

per law. The assessee shall be at liberty to produce all its

- - 8 I.T.A. No. 3094/Mds/2014 relevant details within three effective opportunities of hearing. We find that a lot of water has flown downstream since the end of the relevant assessment year 2001-02. It would be appreciated if the learned Assessing Officer passes his consequential order within a period of four months from getting copy of this order.

sd/- sd/- (A. Mohan Alankamony) (S.S. Godara) (ए. मोहन अलंकामणी) (एस.एस. गोदारा) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 5th March, 2015.

Kri.

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A)-II, Chennai 4. आयकर आयु�त/CIT, Chennai-II, Chennai 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.