Case Law Details
Pentasoft Technologies Ltd Vs ITO (ITAT Chennai)
ITAT Chennai held that while computing deduction under section 10A of the Income Tax Act expenses deducted from export turnover needs to be deducted from total turnover.
Facts- The first issue involved here is assessment of income from sale of course material under the head ‘income from other sources’. The AO assessed income from course material under the head ‘income from other sources’ and also denied deduction claimed u/s.10A of the Act, on the ground that the receipts are not in the nature of profits & gains derived from export unit.
The next issue that came up for our consideration is depreciation on non-compete fee. AO has disallowed depreciation on non-compete fee on the ground that the non-compete fee/good will is not depreciable asset, eligible for depreciation u/s.32(i)(ii) of the Act.
Another issue is is exclusion of software development expenses and exchange fluctuation loss from export turnover but not from total turnover. The AO while re-computing deduction u/s.10A of the Act, excluded expenditure incurred towards software development expenses as per Explanation (2) to sec.10A of the Act, and exchange fluctuation loss, but does not exclude same from total turnover.
Conclusion- We are of the considered view that there is no error in the reasons given by the AO and the Ld. CIT(A) to assess income from course material under the head ‘income from other sources’, because, it is nothing to do with main business activity of the assessee i.e. export of software products & services from STP Units and thus, we confirm the action of the AO in assessing income from course material under the head ‘income from other sources’ and also denial of deduction u/s.10A of the Act.
Following the decision of the jurisdictional High Court of Madras in Pentasoft Technology Ltd. , we are of the considered view that the assessee is entitled for depreciation on non-compete fee and thus, we direct the AO to allow depreciation on non-compete fee as claimed by the assessee.
Hon’ble Supreme Court in the case of HCL Technologies Ltd., where it was held that expenses deducted from export turnover needs to be deducted from total turnover. Therefore, we are of the considered view that the AO & the Ld. CIT(A) is erred in not excluded expenses deducted from export turnover from total turnover and thus, we direct the AO to exclude expenditure incurred towards software development and foreign exchange loss from total turnover also.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These two cross-appeals filed by the assessee, as well as the Revenue are directed against the order of the Commissioner of Income Tax (Appeals)-V, Chennai, dated 29.11.20 10, and pertains to assessment year 2004-05. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed off, by this consolidated order.
2. The brief facts of the case are that the assessee company is engaged in the business of software development & services is exporting software and services from Software Technology Park and claimed deduction u/s.10A of the Act. The assessee has filed its return of income for the AY 2004-05 on 0 1.11.2004 declaring a loss of Rs.26,62,56,653/-. The assessment has been completed u/s.143(3) of the Act, on 22.12.2006 and determined total income of Rs.34,14,15,708/-, by making various additions and also re-computation of deduction claimed u/s.10A of the Act. The assessee carried the matter in appeal before the First Appellate Authority, and the Ld. CIT(A) for the reasons stated in their appellate order dated 29.11.2010 partly allowed the appeal filed by the assessee.
ITA No.121/Chny/2011 for the AY 2004-05 – (assessee’s appeal):
3. The first issue that came up for our consideration from Ground No.1 of the assessee’s appeal is assessment of income from sale of course material under the head ‘income from other sources’. The AO assessed income from course material under the head ‘income from other sources’ and also denied deduction claimed u/s.10A of the Act, on the ground that the receipts are not in the nature of profits & gains derived from export unit.
3.1 The Ld.AR for the assessee submitted that the main business of the assessee is to impart education and training in the field of software development & services and hence, income from sale of course material is assessable under the head ‘profits & gains of business’, but not under the head ‘income from other sources’. The Ld. Counsel for the assessee made an alternative submission and argued that if at all, same needs to be assessed under the head ‘income from other sources’, then only net income after expenses needs to be assessed.
3.2 The ld.Sr.DR/Dr.S.Palanikumar, for the Revenue, on the other hand, supporting the order of the Ld. CIT(A) submitted that this issue is covered against the assessee by the decision of the ITAT Chennai Benches, in assessee’s own case, for the AY 1996-97 in ITA Nos.1597 & 1598/Mds/2008, wherein, the Tribunal after considering the nature of receipt, held that income from sale of course material, is assessable under the head ‘income from other sources’.
