2012 (7) TMI 588 - AT - Income Tax

Reopening of the assessment u/s 147 - after expiry of four years - Held that - As it is clear from the reasons recorded by the AO that the same does not disclose or state that there was a failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment - AO has examined the issue of total turnover and accepted the claim of the assessee while framing the assessment u/s 143(3) then even if it is found that the claim allowed in the original assessment should not have been allowed the same itself is not a valid reason to reopen the assessment beyond the period of four years after the end of the relevant assessment years - in favour of assessee. Disallowance of bad debts written off - as the assessee failed to produce the complete details regarding the Debts written off and has failed to establish that the debt has actually become bad. Held that - As far as the requirement of establishing that the debt has actually gone bad the same is not essential for claiming the deduction of bad debts in view of the decision of Hon ble Supreme Court in case of TRF LIMITED V. CIT (2010 (2) TMI 211 - SUPREME COURT ) - as assessee has filed the additional material before the CIT(A), which has not been properly examined therefore this issue is remitted back to AO for verification and examination of the record filed by the assessee - in favour of assessee by way of remand. Disallowance of advances written off - Held that - This issue is also similar to the disallowance of bad debts written off. Since the issue of disallowance of bad debts written off has been set aside to the record of the AO therefore this issue is also remitted to the record of the AO - in favour of assessee by way of remand. Disallowance of software expenses being capital in nature - Held that - The expenditure was incurred by the assessee for development of software to be used in the assessee s business of software as evident from the assessee s books of account that the assessee has shown the said expenditure as work-in-progress being capital in nature. Having regard to the facts and circumstances of the case that when the assessee has incurred the expenditure for bringing a new asset into existence to be used for the business of the assessee then the same cannot be allowed as revenue expenditure. Since the asset was not yet come into existence therefore there is no question of allowing any depreciation - against assessee. Justification on computation of deduction u/s 10A - Revenue held that loss on account of Exchange Fluctuation is the claim of expenditure but not an exclusion from total turnover - Held that - There should be uniformity in the ingredients of both the numerator and the denominator of the formula as if the export turnover in the numerator is to be arrived at after excluding certain expenses the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover - though there is no definition of the term total turnover in Section 10A there is nothing in the said section to mandate that what is excluded from the numerator that is export turnover would nevertheless form part of the denominator - that the total turnover for the purpose of computation of 10A deduction has to be taken after excluding the foreign exchange loss from the total turnover shown in the profit and loss account - in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of the assessment under section 147 of the Income Tax Act after four years.
2. Disallowance of bad debts written off.
3. Disallowance of advances written off.
4. Disallowance of software expenses as capital in nature.
5. Computation of total turnover for deduction under section 10A.

Issue-wise Detailed Analysis:

1. Validity of Reopening of the Assessment under Section 147:
The assessee challenged the reopening of the assessment for the assessment years 2000-01 and 2001-02, arguing that the reopening was invalid as it was done after four years without any failure on their part to disclose all material facts. The Tribunal noted that the additional ground raised by the assessee was purely legal and went to the root of the matter, thus admitting it for adjudication. The Tribunal found that the reopening was based on a mere change of opinion by the Assessing Officer (AO) and not on any fresh evidence. The AO had all the necessary information, including TDS certificates, at the time of the original assessment. Consequently, the Tribunal held that the reopening was invalid and set aside the assessments for these years.

2. Disallowance of Bad Debts Written Off:
The assessee claimed bad debts of Rs. 2,19,23,080/- for the assessment year 2003-04, which the AO disallowed due to lack of evidence showing the debts had become bad. The Tribunal referred to the Supreme Court decision in TRF Limited v. CIT, which held that establishing the debt had actually become bad was not necessary once written off in the books. The Tribunal remitted the issue back to the AO for verification and examination of the records filed by the assessee.

3. Disallowance of Advances Written Off:
The assessee also claimed advances written off amounting to Rs. 14,60,121/-. Similar to the bad debts issue, the Tribunal remitted this matter back to the AO for fresh examination, considering all relevant materials filed by the assessee.

4. Disallowance of Software Expenses as Capital in Nature:
The assessee incurred expenses for developing software, which was shown as capital work-in-progress. The AO treated these expenses as capital in nature and disallowed them. The Tribunal upheld the AO's decision, noting that the expenditure was for bringing a new asset into existence, which had an enduring benefit. Since the asset was not yet in use, depreciation was also not allowable.

5. Computation of Total Turnover for Deduction under Section 10A:
For the assessment year 2003-04, the assessee reduced the total turnover by the amount of foreign exchange loss, which the AO contested. The Tribunal upheld the CIT(A)'s decision in favor of the assessee, citing the Special Bench decision in Sak Soft Ltd and the Karnataka High Court ruling in CIT v. Tata Elxsi Ltd. It was held that for computing the deduction under section 10A, the total turnover should be reduced by the foreign exchange loss, ensuring uniformity in the computation formula.

Conclusion:
The Tribunal allowed the assessee's appeals for the assessment years 2000-01 and 2001-02, partly allowed the appeal for the assessment year 2003-04 for statistical purposes, and dismissed the revenue's appeal for the assessment year 2003-04. The Tribunal's decisions were based on legal precedents and thorough examination of the facts and materials on record.