DSM INFOCOM PVT LTD,MUMBAI vs. ACIT CIR 4(1)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER & SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER 1. ITA No. 5143/Mum/2025 (Assessment Year: 2017-18) DSM Infocom Pvt. Ltd. ACIT Cir 4(1)(2), SFA 12 Art Guild Room No. 640, 6th House, LBS Marg, Vs. Floor, Aayakar Kamani, Mumbai- Bhavan, Maharshi 400 070 Karve Road, Mumbai – 400 020 PAN/GIR No. AACCD0460G (Applicant) (Respondent)

2 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. आदेश / ORDER PER MAKARAND VASANT MAHADEOKAR, AM: These are cross appeals filed by the Revenue as well as the assessee against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi[hereinafter referred to as "CIT(A)"], passed under section 250 of the Income- tax Act, 1961 [hereinafter referred to as "the Act"]dated 09.07.2025, arising out of the assessment order passed by the Assessing Officer under section 143(3) of the Act dated 30.12.2019 for Assessment Year 2017–18. Since common issues are involved, both the appeals are heard together and are being disposed of by this consolidated order for the sake of convenience. Facts of the Case 2. Briefly stated, the facts of the case are that the assessee is a company engaged in the business of network and IT services with system integration and solutions, providing services of erection, installation and commissioning, maintenance or repair services, manpower recruitment services and supply of IT hardware products to its clients. The assessee filed its original return of income on 30.10.2017 declaring total income at Rs. 1,11,57,280/-. The return was subsequently revised on 13.08.2018 declaring income at Rs.1,15,31,140/- and again revised on 01.12.2018 declaring income at Rs.1,16,28,780/-. The return was processed under section 143(1) and thereafter the

3 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. case was selected for scrutiny under CASS. Statutory notices under sections 143(2) and 142(1) were issued from time to time and duly served upon the assessee. 3. During the course of assessment proceedings, the Assessing Officer observed that the assessee had entered into various contracts and had reported opening unbilled services at Rs.4.12 crore and closing work-in-progress on account of unbilled work at Rs.3.29 crore. The Assessing Officer further noted that the assessee had incurred total expenditure of Rs.37,94,17,154/- comprising material consumption, employee benefit expenses, direct project expenses, selling and administrative expenses and finance cost. The Assessing Officer called upon the assessee to furnish the basis of valuation of closing work-in-progress. In response, the assessee furnished tabulated details but failed to explain the basis of valuation or furnish copies of underlying contracts. The assessee, during the assessment proceedings, contended that it had accounted for its transactions and furnished details as called for. However, according to the Assessing Officer, the assessee failed to substantiate the basis of allocation of expenses to completed and incomplete contracts and did not furnish supporting documentary evidence such as contracts or working of work-in-progress. The Assessing Officer, on the basis of the material on record, held that a portion of the expenditure was attributable to incomplete and unbilled contracts and therefore could not be allowed as revenue expenditure. Accordingly, an ad hoc disallowance of 20% of the

4 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. total expenditure amounting to Rs.7,58,83,431/- was made and added to the closing work-in-progress. 4. The Assessing Officer further observed mismatch in revenue as per the return of income and service tax returns. The assessee explained that the difference of Rs.86,51,446/- was on account of credit notes issued during the year. However, the Assessing Officer held that such credit notes were unilaterally issued without customer confirmation and were an afterthought to suppress sales, and accordingly made addition of Rs.86,51,446/-. 5. The Assessing Officer also examined the claim of sales return of Rs.2,90,15,080/- and observed that the assessee failed to furnish third-party confirmations or documentary evidence such as delivery challans or correspondence from customers. The Assessing Officer further noted inconsistencies in credit notes and held that the claim of sales return was unsubstantiated. Accordingly, the entire amount of Rs.2,90,15,080/- was added to the income. 6. The Assessing Officer also disallowed technical fees of Rs.7,94,00,000/- on the ground that the invoices were raised at the fag end of the financial year and the assessee failed to establish that the services were consumed or linked with revenue. The expenditure was accordingly treated as capital in nature and added to closing work-in-progress. 7. Accordingly, the total income of the assessee was determined at Rs.20,45,78,740/- as against returned income of

5 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. Rs.1,16,28,780/- and penalty proceedings under section 270A(3)(i) were also initiated. 8. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A). The assessee, in appellate proceedings, submitted detailed written submissions contending that the method of valuation of work-in-progress was consistently followed in accordance with ICDS-II and accepted in earlier years; that the disallowance of 20% expenses resulted in double addition; that sales return and credit notes were genuine business adjustments; that mismatch in revenue was duly explained; and that technical fees were incurred in the ordinary course of business and duly supported by agreements and invoices. 9. The learned CIT(A), after considering the submissions, partly allowed the appeal. In respect of disallowance of Rs.7,58,83,431/- towards capitalization of expenses to work-in-progress, the learned CIT(A) held that the Assessing Officer had made ad hoc disallowance without pointing out specific defects and accordingly deleted the addition. In respect of sales return, the learned CIT(A) held that the assessee failed to substantiate the claim with adequate documentary evidence except to the extent of Rs.15,54,373/- which was allowed as deduction under section 36(1)(vii), and the balance addition of Rs.2,74,60,707/- was sustained. The addition of Rs.86,51,446/- on account of mismatch in revenue was confirmed. The disallowance of technical fees of Rs.7,94,00,000/- was also confirmed in full

6 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd.

holding that the assessee failed to establish utilisation and linkage with revenue. Thus, the appeal was partly allowed.

