Head-count basis for s.10A expense apportionment upheld; rule of consistency bars Revenue from sudden method change

HC upheld the Tribunal's acceptance of the assessee's head-count method for apportioning common/indirect expenses between STP and domestic units for computing exemption under s.10A. The Court applied the rule of consistency, holding that since the department had consistently accepted this method in earlier years, the AO could not reject it for the years in appeal without demonstrating distortion of profits or statutory violation. Turnover-based allocation, though possibly preferable in manufacturing, was not mandated, and head-count was a plausible method in a service industry. Finding no perversity in the Tribunal's reasoning or factual conclusions, HC dismissed the Revenue's appeal.

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Issues Involved:
1. Whether the Income Tax Appellate Tribunal (ITAT) was correct in accepting the "head-count" method of expense allocation between STP and non-STP units.
2. Whether the ITAT was correct in applying the Rule of Consistency despite the head-count method not being the correct method of accounting.
3. Whether the ITAT was correct in discarding the method of distribution adopted by the Assessing Officer (AO) in accordance with Section 10A(iv) of the Income-tax Act.
4. Whether the ITAT's order is perverse in law and on facts.

Detailed Analysis:

1. Acceptance of "Head-Count" Method:
The respondent-assessee, a private limited company, operated two units: an STP unit and a non-STP unit. The assessee apportioned indirect expenses based on the head-count of employees in each unit, a method consistently followed and accepted by the income-tax authorities in the past. The AO, however, deemed this method inappropriate, suggesting that expenses should be allocated based on turnover, which he considered more logical. The AO re-apportioned the expenses, resulting in a higher taxable income for the non-STP unit. The Tribunal upheld the head-count method, noting its consistent acceptance and reasonableness in the context of the assessee's service industry.

2. Application of Rule of Consistency:
The Tribunal emphasized the importance of consistency in accounting methods. It noted that the head-count method had been consistently followed and accepted by the revenue authorities in the past, and no serious objections were raised against it. The Tribunal found no justification for the AO's departure from this method in the years under appeal, highlighting that consistency helps avoid distortion of profits, especially during the tax-holiday period under Section 10A.

3. Discarding AO's Method:
The AO's method of allocating expenses based on turnover was upheld in principle by the CIT(A) but was found to be erroneous in calculation for the assessment year 2002-03. The Tribunal noted that the head-count method was more appropriate for the service industry and had been accepted without demur in the past. The Tribunal found that the AO's method, although logical for manufacturing concerns, was not necessarily suitable for the assessee's business. The Tribunal ruled that the head-count method did not distort profits and was fair to both sides.

4. Perversity in Law and Facts:
The Tribunal's order was challenged on the grounds of perversity. However, the Tribunal's decision was based on settled principles of law and proper reasoning. The Tribunal found that the head-count method had been consistently accepted and did not distort profits. The Tribunal also noted that the AO's method was not supported by any commercial accounting principle or accounting standard repudiating the head-count method. The Tribunal concluded that there was no just cause for the revenue authorities to abandon the consistently accepted method, and thus, the order was not perverse.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the head-count method of expense allocation was reasonable and consistent with past practices. The Court emphasized the importance of consistency in accounting methods and found no just cause for the revenue authorities to deviate from the accepted method. The appeals filed by the revenue were dismissed, and the Tribunal's order was deemed not perverse in law or on facts.

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