3.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee is in the business of software development & services and derived income from export of software and services from Software Technology Park Units (in short “STP Units”). The assessee also derived income from training and related course materials. The assessee had declared income from course material under the head ‘other income’ in the P & L A/c. Further, from the details filed by the assessee, it is undoubtedly clear that income from course material, is not at all related to the business of export of software products & services. Therefore, we are of the considered view that there is no error in the reasons given by the AO and the Ld. CIT(A) to assess income from course material under the head ‘income from other sources’, because, it is nothing to do with main business activity of the assessee i.e. export of software products & services from STP Units and thus, we confirm the action of the AO in assessing income from course material under the head ‘income from other sources’ and also denial of deduction u/s.10A of the Act. Further, this issue is also covered against the assessee by the decision of ITAT Chennai Benches, in the assessee’s own case, for the AY 1996-97 in ITA Nos.1597 & 1598/Mds/2008, where the Tribunal after considering relevant facts has rightly held that income derived from training fee and related course material, is not entitled for deduction u/s.10B of the Act. Therefore, consistent with view taken by the co-ordinate bench, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the assessee. As regards alternate claim of the assessee, the AO is directed to verify the claim and if found correct, the assessed net income under the head ‘income from other sources’.
4. The next issue that came up for our consideration from Ground No.2 of the assessee’s appeal is assessment of rental income under the head ‘income from other sources’. The AO has assessed rental income under the head ‘income from other sources’ on the ground that said income is not in the nature of profits & gains derived from export unit and thus, denied deduction claimed u/s.10A of the Act. The Ld.CIT(A) assessed rental income under the head ‘income from business’ and also allowed consequent expenses like depreciation on building, rates & taxes, insurance, and repairs & maintenance. However, affirmed the findings of the AO in not allowing deduction u/s.10A of the Act.
4.1 The Ld.Counsel for the assessee submitted that rental income derived by the assessee is assessable under the head ‘income from house property’ as held by the jurisdictional Hon’ble High Court of Madras in the case of Indian Overseas Bank Ltd. v. CIT reported in 246 ITR 206, 208 (Mad). Therefore, the Ld.CIT(A) is erred in not deciding the issue in light of above decision.
4.2 The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A), submitted that there is no clarity on income derived by the assessee, whether it is from leasing of land & building or any other equipment. Therefore, the AO has rightly assessed said receipt under the head ‘income from other sources’ and their orders should be upheld.
4.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. It is an admitted fact that the assessee has declared rental income under other income in the P & L A/c. Further, there is no details as regards whether rental income is derived from leasing of land & building or any plant & machinery or equipment. Further, even in the assessment order there is no details about nature of rental receipt. Although, the Ld.CIT(A) directed the AO to assess rental receipt under the head ‘income from business & profession’ and also allow consequent expenses, but there is no discussion on nature of rent received by the assessee. Therefore, we are of the considered view that the issue needs to be set aside to the file of the AO for further verification. In case, the assessee derived rental income from lease of land & building, then definitely said income is assessable under the head ‘income from house property’ and consequent action needs to be followed. But, in case, rental income is derived from lease of plant & machinery or equipment, then same needs to be assessed under the head ‘income from other sources’ and consequent action needs to be followed. Further, if at all the assessee is in the business of letting out properties or plant & machinery, then same needs to be assessed under the head ‘income from business or profession’ as considered by the Ld.CIT(A) and consequent action needs to be followed like allowing expenses relatable to said income. Since, facts are not clear, we set aside the issue to the file of the AO and direct the AO to re-consider the issue in light of our discussion given hereinabove and decide the issue in accordance with law.
5. The next issue that came up for our consideration from Ground No.3 of the assessee’s appeal is depreciation on non-compete fee. The AO has disallowed depreciation on non-compete fee on the ground that the non-compete fee/good will is not depreciable asset, eligible for depreciation u/s.32(i)(ii) of the Act, nor the expenditure on acquisition of goodwill, is eligible item for deduction u/s.35D(2) of the Act. The Ld. CIT(A) allowed depreciation on non-compete fee, by following the decision of ITAT in the assessee’s own case for the earlier assessment years.