7 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd.

a) the amount was actually written off in the books of account during the year under consideration; b) the debt had become irrecoverable in fact and in law; and c) all conditions laid down under section 36(1)(vii) read with section 36(2) were duly fulfilled. 2.2 On the facts and in the circumstances of the case and in law the Ld. CIT(A) failed to consider that the assessee‟s claim was not supported by adequate evidence or provisioning trail and that the allowance was granted merely on the basis of a generalized reconciliation without statutory compliance. 11. The assessee has also filed cross appeal and raised the following grounds:

8 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. 14. The facts, in brief, are that during the course of assessment proceedings, the Assessing Officer observed that the assessee had incurred total expenditure of Rs.37,94,17,154/- and that a portion of such expenditure pertained to incomplete and unbilled contracts. The Assessing Officer called upon the assessee to furnish the basis of valuation of closing work-in-progress and supporting documentary evidence such as copies of contracts. However, according to the Assessing Officer, the assessee failed to furnish satisfactory details or substantiate the basis of allocation of expenditure between completed and incomplete contracts. In absence of proper explanation, the Assessing Officer held that part of the expenditure was attributable to unbilled contracts and could not be allowed as revenue expenditure for the year. Accordingly, an ad hoc disallowance of 20% of the total expenditure amounting to Rs.7,58,83,431/- was made and added to the closing work-in-progress. 15. Before the learned CIT(A), the assessee submitted that it had consistently followed the method prescribed under ICDS-II for valuation of inventories, particularly the retail price method, which had been accepted by the Department in earlier years. It was further submitted that the disallowance made by the Assessing Officer was arbitrary and resulted in double addition, as the work-in-progress had already been accounted for in the books. The learned CIT(A), after considering the submissions, observed that the Assessing Officer had made the disallowance on an ad hoc basis without identifying any specific defect in the

9 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. method of valuation or bringing any material on record to demonstrate understatement of work-in-progress. It was further observed that the method followed by the assessee was consistent and there was no finding that it was contrary to accepted accounting standards. Accordingly, the learned CIT(A) held that the addition was arbitrary and unsubstantiated and directed deletion of the entire disallowance of Rs.7,58,83,431/-. 16. The learned Departmental Representative (DR), drawing specific attention to the findings recorded by the Assessing Officer, submitted that the assessee had failed to discharge the primary onus cast upon it to substantiate the valuation of closing work-in-progress. It was contended that the Assessing Officer had categorically observed that while a substantial portion of the total expenditure incurred during the year related to contracts which were completed and billed, the remaining expenditure pertained to projects which were incomplete and remained unbilled at the year end. 17. The learned DR further submitted that the Assessing Officer had specifically called upon the assessee to furnish the basis of valuation of such unbilled and incomplete projects. However, in response, the assessee merely furnished tabulated figures of closing work-in-progress without providing any explanation as to how such valuation had been arrived at. It was emphasized that the correct valuation of work-in-progress necessarily required examination of individual contracts, including the nature of work,

10 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. stage of completion, timeline for execution and the extent of work remaining, which could only be ascertained from contract-wise details. 18. It was thus argued that the disallowance made by the Assessing Officer was based on logical reasoning emanating from the failure of the assessee to furnish necessary evidences, and therefore the learned CIT(A) was not justified in deleting the same. 19. Per contra, the learned Authorised Representative (AR) submitted that complete details of valuation of work-in-progress were furnished before the lower authorities. Referring to pages 49 to 52 of the paper book, it was submitted that contract-wise unbilled amounts as on 31.03.2017 along with details of subsequent invoices raised in the following year and corresponding income recognition were placed on record. It was further submitted that the assessee had worked out the profit margin at 15.72% and reduced the same from the unbilled sales value of Rs.3,90,73,469/-, resulting in WIP at cost of Rs.3,29,31,119/-.The learned AR submitted that the total expenditure for the year was Rs.37,94,17,154/- and the WIP of Rs.3.29 crore constitutes approximately 8% thereof, which is reasonable considering the nature of business. It was contended that the Assessing Officer, without pointing out any defect in the method or computation, applied an ad hoc rate of 20% of total expenses and made addition of Rs.7,58,83,431/-, which is

