2024 (1) TMI 214 - AT - Income Tax

Deduction u/s 10A - Allocation of general corporate expenses between the STPI and non STPI units - assessee has maintained separate books of accounts - On the query from the bench on the consistency of methodology adopted by the assessee the AR submitted that the assessee has been following this system of allocation in the earlier year and subsequent years - AR submitted that the allocation was made to STPI units on the basis of STPI turnover to total turnover and in case of Non STPI units the basis adopted being domestic turnover to total turnover and the Ld.AR demonstrated the chart on the allocation of expenses - HELD THAT - Considering the facts circumstances and evidences filed on consistency adopted by the assessee the action of the assessing officer is not tenable. Further the revenue could not explain the basis of reallocation of expenses. Whereas the assessee has complied with the accounting principles and policies and has been scientifically allocating the expenses between STPI Non STPI Units based on the Audited books of Accounts maintained separately. The revenue has accepted the methodology of allocation of expenses adapted by the assessee in the assessment u/sec 143 (3) of the Act for A.Y. 2008-09 to 2012-13. Therefore the order of the CIT(A) is set aside and direct the assessing officer to accept the methodology adopted by the assessee in allocating the expenses. Decided in favour of assessee.

Summary

Issues involved:
The appeal against the order of National Faceless Appeal Centre (NFAC) and CIT (A) regarding allocation of general corporate expenses to STPI and Non STPI unit, following scientific principles and policies, consistency in expense allocations, and deductibility under section 10A of the Act.

Allocation of General Corporate Expenses:
The appellant challenged the order confirming the arbitrary allocation of expenses to STPI and Non STPI units by the CIT(A), emphasizing the separate maintenance of books for each unit. The appellant contended that the reallocation by the AO resulted in double allocation and lacked consideration for consistency in expense allocation from previous years.

Assessment and Disallowances:
The appellant, engaged in IT services, filed for deduction under section 10A for A.Y 2007-08, with the assessment resulting in disallowances and a revised total income. The ITAT granted partial relief in a previous appeal, specifically on the issue of common expenses allocation, which was remanded to the Assessing Officer for reexamination.

Assessing Officer's Order and Appeal:
The AO issued a notice for explanation on expense allocation, and upon review, reallocated expenses between STP and domestic units based on specific ratios. The AO determined the deduction under section 10A accordingly. Subsequently, the CIT(A) upheld the AO's decision, leading to the current appeal before the Tribunal.

Tribunal's Decision:
During the hearing, the appellant argued that the CIT(A) erred in confirming the AO's decision without considering the scientific basis of expense allocation and the maintenance of separate accounts for each unit. The appellant demonstrated consistency in allocation methodology and proximity of expenses to unit profits. The Tribunal found the AO's actions untenable, noting the lack of explanation for reallocation by the revenue. Considering the appellant's compliance with accounting principles and past acceptance of allocation methods, the Tribunal set aside the CIT(A)'s order and directed the AO to accept the appellant's allocation methodology.

Conclusion:
The Tribunal allowed the appeal in favor of the appellant, emphasizing the scientific and consistent allocation of expenses between STPI and Non STPI units based on audited accounts. The decision was pronounced in open court on 07.12.2023.