5.1 The Ld. Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the Hon’ble Madras High Court in the case of Penta soft Technology Ltd. v. DCIT reported in [2014] 264 CTR 0187 (Mad), where the Hon’ble Madras High Court allowed depreciation on non-compete fee as an intangible asset in terms of sec.32(1) of the Act.
5.2 The Ld. DR, on the other hand, supporting the order of the Ld. CIT(A), submitted that non-compete fee is not an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act. However, fairly agreed that the issue is covered in favour of the assessee by the decision of the Hon’ble Madras High Court.
5.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Depreciation on non-compete fee whether it is an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act, is no longer res integra. The Ld. CIT(A) allowed depreciation on non-compete fee by following the decision of ITAT in the assessee’s own case for the AYs 2001-02 & 2002-03, where the Tribunal held that non-compete fee is an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act. The matter reached to the Hon’ble Madras High Court and the jurisdictional High Court of Madras had considered an identical issue in the case of Penta soft Technology Ltd. (supra) and held that non-compete fee is in the nature of intangible asset in terms of sec. u/s.32(1)(ii) of the Act, and would be a capital asset entitled for depreciation. The relevant findings of the Hon’ble Madras High Court are as under:
11. We have carefully considered the submissions made on either side and perused the materials available on record.
12. The assessee entered into an agreement dated 23.02.2000 with Pentamedia Graphics Limited. Under the said agreement PMGL was a transferor and the assessee was the The transferor was carrying on business in multimedia and software development and it identified the multimedia, which is poised for major growth in future as its core business and decided to hive off the software business and training and the assessee/appellant agreed to acquire the software business and accordingly, PMGL unconditionally transferred, assigned and permitted the assessee to use the Intellectual Property Rights. Under the same agreement dated 23.02.2000, there was a clause relating to non-competition by virtue of which, PMGL agreed that they shall not within the geographical limits of all countries for a period of 10 years after the closing, either on its own behalf or on behalf of the association with any third person, act or advise or consult or be as a trustee either directly or indirectly compete with the software business among other things. The IPRs which stood transferred under the said agreement were trade names, trademarks or service marks together with the goodwill associated therewith; copy rights pending or issued registrations for any of the foregoing inventions, trade secrets and other confidential or proprietary information, computer programs and all other intangible property rights of the software business. That apart the product also meant to include banking product, insurance product, finance products etc., and PMGL bound themselves not to use the name ‘Pentasoft’ in the business transactions or any products developed by them and what they permitted the assessee unreservedly and without encumbrance is to utilize the said name in any of the product transferred with the software business or any of the products that may be developed by them in future. The other rights owned by PMGL with regard to the development and training also stood approval under the said agreement. Further in the agreement, the assessee had agreed that the consideration for transfer of the Intellectual property and agreeing to non-compete shall be Rs. 544.21 crores. It is to be pointed out that in the agreement there was no break-up details given as to how much of the above amount is allocable towards the transfer of IPR and how much towards non-compete fee. Nevertheless, such details has been furnished by the assessee before the Authorities below. The Assessing Officer, after taking note of the opinion of the Chartered Accountant of the assessee held that the opinion was not based on any scientific valuation and it is not a proper professional approach and accordingly, the capitalization of the goodwill, i.e. Intellectual Property Rights and non-compete fee was rejected and the claim for depreciation was disallowed.