11 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. excessive and without basis. It was further submitted that the method of valuation adopted by the assessee is a recognised and consistently followed method and has not been disturbed by the Department in earlier and subsequent years. It was also contended that the addition made by the Assessing Officer results in double addition, as the WIP already computed by the assessee is again enhanced by adding a portion of expenses. 20. We have heard the rival submissions and perused the material available on record. It is an undisputed fact emerging from the assessment order that the Assessing Officer has not rejected the books of account of the assessee nor has he pointed out any specific defect in the method of accounting or valuation of work-in-progress adopted by the assessee. The addition has been made purely on an ad hoc basis on the premise that a portion of expenditure would relate to incomplete contracts. Such presumption, in absence of cogent material, cannot form the basis of addition. On the contrary, the material placed on record shows that the assessee has furnished contract-wise details of unbilled revenue as on 31.03.2017 amounting to Rs.3,90,73,469/- and has reduced therefrom profit margin of 15.72%, resulting in closing work-in-progress at cost of Rs.3,29,31,119/-. The assessee has further demonstrated that the said unbilled revenue has been subsequently billed and offered to tax in the succeeding period. Thus, the method adopted by the assessee reflects a reasonable and systematic basis of valuation. Further, it is noted that the total expenditure incurred

12 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. during the year is Rs.37,94,17,154/- and the closing work-in- progress of Rs.3.29 crore constitutes approximately 8% thereof. 21. In contrast, the Assessing Officer has applied an ad hoc rate of 20% of total expenditure, resulting in addition of Rs.7,58,83,431/-, which is disproportionate and without any correlation to the actual stage of completion of projects. 22. The contention of the Revenue that the assessee failed to furnish contract-wise details is not borne out from the material on record. The assessee has placed detailed workings demonstrating project-wise unbilled amounts and subsequent billing. Once such primary data is available, it was incumbent upon the Assessing Officer to examine the same and bring on record specific discrepancies, if any. In absence thereof, resorting to an ad hoc estimation is not justified. We also find merit in the contention of the assessee that the addition results in distortion of true profits. The assessee has already accounted for work-in- progress based on a recognized method, and further addition of a fixed percentage of expenses, without identifying any excess claim, effectively leads to duplication. 23. In view of the above factual matrix, we find that the learned CIT(A) has rightly held that the addition made by the Assessing Officer is arbitrary and unsubstantiated. The Revenue has not brought any material before us to controvert the findings of the learned CIT(A).Accordingly, the ground raised by the Revenue is dismissed.

13 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. 24. Ground No. 2 raised by the Revenue relates to the action of the learned CIT(A) in allowing deduction of Rs.15,54,373/- under section 36(1)(vii) of the Act out of the total addition of Rs.2,90,15,080/- made by the Assessing Officer on account of unsubstantiated sales return. 25. The facts, in brief, are that the Assessing Officer had made addition of Rs.2,90,15,080/- on account of sales return claimed by the assessee on the ground that the same was not supported by documentary evidence such as customer confirmations, delivery challans or correspondence. During appellate proceedings, the assessee furnished reconciliation and contended that part of such amount represented irrecoverable balances written off. 26. The learned CIT(A), after examining the submissions, held that the assessee had failed to substantiate the claim of sales return to the extent of Rs.2,74,60,707/- and confirmed the addition to that extent. However, the learned CIT(A) accepted the claim of Rs.15,54,373/- as bad debt written off and allowed deduction under section 36(1)(vii). 27. The learned DR submitted that the learned CIT(A) erred in allowing deduction without proper verification as to whether the amount was actually written off in the books, whether it had become irrecoverable and whether conditions under section 36(2) were fulfilled.

14 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. 28. Per contra, the learned AR supported the order of the learned CIT(A) and submitted that the amount of Rs.15,54,373/- was duly written off in the books and satisfies the conditions of section 36(1)(vii). 29. We have considered the rival submissions. It is observed that the learned CIT(A), on examination of the reconciliation furnished by the assessee, has recorded a categorical finding that out of the total amount, a sum of Rs.15,54,373/- represents write-offs on account of irrecoverable amounts. The learned CIT(A) has further taken note of the legal position laid down by the Hon’ble Supreme Court in the case of TRF Ltd. v. CIT (323 ITR 397), wherein it has been held that once a debt is written off as irrecoverable in the books of account, no further condition is required to be satisfied for claiming deduction under section 36(1)(vii) of the Act. 30. In the present case, the Revenue has not brought any material on record to controvert the factual finding recorded by the learned CIT(A) that the amount of Rs.15,54,373/- was actually written off in the books of account. The objection of the Revenue is general in nature, without demonstrating that the write-off is not genuine or that the conditions of section 36(2) stand violated. 31. In view of the settled legal position and in absence of any contrary material, we find no infirmity in the order of the learned CIT(A) in allowing deduction of Rs.15,54,373/- under section

