Income Tax Appellate Tribunal - Chennai
Amoeba Publishing Solutions P. Ltd., ... vs Assessee on 18 December, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER AND
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
ITA No.1634/Mds/2011 & C.O.No.159/Mds/2011
(Assessment Year: 2003-04)
Deputy Commissioner of Income Vs. M/s.Amoeba Publishing Solutions P.
Tax, Company Circle-I(3), Ltd.,
Race Course Road, 683-686, Stock Exchange Building,
Coimbatore-641 005. Coimbatore-5.
PAN:AACCA4406B
(Appellant) (Respondent/Cross Objector)
Appellant by : Mr Guru Bashyam, JCIT
Respondent by : Mr. K.Raghu, C.A.,
Date of Hearing : 18th December, 2012
Date of Pronouncement : 3rd January, 2013
ORDER
Per Vikas Awasthy, JM:
The appeal has been filed by the Revenue impugning the order passed by the CIT(A)-I, Coimbatore dated 13.07.2011 relevant to the assessment year 2003-04.
2. The assessee is a company registered under the provisions of the Companies Act, 1956 and is carrying on the business of software development. The assessee filed its return of income for the assessment year 2003-04 on 29.10.2003 declaring Nil income. The case of the assessee 2 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 was taken up for scrutiny and notice was issued to the assessee under section 143(2) of the Income Tax Act (hereinafter referred to as "the Act). During the relevant assessment year the assessee computed income from business as `52,55,062/- which was set off against earlier year losses. During the year under consideration, the assessee had debited a sum of `1,29,06,390/- towards software development expenditure. The said expenditure primarily constituted payment towards salaries for the immediately preceding year i.e. assessment year 2002-03 for development of software. The Assessing Officer vide assessment order dated 29.12.2005 disallowed the expenditure towards software development as prior period expenses. The assessee filed an appeal before the CIT(A) impugning the assessment order. The CIT(A) vide order dated 13.3.2008 upheld the order of the Assessing Officer and dismissed this ground of appeal of the assessee. However, under the provisions of section 115JB, the CIT(A) held that the Assessing Officer's action in adding back the software development expenses to the "Book Profits" computed under 3 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 section 115JB was not warranted and therefore deleted the same.
3. The assessee preferred an appeal before the Tribunal in ITA No.922/Mds/2008 impugning the order dated 13.3.2008 passed by the CIT(A). The issue brought before the Tribunal for adjudication was whether the software development expenses of `1,29,06,390/- debited to profit and loss account is to be disallowed as prior period expenses since the same had been incurred during previous years. The Tribunal vide order dated 20th March, 2009 has observed as under:-
"Further, we find that CIT(A) in his order had not averted to "matching principle" though elaborate submissions were made before him. In our opinion, it is only summary order and hence, we restore this matter to CIT(A) with a direction to pass a speaking order after considering the "matching principle" and project completion method claimed by the assessee after giving effective opportunity of being heard to the parties. The assessee is also directed to cooperate with the CIT(A) by producing necessary details that may be required from it. Thus, the appeal of the assessee is allowed for statistical purposes."
In the second round of litigation, the CIT(A) complying with the directions of the Tribunal decided the appeal of the assessee vide order dated 13.7.2011 and held that as per 4 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 notes on accounts for 31.03.2002, deferred software expenses have to be amortized over a period of three years starting from assessment year 2003-04 and directed the Assessing Officer to allow the expenditure for the assessment year 2003-04 and partly allowed the appeal of the assessee.
4. Aggrieved against the findings of the CIT(A), the Revenue has come in appeal before the Tribunal. The assessee has also filed Cross Objection on the ground that the CIT(A) has not allowed expenditure incurred on software development for the assessment year 2003-04 in full and has erred in directing the expenditure to be amortized over the period of three years starting from assessment year 2003-04.
5. Shri Guru Bhashyam appearing on behalf of the Revenue submitted that the expenditure claimed by the assessee pertains to the previous assessment year i.e. assessment year 2002-03, therefore, it cannot be allowed in the assessment year 2003-04. The assessee has been maintaining books of account on the basis of mercantile system of accounting. Under mercantile system of accouting, the matching is required to be done on accrual basis. The 5 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 salary paid to the employees has been credited to the project account. He submitted that a perusal of balance sheet as on 31.3.2002 would show that the expenditure has been shown as deferred revenue expenditure under miscellaneous expenses. The assessee has failed to follow matching concept of expenditure. In the Notes to accounts, the assessee itself has mentioned that the expenses amounting to `1,29,06,390/-as given in annexure is proposed to be capitalized and the said capitalized expenses are proposed to be amortized over a period of three years. The D.R. strongly supported the assessment order and contended that the prior period expenses on software development are not allowable as expenditure.