13. The First Appellate Authority, on appeal by the assessee against the said finding of the Assessing Officer, observed that the assessee has not only acquired trade mark but also licence to sell 25 different types of products acquired from PMGL, which it had sold to India and abroad after acquisition i.e. on 1.4.1999 and that the assessee also acquired commercial right to conduct training programmes with the use of trade mark ‘pentasoft’ and engaged in software development and export in the line of various software products acquired from PMGL exclusively. Further it took note of the fact that PMGL has been restrained to engage in the two activities by virtue of the non-competition agreement between them for which the assessee paid Rs. 180 crores to PMGL. Therefore, after taking note of the AS26 issued by ICAI, that IPRs and non-compete fee are classifiable as intangible assets as in the assessees case it satisfies the criteria, viz., it was identifiable; it was controllable and economic benefits flowed out to the enterprise. Since the three criteria were satisfied and the assets were unconditionally transferred by PMGL, the First Appellate Authority held that the assessee had acquired absolute rights to enjoy, utilize and exploit such exclusive rights.
14. After referring to the decision of the Hon’ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh reported in 271 ITR 401 (SC), the First Appellate Authority held that the assessee has acquired trademarks and licence to use the trade mark ‘pentasoft’ exclusively and also to carry on business and software development export and training by restraining PMGL from carrying out the same activities. Hence, such trade mark licence and the commercial rights acquired by payment of non-compete fee are intangible assets entitled to depreciation under Section 32(1)(ii) of the Act.
15. The Revenue preferred appeal before the Income Tax Appellate Tribunal. In fact, the assessee also preferred appeal as against the other issues, which we are not presently On the appeal preferred by the Revenue, the Income Tax Appellate Tribunal held that non-compete fee is not an asset, which the assessee could use like licence or franchise etc., in its business and it is a payment to ward off the competitor for a specified number of years and it confers the right to sue in case of breach by a person and depreciation cannot be allowed on non-compete fee.
16. The Tribunal in para No.21 of its order relied on its earlier decision passed in ITA No.1293(Mds)/2006 dated 23.11.2007 [M/s.A.B. Mauria India Pvt. Ltd. vs. ACIT]. Learned Counsel on either side fairly stated that they are unable to get a copy of the said decision as the said decision has not been reported.
17. Be that as it may, the only reason assigned by the Tribunal is that the non-compete fee is not an asset, which the assessee could use like a licence or franchise and therefore, depreciation cannot be allowed.
18. In the preceding paragraphs, we have referred to the agreement entered into between the parties. The said agreement dated 23.02.2000 is a composite agreement by virtue of it, there was transfer of all rights over the IPRs as well as the training and development programmers to be exclusively used by the assessee for a fixed fee. Under the agreement, the consideration payable for transfer of IPRs and towards non-compete fee have not been segregated or distinctly mentioned. In order to qualify for a depreciation under Section 32(1)(ii) of the Act, it would first be relevant to refer to the said provision, which reads as under:
“Depreciation: 32(1) [in respect of depreciation of
(i) …………
(ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed -] Therefore, in terms of the above provision, deduction is allowable in respect of depreciation of patents, copy rights, trade marks, license, franchise, etc. or any other business or commercial rights of similar nature. There is no difficulty insofar as the trade mark and copy rights, which have been transferred in favour of the assessee.
19. The only issue is whether non-compete agreement/arrangement would fall within the ambit of clause (ii) of Section 32(1) of the Act.
20.It is the case of the Revenue that this non-compete fee is in the nature of a negative right and it cannot be of a commercial right of similar nature and the expression ‘similar nature’ shall be relatable to patents, copy rights and trade mark license or franchise or any other business. Therefore, it is submitted that this negative right cannot be construed either as a license or as a commercial right to be eligible for deduction.
21. We are unable to agree with the stand taken by the Revenue for the simple reason that the agreement between the parties is a composite agreement. Under the agreement, the transfer or had transferred all its rights, copy rights, trade marks in respect of the word ‘pentasoft’ as well as the training and development division exclusively to be exploited by the assessee. In order to strengthen those rights transfer under the said composite agreement, there was a non-compete clause by virtue of which, the transferor was restrained from using the same trade mark, copyrights etc., in favour of the assessee. Therefore, the non-compete clause under the agreement should be read as a supporting clause to the transferor of the copy rights and patents rather to strengthen the commercial right, which was transferred in favour of the assessee.