15 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. 36(1)(vii) of the Act. Accordingly, this ground of the Revenue is dismissed. 32. We shall now take up the appeal filed by the assessee – ITA No. 5143/Mum/2025 33. Ground No. 1 raised by the assessee relates to confirmation of addition of Rs.2,74,60,707/- on account of disallowance of sales return, with an alternative plea that the addition be restricted to the profit element embedded therein. 34. The facts, in brief, are that the assessee had claimed sales return of Rs.2,90,15,080/- against gross trading sales of Rs.7,61,21,854/-. The Assessing Officer disallowed the entire claim on the ground that the assessee failed to furnish documentary evidence such as customer confirmations, delivery challans or correspondence to substantiate the return of goods. The Assessing Officer also noted inconsistencies in the nature of items shown as returned. In appellate proceedings, the learned CIT(A) examined the reconciliation furnished by the assessee and partly accepted the claim to the extent of Rs.15,54,373/- as bad debts written off. However, for the balance amount of Rs.2,74,60,707/-, the learned CIT(A) held that the assessee failed to furnish any credible third-party evidence such as acknowledgements from customers or supporting documentation, and accordingly confirmed the addition to that extent. 35. The learned AR, referring to the paper book, submitted that the addition sustained by the learned CIT(A) is not justified

16 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. inasmuch as the assessee had furnished complete details substantiating the sales return. Drawing specific attention to page nos. 10 and 11 of the paper book, it was submitted that the assessee had explained in detail the reasons for issuance of credit notes aggregating to Rs.2,38,68,843/-, which were primarily on account of revision of invoices. The learned AR further referred to page nos. 67 to 73 of the paper book and submitted that an exhaustive reconciliation statement was furnished containing complete details of original invoices, corresponding credit notes and revised invoices subsequently raised. It was contended that this establishes that the transactions were not fictitious but merely represent commercial adjustments in billing. Referring to page nos. 74 to 127 of the paper book, the learned AR submitted that copies of all credit notes issued during the year were placed on record. It was further submitted, with reference to page nos. 80 and 90, that each credit note contains specific reasons for issuance and that a detailed explanation of events leading to such credit notes, along with supporting documents including external evidences on sample basis, were also furnished. 36. The learned AR also submitted that in such transactions, there was no physical return of goods, and therefore, the requirement of furnishing delivery challans or evidence of goods return, as insisted upon by the Assessing Officer, was misplaced. It was contended that the transactions were in the nature of billing adjustments and not physical sales return.

17 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. 37. The learned DR, on the other hand, strongly relied upon the findings of the Assessing Officer and the learned CIT(A). It was submitted that the conduct of the assessee itself raises serious doubts about the genuineness of the claim, inasmuch as the return of income was revised twice with variation in the declared income, which, according to the learned DR, indicates post facto adjustments in revenue. The learned DR further submitted that the magnitude of the claim itself is abnormal, as the sales return of Rs.2,90,15,080/- constitutes nearly 40% of the total trading sales of Rs.7,61,21,854/-, which is highly disproportionate and not supported by normal business practice. It was emphasised that such substantial reversal of sales ought to have been backed by strong and independent evidences. The learned DR also pointed out that the so-called sales returns were not acknowledged by the customers and were merely supported by self-generated credit notes. It was submitted that no third-party confirmations, delivery challans, e-mails or any contemporaneous correspondence were furnished to substantiate the reversal of revenue. In absence of such primary evidences, the claim cannot be accepted. The learned DR further drew attention to the observations of the Assessing Officer highlighting factual inconsistencies in certain transactions. It was pointed out that in cases such as “HP Haryana CCTNS”, the assessee has shown items like “Supply of Civil Job” and “Supply of Electrical Job” as “goods returned”, which, by their very nature, are services and not capable of being physically returned. This, according to the

18 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. learned DR, clearly demonstrates that the entries are not genuine sales returns but are merely book adjustments without any real underlying transaction. 38. We have heard the rival submissions and perused the material available on record. The issue for consideration is whether the learned CIT(A) was justified in sustaining the addition of Rs.2,74,60,707/- on account of disallowance of sales return. It is an admitted position that the assessee has claimed sales return of Rs.2,90,15,080/- which constitutes a substantial portion of the total sales. The evidences placed on record in support of such claim primarily consist of self-generated credit notes. No corresponding debit notes from customers, confirmations from parties, delivery challans, or any contemporaneous correspondence such as emails have been furnished to substantiate that the sales were in fact reversed at the instance of the customers. 39. The explanation of the assessee that the transactions represent mere billing adjustments is not supported by independent evidence. Even in cases where revised invoices are stated to have been issued, the assessee has failed to demonstrate a complete trail linking the original invoices, credit notes and revised invoices with acknowledgment from the customers. The absence of third-party corroboration materially weakens the claim.

