INCOME TAX ACT, 1961

--Deduction under section 10A--Undertaking in a free trade zoneAssessee having both STP unit as well as non-STP unit--The assessee was a private limited company resident in India. During the relevant previous year, it operated two units: a Software Technological Park unit (STP unit) which was engaged in the development of software which was primarily exported to the parent company in Sweden and another domestic unit (non-STP unit) which was primarily engaged in the implementation of the telecom software for vendors/customers in India. In respect of the profits from the STP unit the assessee was undisputedly entitled to the deduction provided in section 10A. In the returns filed for the years under appeal the assessee computed the profits from the STP unit by apportioning the indirect or common expenses on the basis of the head-count of the employees working in the said unit and the domestic unit and claimed the deduction under section 10A in respect of the former unit accordingly. While completing the assessment under section 143(3), the AO was of the view that the apportionment of the common or indirect expenses between the two units 'STP and domestic' on the head-count basis was not appropriate and it resulted in more profits being shown from the STP unit. He was of the view that the common expenses should have been apportioned on the basis of the turnover in the respective units. He accordingly apportioned the total indirect expenses in the ratio of the turnover in the two units. Held: In the present case, the AO had accepted the head-count method adopted by the assessee in the past but rejected it only for the years under appeal. This would disturb or distort the profits. The question whether the head-count method is the most appropriate method had been raised by the AO in the course of the assessment proceedings and it had been stated by the assessee that though the turnover basis preferred by the AO may be more suited to manufacturing businesses, in the case of service industry such as the assessee's case the head-count method would be more appropriate to be followed for the purpose of apportioning the indirect expenses. It appears to be a plausible view, though it can possibly also be a debatable view. But merely because there can be more than one method of apportioning the common expenses between the STP and domestic units it cannot be said that the method of head-count followed by the assessee should be discarded, that too mid-way, even though it was not questioned at any time in the past.