22. Learned counsel for the assessee contended that the non-compete is in effect an indirect However, we are not inclined to agree with the said submission since non-compete, at best could be a commercial right because that right is relatable to the transfer of trade mark, copy rights and patents. Therefore, the view taken by the Commissioner of Income Tax(Appeals) in this regard is acceptable.
23. In the case of Techno Shares and Stocks Ltd vs. Commissioner of Income Tax reported in 327 ITR 323 (SC), the assessee therein before the Hon ’ble Apex Court claimed depreciation on the membership card held by it with the Bombay Stock Exchange enables it to trade on the floor, is a business or commercial right in the nature of a licence under Section 32 (1)(ii) of the Act.
24. The Department on the other hand, pointed out that membership is a personal privilege and that it is not an asset and that it is not owned by the assessee and therefore, the claim of the assessee for depreciation was not admissible under Section 32(1)(ii) of the Act.
25. While answering the question, the Honble Supreme Court considered the rules of the Bombay Stock Exchange and after perusing Rules 5 to 10, it held thus:
………. “that the right of nomination is conferred on the member of the exchange; that, the said right shall cease and vest in the exchange when his membership gets forfeited to the exchange; that on such forfeiture the right of membership gets vested in the exchange and on such vesting the exchange has the right to deal with it as it may think fit. That, on forfeiture even the right of nomination vests in the exchange. Thus, a non-defaulting continuing member owns the right of nomination with respect to the membership of the exchange till his right of membership is forfeited to the exchange.”
However, the Hon’ble Supreme Court observed that the right of membership including the right of nomination gets vested in the exchange on the demise/default committed by the member; that on such forfeiture and vesting in the exchange, the same gets disposed of by inviting offers and the consideration received thereof is used to liquidate the dues owed by the former/defaulting member to the exchange or clearing house.
26. It further held that it is this right of membership, which allows the non-defaulting member to participate in the trading session on the floor of the exchange. The said membership right is the business or commercial right conferred by the rules of the Bombay Stock Exchange on the non-defaulting continuing member.
27. We are conscious of the fact that the Honble Supreme Court clarified that the said judgment is strictly confined to the right of the membership conferred upon the member under the Bombay Stock Exchange membership card during the relevant assessment years and that judgment should not be understood to mean that every business or commercial right would constitute a ‘license’ or a ‘franchise’. Therefore, the said decision was rendered after taking into consideration the Rules of the Bombay Stock Exchange.
28. In the case of hand, we have analysed the agreement and also in the previous portion of this order elaborated upon the various terms and conditions, which bind the parties had observed that the earlier transfer of the trade mark, patents and other rights in favour of the assessee was undoubtedly the transfer of intangible assets, which in terms of section 32(1)(ii) of the Act would be a capital asset entitled to depreciation.
5.4 In this view of the matter and by respectfully following the decision of the jurisdictional High Court of Madras in Pentasoft Technology Ltd. (supra), we are of the considered view that the assessee is entitled for depreciation on non-compete fee and thus, we direct the AO to allow depreciation on non-compete fee as claimed by the assessee.
6. In the result, appeal filed by the assessee in ITA No.121/Chny/2011 is partly allowed.
ITA No.449/Chny/2004-05 for the AY 2004-05 – (Revenue’s appeal)
7. The first issue that came up for our consideration from Ground No.1 of the Revenue’s appeal is exclusion of software development expenses and exchange fluctuation loss from export turnover but not from total turnover. The AO while re-computing deduction u/s.10A of the Act, excluded expenditure incurred towards software development expenses as per Explanation (2) to sec.10A of the Act, and exchange fluctuation loss, but does not exclude same from total turnover.
7.1 The Ld. Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. v. CIT reported in 165 DTR 305 (SC), where it has been held that expenses deducted from export turnover also needs to be deducted from the total turnover.
7.2 The Ld. DR, on the other hand, supporting the order of the Ld. CIT(A), submitted that as per law, export turnover and total turnover has been defined and further, while computing deduction u/s.10A/10B of the Act, expenses incurred in foreign currency needs to be excluded from export turnover. However, same need not be excluded from total turnover. But, he fairly agreed that the issue is covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra).