19 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. 40. Further, we find merit in the contention of the Revenue that in several instances, there are apparent factual inconsistencies. As noted by the Assessing Officer, items such as “Supply of Civil Job” and “Supply of Electrical Job” have been shown as “goods returned”, which by their very nature are services and incapable of being physically returned. This creates serious doubt on the correctness of the entries passed by the assessee. It is also not in dispute that no goods have actually been received back by the assessee. In such circumstances, the claim of “sales return” cannot be accepted in the absence of cogent evidence establishing that the revenue earlier recognised had in fact been reversed on account of commercial exigencies mutually agreed with the customers. 41. In view of the above factual matrix, we are of the considered view that the assessee has failed to discharge the onus cast upon it to substantiate the claim of sales return to the extent of Rs.2,74,60,707/-. The findings recorded by the learned CIT(A) in sustaining the addition are, therefore, upheld in principle. However, we also take note of the alternative plea raised by the assessee. It is a settled principle that where the sales are doubted or the reversal thereof is not accepted, the entire amount cannot be brought to tax unless it is shown that the underlying transactions are wholly non-genuine. In the present case, the sales have been recorded in the books and there is no finding that the corresponding purchases or underlying transactions are bogus. The defect pointed out is with regard to lack of

20 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. substantiation of reversal entries and not that the sales themselves are fictitious. Therefore, bringing the entire amount of Rs.2,74,60,707/- to tax would result in overstatement of income. 42. Considering the totality of facts and circumstances of the case, including the absence of third-party evidence, factual inconsistencies noted in certain transactions, and the nature of claim made by the assessee, we deem it appropriate to accept the alternative contention of the assessee and restrict the addition to the profit element embedded in the impugned amount. 43. We find from the working furnished in the paper book that the assessee has computed its profit as under:  Sales (A) : Rs. 43,18,75,723/-  Total Expenses (B) : Rs. 36,39,92,670/-  Profit (A – B) : Rs. 6,78,83,053/- 44. Thus, the profit margin works out to 15.72% of the sales. The said percentage has also been consistently adopted by the assessee for valuation of work-in-progress by reducing the profit element from the unbilled revenue. Applying the aforesaid profit rate of 15.72% to the amount of disputed sales return sustained by the learned CIT(A) at Rs. 2,74,60,707/-, the addition liable to be sustained works out as under:  Disputed amount : Rs. 2,74,60,707/-  Profit @ 15.72% : Rs. 43,17,463/- (approx.)

21 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. 45. We direct the Assessing Officer to restrict the addition to Rs. 43,17,463/- and delete the balance addition. Accordingly, Ground No. 1 of the assessee is partly allowed. 46. Ground No. 2 raised by the assessee relates to confirmation of addition of Rs.86,51,446/- on account of mismatch of revenue as per return of income and service tax return. The facts, in brief, are that the Assessing Officer observed that the revenue chargeable to service tax as per books was Rs.37,90,39,070/- whereas as per service tax return the same was Rs.38,76,90,516/-, resulting in difference of Rs.86,51,446/-. The assessee explained that the difference was on account of credit notes issued during the year. However, the Assessing Officer held that such credit notes were unilaterally issued without customer confirmation and treated the same as suppression of sales. The learned CIT(A), after examining the submissions, upheld the addition observing that the credit notes were not supported by any third-party evidence, were issued after crystallisation of revenue, and in several cases pertained to earlier financial years. The learned CIT(A) further held that there was no evidence of contractual modification or dispute with customers to justify reversal of income. 47. The learned AR, referring to the detailed reconciliation placed in the paper book (page NO.27-31), submitted that the entire difference of Rs.86,51,446/- stands fully explained with supporting documentary evidence. Drawing attention to the

22 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. break-up furnished, it was submitted that the credit notes pertain to identified parties, namely Hewlett Packard (HP), Hitachi India and NCR India, and the nature of each transaction has been specifically explained. It was submitted that out of the total credit notes of Rs.86,51,446/-, a substantial portion amounting to Rs.75,54,685/- pertains to Hewlett Packard. The learned AR referred to the tabulated details wherein each credit note is linked with corresponding original invoices and revised invoices. It was explained that in several instances, credit notes were issued for cancellation of earlier invoices and issuance of revised invoices, and in certain cases, the credit notes were issued to rectify duplication of invoices captured in the system. The relevant invoices, credit notes and revised invoices were placed on record with page references. 48. The learned AR further submitted that in the case of Hitachi India, credit notes aggregating to Rs.2,19,780/- were issued on account of penalty deductions made by the customer at the time of payment. It was contended that such deductions were directly adjusted by the customer, and therefore the assessee accounted for the same by issuing credit notes. Corresponding documentary evidences and communications were placed on record to substantiate the same. Similarly, in the case of NCR India, credit notes aggregating to Rs.8,76,973/- were issued, which were duly explained. It was submitted that part of the credit notes were issued consequent to issuance of revised invoices, while certain amounts represented penalty deductions by the customer.

