2004 (12) TMI 637 - AT - Income Tax

Disallowance of expenses reimbursed to Arthur Anderson Worldwide Societe Co-operative (AWSC) - Deduction u/s 80HHE. HELD THAT - The Assessing Officer accepts that the accounts were duly audited that expenses are justified on the grounds of business expediency and in the light of the substantial benefit received from AWSC and yet he makes an ad hoc disallowance of 20% of expenses. In our considered view however such an approach is entirely unsustainable in law. The very concept of token disallowance is bad in law because such a disallowance is inherently based on surmises and conjectures and devoid of a legally sustainable foundation. It is a case where one accepts all the contentions but not the consequences flowing from accepting the same. That cannot meet our approval. The CIT(A) was quite justified in deleting the disallowance. We approve and confirm the stand of the CIT(A). His action of deleting the disallowance does not call for any interference by us. Accordingly we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. Appeal is thus dismissed. Technical services for development of computer software - deduction u/s 80HHE - In our considered view the documents reasonably establish the fact that the said technical services are indeed rendered by the assessee s personnel. The mere fact that most of these evidences are in the nature of documentation of AWSC affiliates cannot lead to the conclusion that the documentation is unreliable. We have also noted that the detailed billing particulars in respect of each project are available. However only because AWSC makes one billing adjustment does not vitiate the fact that the complete details of the relevant earnings are on record. It is not necessary that in respect of each billing unit a separate entry is required to be made by the AWSC. In our considered view reasonable evidence in support of the services having been rendered by the assessee s personnel is on record. Even though the evidences are internal to the extent the evidences are primarily from AWSC this fact by itself cannot indicate that the evidences are fabricated or unreliable. These are contemporaneous evidences and constitute reasonable basis for a finding that the assessee s personnel have rendered technical services for or in connection with development of computer software. We have also noted that the requisite chartered accountant certificate u/s 80HHE(4) is also placed on record and no faults have been noticed in the same. The doubts raised by the Assessing Officer and the CIT(A) are in our considered view ill founded and unsustainable in law. Thus we deem it fit and proper to direct the Assessing Officer to grant deduction u/s 80HHE in accordance with the law and in the light of our above observations. The assessee will get relief accordingly. Ground No. 2 is thus allowed for statistical purposes. In the result the assessee s appeal is partly allowed. To sum up while revenue s appeal is dismissed the assessee s appeal is partly allowed.

Summary

Issues Involved:
1. Disallowance of expenses reimbursed to Arthur Anderson Worldwide Societe Co-operative (AWSC).
2. Disallowance of deduction claimed u/s 80HHE of the Income-tax Act, 1961.

Summary:

Issue 1: Disallowance of Expenses Reimbursed to AWSC

In IT Appeal No. 6192/Mum./04 for the assessment year 1997-98, the revenue challenged the deletion of disallowance of Rs. 1,66,19,762, being 20% of the expenses reimbursed to AWSC. The assessee, a chartered accountants firm, claimed a deduction of Rs. 8,30,98,810 for reimbursement of expenses under an inter-firm agreement with AWSC. Initially, the Assessing Officer (AO) disallowed this deduction, but upon appeal, the Tribunal restored the matter to the AO for fresh examination. The AO, after reconsideration, acknowledged the commercial expediency and business purpose of the expenses but disallowed 20% of the expenditure on the grounds of potential excessiveness. The CIT(A) deleted this disallowance, noting that the AO had accepted the business purpose and benefits derived from the expenses, and the accounts were duly audited. The Tribunal upheld the CIT(A)'s decision, stating that the concept of token disallowance is unsustainable in law as it is based on surmises and conjectures. Thus, the revenue's appeal was dismissed.

Issue 2: Disallowance of Deduction u/s 80HHE

In ITA No. 1735/Mum./02 for the assessment year 1998-99, the assessee appealed against the disallowance of Rs. 9,25,02,953 paid to AWSC towards reimbursement of establishment costs and the disallowance of Rs. 1,17,59,722 claimed u/s 80HHE. The Tribunal noted that the nature of payment and material facts were the same as in the previous year. Since the entire expenditure on reimbursement to AWSC was allowed in the assessment year 1997-98, no disallowance was warranted for the assessment year 1998-99. Thus, the first ground of appeal was allowed.

Regarding the deduction u/s 80HHE, the AO had disallowed the claim on the grounds that the assessee failed to substantiate the claim of providing technical services for the development of computer software. The Tribunal, however, found that the assessee had provided sufficient evidence, including client details, nature of services, qualifications of personnel, and technical appraisals, to establish that technical services were rendered for software development. The Tribunal directed the AO to grant the deduction u/s 80HHE, thus allowing the second ground of appeal for statistical purposes.

Conclusion:

The revenue's appeal was dismissed, and the assessee's appeal was partly allowed.