7.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The issue of computation of deduction u/s.10A of the Act, in light of definition of export turnover and total turnover, has been resolved by the Hon’ble Supreme Court in the case of HCL Technologies Ltd., where it was held that expenses deducted from export turnover needs to be deducted from total turnover. Therefore, we are of the considered view that the AO & the Ld. CIT(A) is erred in not excluded expenses deducted from export turnover from total turnover and thus, we direct the AO to exclude expenditure incurred towards software development and foreign exchange loss from total turnover also.
8. The next issue that came up for our consideration from Ground No.2 of the Revenue’s appeal is depreciation on Intellectual Property Rights (in short “IPR”). The Ld. Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of ITAT in the assessee’s own case for the AY 2002-03, where the Tribunal held that the assessee is entitled for depreciation on IPRs u/s.32(1)(i) of the Act.
8.1 The Ld.DR, on the other hand, supporting the order of the AO, submitted that the issue is covered in favour of the assessee by the decision of ITAT in the assessee’s own case for the earlier assessment years.
8.2 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in the assessee’s own case for the AY 2002-03 in ITA No.1540//Mds/2006, where the Tribunal after considering relevant facts held that IPR is eligible for depreciation u/s.32(1)(i) of the Act. Therefore, consistent with view taken by the co‑ordinate Bench, we are of the considered view that there is no error in the reasons given by the Ld. CIT(A) to delete additions made towards disallowance of depreciation on IPR and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue.
9. The next issue that came up for our consideration from Ground No.3 of the Revenue’s appeal is expenditure on purchase of software treated as Revenue expenditure. The AO has disallowed a sum of Rs.18,24,821/- towards expenditure incurred for purchase of software as capital in nature, since, the assessee derived enduring benefit, but has allowed depreciation. The Ld. CIT(A) by following the decision of CIT v. Southern Roadways Ltd. reported in 288 ITR 15, allowed relief and held that expenditure incurred for purchase of software is Revenue in nature.
9.1 The Ld.Counsel for the assessee submitted that the assessee has incurred expenditure for accreditation of software for improving the efficiency of existing system with a view to keep business pace with latest technology. Therefore, the same does not give any enduring benefit to the assessee and thus, cannot be considered as capital expenditure.
9.2 The Ld.DR, supporting the order of the AO, submitted that expenditure incurred by the assessee for purchase of software is capital in nature, because it gives enduring benefit and thus, the Ld. CIT(A) is erred in deleting additions made towards capital expenditure.
9.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Although, the assessee has purchased software to replace with existing software in a computer system, but same does not give any enduring benefit, because the life of software is very short. Therefore, the same cannot be considered as capital in nature. We find that the jurisdictional high Court of Madras in the case of Southern Roadways Ltd., (supra) has considered an identical issue and held that there is an enduring benefit, it does not result in acquisition of any capital asset and merely enhanced the productivity or efficiency of the system and thus, it cannot be considered as capital in nature. The Ld. CIT(A) after considering relevant facts and also by following the decision in the case of Southern Roadways Ltd., (supra) has rightly deleted the additions made by the AO and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.
10. The next issue that came up for our consideration from Ground No.4 of the Revenue’s appeal is unexplained credit in the name of M/s.Penta Media Graphics Ltd. The AO has made additions towards credits in the name of M/s.Penta Media Graphics Ltd., for the reason that the assessee could not furnish full details in respect of balance payable to M/s.Penta Media Graphics Ltd. The Ld. CIT(A) allowed relief to the assessee on the basis of reconciliation filed by the assessee along with ledger account of M/s.Penta Media Graphics Ltd., in the books of the assessee and vice-versa.