23 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. Detailed party-wise reconciliation along with invoice numbers, dates and supporting documents were furnished. 49. The learned AR emphasised that for each credit note, the reasons for issuance have been clearly recorded, such as issuance of revised invoices, rectification of duplicate billing and deduction of penalties by customers. It was further submitted that copies of all credit notes, corresponding invoices and relevant correspondence including emails exchanged with customers were placed on record, thereby establishing that the transactions were genuine business adjustments. 50. In view of the above detailed reconciliation and supporting evidences, the learned AR submitted that the difference between revenue as per books and service tax return stands fully reconciled and explained, and therefore, the addition sustained by the learned CIT(A) deserves to be deleted. 51. The learned DR, on the other hand, strongly relied upon the findings recorded by the Assessing Officer and invited our attention to the specific observations in the assessment order. It was submitted that on a perusal of the credit notes furnished by the assessee, the Assessing Officer has categorically found that almost all the credit notes were passed unilaterally by the assessee without any representation or request from the customers. The learned DR also pointed out that if the credit notes were genuinely issued in earlier periods, the same ought to have been reflected in the service tax returns of the relevant

24 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. period. However, in the present case, the assessee itself has admitted that the credit notes were issued after filing of the service tax return for the month of March 2017. According to the learned DR, this clearly establishes that the credit notes were passed as an afterthought. It was thus contended that the credit notes were not backed by any contemporaneous evidence or third-party confirmation and were merely used as a device to suppress revenue after the close of the financial year. The learned DR therefore submitted that the Assessing Officer was justified in treating the difference of Rs.86,51,446/- as suppression of sales and in making the addition. 52. We have heard the rival submissions and perused the material available on record. It is an undisputed fact that the difference arises on account of credit notes issued by the assessee during the year. The Assessing Officer has proceeded to treat the same as suppression of sales primarily on the ground that the credit notes were unilaterally issued, not acknowledged by customers and were passed after filing of service tax returns. 53. However, on perusal of the material placed before us, we find that the assessee has furnished a detailed and party-wise reconciliation of the entire amount of Rs.86,51,446/-. The break- up clearly identifies the parties, dates, credit note numbers, amounts and reasons for issuance. A substantial portion of the credit notes amounting to Rs.75,54,685/- pertains to Hewlett Packard, wherein the assessee has demonstrated that the credit

25 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. notes were issued either for cancellation of earlier invoices and raising of revised invoices or for rectification of duplicate billing captured in the system. The corresponding revised invoices and ledger extracts have also been placed on record. In respect of Hitachi India, credit notes aggregating to Rs.2,19,780/- have been issued on account of penalty deductions made by the customer at the time of payment. The assessee has placed on record documentary evidence including correspondence and emails demonstrating that such deductions were effected by the customer and the assessee merely accounted for the same by way of credit notes. Similar explanation is furnished in respect of NCR India, where credit notes aggregating to Rs.8,76,973/- have been issued, partly on account of revised billing and partly on account of penalty deductions. 54. Significantly, the assessee has also placed on record email correspondences with customers evidencing that the amounts were either reduced at the time of settlement or revised based on mutual understanding. These communications, though not in the nature of formal debit notes, clearly demonstrate acknowledgment from the customers and negate the allegation that the credit notes were purely unilateral in nature. 55. The objection of the Assessing Officer that the credit notes were issued after filing of service tax returns does not, by itself, render the transactions non-genuine. It is a matter of record that service tax returns could not be revised at the relevant point of

26 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. time, and therefore timing differences in reporting cannot be a sole basis for making addition under the Income-tax Act, particularly when the underlying transactions stand explained. 56. We also note that the Assessing Officer has not disputed the linkage between original invoices and revised invoices in cases where billing has been corrected. Nor has any material been brought on record to show that the amounts credited by way of credit notes have been actually realized by the assessee. In absence of such finding, the conclusion that the assessee has suppressed sales is not sustainable. 57. In our considered view, the assessee has discharged the onus cast upon it by furnishing detailed reconciliation, party-wise break-up, supporting documents and email correspondences evidencing commercial adjustments. The findings of the lower authorities are primarily based on absence of formal third-party confirmations, without appreciating the nature of transactions and evidences placed on record. 58. In view of the above, we hold that the addition of Rs.86,51,446/- is not justified. The same is directed to be deleted. Accordingly, Ground No. 2 of the assessee is allowed. 59. Ground No. 3 raised by the assessee relates to confirmation of addition of Rs.7,90,00,000/- (Rs.7,94,00,000/- as per assessment order) on account of technical fees paid to three parties. The facts, in brief, are that the assessee had debited an amount of Rs.7,94,00,000/- towards technical fees in the Profit