6. On the other hand, Mr.Raghu appearing on behalf of the assessee submitted that the project was terminated within one year. Therefore, there is no question of amortization of expenses over a period of three years. The revenue from the project was generated in only one year. The anticipation of the assessee to amortize the expenditure over a period of three years fell back when the project was terminated within 6 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 a period of one year. The learned AR submitted that in Notes on accounts for the year ending 31.03.2002, it was mentioned that deferred software expenditure have to be amortized over a period of three years from the assessment year 2003-04 in anticipation that revenue from the project will continue for many years, but when the project itself was terminated in one year after earning the one and only revenue from it, there was no case for amortizing the expenses for three years and it has been charged off fully to match the revenue during the year. The A.R. admitted that expenditure relates to the previous year. He contended that since the assessee did not claim the same in the assessment year 2002-03 and treated the same as deferred expenditure in its balance sheet as on 31.03.2002, the assessee is entitled to claim the same in the subsequent assessment year. The AR further contended that the CIT(A) has erred in coming to the conclusion that the expenditure on software development expenses is to be amortized over a period of three years starting from the assessment year 2003-04. The AR further stated that by applying "matching principle" the expenditure incurred on a 7 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 specific software project is deductible in full in the same year in which the revenue from such software project has been generated.
7. We have heard the submissions made by both the parties. We have gone through the orders passed by the authorities below. It is an admitted fact that the expenditure on software development has been incurred by the assessee in the period relevant to the assessment year 2002-03. The A.R. has referred to an agreement which is at page 12 to 20 of the paper book to show that the assessee has undertaken software development project in accordance with the agreement dated 1.7.2002 between the assessee and M/s.ISoftel Ltd., a company incorporated under law of Singapore. A perusal of the same shows that software development agreement has been executed between the Singapore company and M/s. Amoeba Telecom Ltd. and not the assessee i.e., M/s.Amoeba Publishing Solutions P. Ltd. Both the companies are two separate legal entities. They may have similar objects and businesses but there is nothing on record to show that the assessee company has 8 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 undertaken the execution of the project. The A.R. has placed on record ledger extracts of Export Sales for the period starting from 1.4.2002 to 31.3.2003 which is at page 21 of the paper book and sales invoices which are at page 22 to 25 of the paper book. All these invoices and ledger extracts pertain to M/s. Amoeba Telecom Ltd and has nothing to do with the assessee company. The A.R. has referred to export invoices showing the name of the customer and the details of invoiced product. A further perusal of the description of the product shows that it relates to invoicing of man-hours /man- days/man-months and not to any particular software development as contended by the A.R. The A.R has also referred to Notes on capitalization of software development, which is at page 26 of the paper book. The said notes also relates to M/s. Amoeba Telecom Ltd. The assessee has also referred to the details of Centerwise expenditure for the period starting from July to March, 2002 capitalized on 31.3.2002 at page 27. The said details also relates to M/s. Amoeba Telecom Ltd and not to the assessee. The only document relating to the expenses of assessee during the 9 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 financial year 2001-02 with respect to details of salary paid to engineers is at page 28 & 29 of the paper book. The said details are only extracts and are not supported by any other document. No document has been placed on record with respect of the assessee company to show that the same are in the books of accounts of the assessee company. The AR of the assessee has certified that all the documents viz., agreement, ledger extracts, note on capitalization, break-up of expenditure etc. were placed before the CIT(A). The CIT(A) in para 5 of its order has observed that the agreement dated 1.7.2002 is between Isoftel Ltd and Ameoba Telecom Ltd. and not the assessee. The CIT(A) further observed that it is not known whether M/s. Amoeba Telecom Ltd. is one and the same as Amoeba Publishing Solutions P. Ltd. Despite such observation, the assessee has not placed any document on record to show the relation between M/s. Amoeba Telecom Ltd. and the assessee. It is not the case of the assessee that there is any change of name of company, it is also not the case of the assessee that there has been any merger or amalgamation of the companies. The assessee has neither 10 ITA No.1634/Mds/2011 & CO No.159/Mds/2011 placed any document on record to show that the assessee was executing the project for the other company nor any evidence to link it with the project. The assessee has only filed extract of details of salary paid to engineers in the financial year 2001-02 at page 28 and 29 of the paper book. The said extracts are also not certified, therefore, no reliance can be placed on them. Even Form 35 and 36 filed before the CIT(A) and the Tribunal respectively does not mention any relation between the assessee company and M/s. M/s. Amoeba Telecom Ltd.
Be that as it may, the expenditure related to prior period expenses cannot be allowed in subsequent assessment year. The assessee ought to have claimed the same in the year of expenditure itself.
8. We are of the considered opinion that the assessee has not been able to show from the documents placed on record that the expenditure relates to the assessee company. We therefore hold that the same is not allowable in the hands of the assessee .
11 ITA No.1634/Mds/2011 &CO No.159/Mds/2011
9. In view of our above findings, the appeal of the Revenue is allowed and the Cross Objection of the assessee is dismissed.
Order pronounced in the open court on Thursday, the 3rd day of January, 2013 at Chennai.
Sd/- Sd/-
(Abraham P.George) (Vikas Awasthy)
Accountant Member Judicial Member
Chennai,
Dated the 3rd January, 2013
somu
Copy to: (1) Appellant (4) CIT(A)
(2) Respondent (5) D.R.
(3) CIT (6) G.F.