10.1 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Admittedly, the assessee could not file any evidences including confirmations from the party before the AO to justify credit in the name of M/s.Penta Media Graphics Ltd. Before the Ld. CIT(A), the assessee claims to have filed reconciliation along with ledger account of M/s.Penta Media Graphics Ltd., in the books of accounts of the assessee and vice-versa. The assessee further claimed that it has reconciled difference between ledger account of M/s. Penta Media Graphics Ltd., in their books of accounts with creditors books and explained the difference of Rs.3 lakhs. The Ld. CIT(A) after considering relevant facts deleted the additions made by the AO. We find that although, the assessee has filed reconciliation and further evidences first time before the Ld. CIT(A), the Ld. CIT(A) has allowed relief to the assessee without confronting those evidences to the AO for his rebuttal. No doubt, the assessee has filed details of ledger account along with confirmation from the party and explained the credit. But, the Ld. CIT(A) should have confronted those evidences to the AO for his comments before allowing the relief to the assessee. Therefore, we are of the considered view that the issue needs to go back to the file of the AO to verify additional evidences filed by the assessee including confirmations from the party and reconciliation of difference between the ledger account of party in the books of accounts of the assessee and in the books of creditors. In case, the assessee is able to explain credit with necessary evidences, then the AO is directed to delete additions made towards credits in the name of M/s.Penta Media Graphics Ltd.
11. The next issue that came up for our consideration from Ground No.5 of the Revenue’s appeal is additions towards credits in respect of M/s.RS & Co. Inc. and M/s. Pentafour Software Solution Inc. The AO has made additions towards creditors in absence of confirmation form the party. The Ld.CIT(A) deleted the additions made by the AO on the basis of subsequent payment made by the assessee to the creditors.
11.1 We have heard both the parties, and perused the materials available on record and we find that the assessee has filed details of ledger account along with payment to creditors in subsequent FY before the Ld. CIT(A) and the Ld. CIT(A) has forwarded additional evidences filed by the assessee to the AO and the AO could not rebut the details filed by the assessee in the Remand Report, except saying that letter sent have not been served or replied by the parties. We find that confirmation of settlement of credit subsequently from creditors were already produced before the Ld. CIT(A). Notices by the AO being returned/unserved cannot be the reason to hold the credit, is not genuine. Creditors are carried over from FY 200 1-02 and are not credits/appearing for the first time during the year. Therefore, we are of the considered view that there is no error in the reasons given by the Ld. CIT(A) to delete the additions towards credits in the name of M/s.RS & Co. Inc. and M/s. Pentafour Software Solution Inc., and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue.
12. The next issue that came up for our consideration from Ground No.6 of the Revenue’s appeal is allocation of disallowance of expenses among STP Units and non-STP Units in the ratio of 90% and 10% on the basis of income of the assessee. The AO has disallowed certain liabilities amounting to Rs.6,64,02,188/- u/s.43B of the Act, as per Tax Audit Report and allocated said disallowances to STP Units and non-STP Units on the basis of income derived by the assessee. The Ld. CIT(A) directed the AO to allocate sec.43B disallowance in the ratio of 90% under STP Units and 10% under non-STP units on the basis of turnover of STP Units & non-STP Units.
12.1 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The AO has allocated disallowance of certain liabilities u/s.43B of the Act, to STP Units & non-STP Units, on the basis of income, whereas, the Ld.CIT(A) has directed the AO to allocate said disallowance on the basis of export turnover and domestic turnover. The short dispute between the assessee and the Revenue on allocation of disallowance on said expenses is whether it should be on the basis of income or turnover. In our considered view, turnover would be the appropriate ratio for allocation of expenses to STP Units & non-STP Units instead of income. Because, income of STP Units & non-STP Units may depend upon various factors including fixed overhead expenses and other parameters. Therefore, we are of the considered view that there is no error in the reasons given by the Ld. CIT(A) to allocate disallowance of expenses u/s.43B of the Act, to STP Units & non-STP Units on the basis of export turnover and domestic turnover and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue.
13. In the result, appeal filed by the Revenue in ITA No.449/Chny/2011 is partly allowed for statistical purposes.
14. In the result, appeal filed by the assessee in ITA No.121/Chny/2011 is partly allowed and appeal filed by the Revenue in ITA No.449/Chny/2011 is partly allowed for statistical purposes.
Order pronounced on the 11th day of November, 2022, in Chennai. ITAT Chennai held that while computing deduction under section 10A of the Income Tax Act expenses deducted from export turnover needs to be deducted from total turnover.
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