27 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. and Loss account. The Assessing Officer observed that major invoices were raised towards the end of the financial year and called upon the assessee to substantiate the nature of services, their utilisation and linkage with revenue. According to the Assessing Officer, the assessee failed to furnish supporting evidence such as service completion details or correlation with income earned, and accordingly held that the expenditure pertained to incomplete projects and was required to be capitalized as part of work-in-progress. The entire amount was thus disallowed and added to income. 60. In appellate proceedings, the assessee submitted that the technical fees were incurred in the ordinary course of business and were supported by agreements and invoices. However, the learned CIT(A) observed that the assessee failed to demonstrate actual rendering and utilization of services and also noted that substantial portion of the expenditure was incurred towards the end of the year. The learned CIT(A) therefore confirmed the disallowance in full. 61. The learned AR, drawing our attention to the detailed submissions and documentary evidences placed in the paper book, contended that the disallowance of technical fees amounting to Rs. 7,94,00,000/- is unsustainable both on facts and in law. It was submitted that the Assessing Officer has proceeded on an erroneous premise that the expenditure pertains entirely to the fag end of the financial year and, therefore, is liable

28 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. to be capitalised as work-in-progress, without appreciating the true nature and timing of the underlying transactions. 62. The learned AR submitted that the agreements with the service providers were entered into much prior to the close of the financial year, namely, with ESDS Software Solutions Pvt. Ltd. on 20.10.2016 and with Diversified Business Solutions Pvt. Ltd. on 05.10.2016, and similar arrangements existed with other vendors. Referring to the clauses of the agreements placed on record, it was contended that the services were to be rendered over a defined period commencing from the effective date of the agreement and were required to be completed on or before 31.03.2017, with invoicing being contractually linked to successful completion of services. It was thus submitted that the concentration of vendor invoices in March 2017 is in accordance with the agreed contractual terms and cannot be construed to mean that the services were rendered only at the end of the year. 63. The learned AR further submitted that the assessee had furnished complete documentary evidences before the lower authorities, including copies of service agreements, invoices raised by the vendors, ledger accounts and balance confirmations, as well as details of invoices raised by the assessee on its customers. It was contended that these documents clearly demonstrate that the services procured from the vendors were utilised for rendering outward services, and that a direct nexus exists between the technical fees incurred and the revenue

29 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. recognised during the year. In this regard, reference was made to the summary of client invoices raised during March 2017 aggregating to Rs. 8,42,00,000/- (exclusive of taxes), which, according to the learned AR, establishes that the corresponding revenue has been duly offered to tax. 64. It was further contended that the Assessing Officer has not disputed either the genuineness of the expenditure or the identity of the parties, nor has any adverse inference been drawn with regard to the payment of consideration or deduction of tax at source. The disallowance, it was submitted, has been made solely on the ground that the assessee did not furnish utilisation schedules, technical reports or delivery logs. According to the learned AR, such requirements are not prescribed under the Act for allowability of business expenditure, particularly where the transactions are supported by agreements, invoices and confirmations. 65. The learned AR also assailed the findings of the learned CIT(A), submitting that although the learned CIT(A) has referred to the judicial precedents relied upon by the assessee, the disallowance has ultimately been sustained primarily on the basis of concentration of high-value invoices in the month of March. It was submitted that such reasoning overlooks the contractual stipulations and the commercial reality of milestone- based billing, especially in the case of service contracts where invoicing is triggered upon completion of specified deliverables. It

30 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. was further contended that the observation of the learned CIT(A) that the expenditure may result in an enduring benefit is misplaced, as the services availed are in the nature of routine database consulting and support services, and do not result in creation of any capital asset or enduring advantage in the capital field. 66. The learned AR also submitted that the assessee is following the mercantile system of accounting and, in accordance with the matching principle, the expenditure incurred for earning the revenue of the year is required to be allowed in the same year. It was contended that once the corresponding income has been recognised, the associated expenditure cannot be deferred merely on account of timing of invoices. 67. Without prejudice, it was further submitted that if the impugned expenditure of Rs. 7,94,00,000/- is treated as work-in- progress, the same would necessarily form part of the opening work-in-progress of the subsequent year and would be allowable as deduction in that year. It was contended that no such corresponding allowance has been granted in the subsequent assessment year, thereby resulting in distortion of taxable income across years. 68. We have given our thoughtful consideration to the rival submissions and have perused the orders of the lower authorities as well as the material placed on record, including the

31 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. agreements, invoices, confirmations and details of revenue recognised by the assessee. 69. The short controversy arising for adjudication is whether the technical fees of Rs. 7,94,00,000/- incurred by the assessee during the year is liable to be treated as revenue expenditure or is required to be capitalised as part of closing work-in-progress. 70. At the outset, it is observed that the disallowance made by the Assessing Officer is not on account of lack of genuineness of expenditure. The identity of the parties, the factum of payment and the existence of contractual arrangements have not been disputed. The sole basis for disallowance is that the invoices have been raised at the fag end of the financial year and, therefore, according to the Assessing Officer, the expenditure pertains to incomplete work and ought to be carried to work-in-progress. 71. In our considered view, such an approach is fundamentally flawed, as it proceeds on a presumption based on timing of invoices without examining the underlying contractual framework governing the transactions. 72. From the agreements placed on record, including the agreements dated 05.10.2016 and 20.10.2016, it clearly emerges that the vendors were appointed as independent contractors to provide specified database consulting and related services, that the services were to be rendered over a defined period commencing from the effective date of the agreement and culminating on or before 31.03.2017, and most importantly, that

32 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. invoicing was contractually linked to successful completion of services. The relevant clause in the agreement provides that “invoicing will be done after successful completion of services.” Thus, the timing of invoices is a consequence of contractual stipulation and cannot be determinative of the period of rendering of services. 73. Further, the assessee has placed on record copies of invoices raised by the vendors during March 2017, as well as corresponding invoices raised by the assessee on its customers during the same period aggregating to Rs. 8,42,00,000/- (exclusive of taxes). This factual matrix clearly establishes that the services procured from the vendors were utilised for rendering outward services and that the corresponding revenue has been duly recognised during the year under consideration. The nexus between the expenditure incurred and the income earned thus stands demonstrated on record. 74. The objection of the Assessing Officer that the assessee has not furnished utilisation schedules, technical reports or delivery logs, in our view, cannot be a valid ground for disallowance in the absence of any statutory requirement to that effect. Once the assessee has produced primary evidences in the form of agreements, invoices and confirmations, and the revenue generated from such services has been accepted, the burden shifts on the Revenue to bring on record material to show that

33 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. the expenditure is not allowable. No such material has been brought on record. 75. Coming to the findings of the learned CIT(A), we note that the learned CIT(A) has referred to and discussed the judicial precedents relied upon by the assessee, including Taparia Tools Ltd., J.K. Industries Ltd. and Calcutta Co. Ltd. However, on a careful reading, it is evident that the learned CIT(A) has not applied the ratio of these decisions to the facts of the present case in its proper perspective. The learned CIT(A) has essentially sustained the disallowance by placing predominant reliance on the concentration of expenditure in the last month of the year and by observing that the assessee has not conclusively established completion of services during the year. Further, an observation has been made that the expenditure may yield enduring benefit. In our considered view, these reasons do not constitute a valid basis to distinguish the binding judicial precedents relied upon by the assessee. 76. The Hon’ble Bombay High Court in Taparia Tools Ltd. v. JCIT [2003] 260 ITR 102 has clearly held that under the mercantile system of accounting, once an expenditure is incurred, it is allowable in the year of incurrence and there is no concept of deferred revenue expenditure unless specifically provided under the statute. The learned CIT(A), while referring to this decision, has not demonstrated how the facts of the present case fall outside this settled principle, particularly when the

34 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd.

expenditure is admittedly incurred and the corresponding income is recognised.

“Matching concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that „revenues‟ of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue.”(para 82) 78. The learned CIT(A), though referring to this principle, has failed to examine the issue in light of the admitted position that the assessee has recognised revenue from the very services for which the expenditure has been incurred. The non-application of the matching principle renders the conclusion unsustainable.

35 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd. 80. We also find that the observation of the learned CIT(A) regarding enduring benefit is not borne out from the nature of services. The services rendered, as evident from the agreements, are routine database consulting, maintenance and support services such as database assessment, security assessment and performance optimisation. These are operational services consumed in the course of business and do not result in creation of any capital asset or enduring advantage in the capital field. No material has been brought on record by the Revenue to demonstrate otherwise. Thus, while the learned CIT(A) has adverted to the judicial precedents relied upon by the assessee, the distinction sought to be drawn is not supported either by facts or by correct appreciation of the ratio laid down therein. The approach of the learned CIT(A) effectively amounts to referring to the precedents without applying their binding principles to the facts of the case. 81. We also find merit in the alternate contention of the assessee that even if the expenditure were to be treated as part of work-in-progress, the same would necessarily be allowable in the subsequent year as opening work-in-progress. However, no such corresponding allowance has been granted, resulting in distortion of taxable income across years, which is impermissible. 82. In view of the above factual and legal position, we hold that the technical fees of Rs. 7,94,00,000/- incurred by the assessee during the year is allowable as revenue expenditure. The

36 ITA No. 5143 & 5685/Mum/2025 DSM Infocom Pvt. Ltd.

disallowance made by the Assessing Officer and sustained by the learned CIT(A) is therefore not sustainable.Accordingly, the addition of Rs. 7,94,00,000/- is deleted and Ground No. 3 raised by the assessee is allowed.

(a) The appeal filed by the Revenue is dismissed.

(b) The appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 29.04.2026.

Sd/- Sd/- (PAWAN SINGH) (MAKARAND VASANT MAHADEOKAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 29/04/2026 Dhananjay, Sr.PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. संबंधधत आयकर आयुक्त / The CIT(A) 4. आयकर आयुक्त(अपील) / Concerned CIT धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, मुम्बई / DR, ITAT, Mumbai 5. 6. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, सत्याधपत प्रधत //True Copy// 1. उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai