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Facts
The Revenue filed an appeal against an order related to the quantum of assessment for AY 2016-17. The case involved expenses claimed as revenue expenditure but treated as capital expenditure by the Principal CIT, leading to a revised assessment. However, a prior ITAT order had already quashed the Principal CIT's review order.
Held
The Tribunal held that since the Principal CIT's order under Section 263, which led to the revised assessment, was itself quashed by a previous ITAT decision, the revised assessment order was unsustainable and consequently quashed. Therefore, the appeal filed by the Revenue was dismissed.
Key Issues
Whether the revised assessment order is sustainable when the order directing the revision (u/s 263) has already been quashed by the ITAT.
Sections Cited
143(3), 263, 37(1), 56(2)(vii)(b)
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Income Tax Appellate Tribunal, ‘C’ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Revenue against order dated 12/03/2025 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) r.w.s. 263 for the A.Y.2016-17.
In the grounds of appeal the Revenue has raised following grounds:-
1. Chalk Farm Ventures Private Limited “1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) ought to have kept the decision in abeyance, since the Revenue has not accepted the ITATs decision and is in appeal before the Hon'ble High Court.
2. On the facts and in circumstances of the case, since the Revenue is in appeal before the Hon'ble High Court on the ITAT's decision, which is pending as on date, this appeal is being filed to keep the issue alive.
3. The appellant craves leave to add, amend or alter any ground/grounds, which may be necessary.”
3. This appeal is arising out of directions given by the ld. PCIT u/s.263 vide order dated 26/03/2021 whereas, the order passed by the ld. PCIT itself has been quashed by the Tribunal in dated 26/04/2022. This has been stated in the order of CIT(A) in the following manner:-
The brief facts of the case are that this case was selected 2. for scrutiny through CASS and assessment was completed u/s 143(3) of the Act vide order dated 30.10.2018 accepting the retuned income/loss. The Pr. CIT, Thane-1 had an occasion to review the assessment order and found as under: “02.It has been further observed from there cords that the assessee is a technology platform which facilitates EMI financing for online shoppers. It noticed from the record that during the course of assessment proceedings, the AO allowed the expenses incurred on software development charges which inter alia includes an amount of Rs. 1,88,50,794/- and Rs.11,94,528/- like platform subscription, server charges, technical fees professional and consultancy fee which are in nature of capital expenditure but claimed as revenue expenditure. Further, it is observed that the assessee has received capital through allotment of convertible preferential Chalk Farm Ventures Private Limited shares at a premium of Rs. 1,88,637/- per share. However, the AO allowed the claim of the assessee without proper verification of facts. Thus, the AO have not properly verified the above facts while passing the order u/s 143(3) of the Act, which caused this order prejudicial to the interest of the revenue.” Thereafter, the Pr. CIT, Thane-1 passed order u/s 263 dated 26.03.2021 setting aside assessment order dated 30.10.2018 to the file of the AO with a direction to examine the issues discussed and redo the assessment after affording opportunity to the assessee. The relevant part of review order u/s 263 dated 26.03.2021 is asunder:
“04. The above explanation of the assessee has been perused, however, the assessee’s contention is not acceptable. The core issue of contention in this case is software development/software purchase expenses. As it is a well settled fact that Software is a capital asset and is an intangible asset. Therefore, any expenditure in acquisition of software/development of software is a capital expenditure thereby not eligible for deduction u/s 37(1) of the IT Act. However, depreciation is allowable as per IT Rules. The assessee failed to submit as to how software purchased/developed by the assessee in its first year of business has no enduring effect. As the assessee providing a software platform which is not a routine application software even it is of an enduring nature which do not get obsolete/redundant in a short span of time (especially during the year under consideration) and therefore, the expenses made towards developing and acquiring of the same is in nature of capital expenditure. Further, it is noticed from the record that the assessee has also not submitted any documents in order to prove the identity, genuineness and creditworthiness of the entities from them capital through allotment of convertible preferential shares at a premium of Rs.1,88,637/- per share had been received.
5. Considering the above mentioned facts, I am of the considered opinion that the assessment made by the A.O. u/s 143(3) of the Act on dated 30.10.2018 is erroneous in so far as Chalk Farm Ventures Private Limited it is prejudicial to the interests of the Revenue. I therefore, set aside the order of the AO with the direction to examine the above discussed issues and to redo the assessment after affording adequate opportunity to the assessee.”
Accordingly, the AO re-framed assessment u/s 143(3) r.w.s. 263 vide order dated 25.03.2022 at an assessed income of Rs. 9,20,22,234/- after making following additions: a. Disallowance of capital expenditure of Rs.2,00,45,322/- u/s 37(1) of the Act, and b. Addition of Rs.11,14,84,467/- u/s 56(2)(vii)(b) of the Act by treating share premium value as income of the assessee. The present appeal has been filed by the appellant against the aforementioned additions made.
In the meantime, the appellant filed appeal before the 4. ITAT against the review order u/s 263 dated 26.03.2021 passed by the Pr. CIT, Thane-1. The Hon’ble ITAT,C Bench, Mumbai vide order dated 26.04.2022 in has decided the issues in favour of the appellant and set aside there view order of Pr.CIT and allowed the appeal of the assessee. The relevant part of Hon’ble ITAT order is as order: “8. Para 4 and Para 5 of the assessment order speaks that the AO has considered all the facts before passing the order dated 30.10.2018. The AO has already been taken the possible view before the completing the assessment. The AO has already taken the possible view. The assessment is not further liable to be reopened. In this regard, we also find support of the law settled in Malabar Industrial Co. Ltd. V CIT (2000) 243 ITR 83 (SC), CIT Vs. Gabriel India Ltd.(1993)203ITR108,CITVs.NiravModi(2017)390ITR292,C ITVs.Chemsword P. Ltd. (2020) 119 taxmann.com 358 & CIT Vs. Future Corporate Resources Ltd. (2021) 132 taxmann.com 173. In view of the said factual circumstances and the law relied by the Ld. Representative of the assessee, we are of the view that the PCIT has wrongly passed the order u/s 263 of the Act. Accordingly, we set aside the order of the PCIT u/s 263 of the Act in question.
Chalk Farm Ventures Private Limited ISSUEU Nos.1&2 9. Since the issue nos. 3 to 10 has already been decided in favour of the assessee, therefore, deciding the issue nos. 1 & 2 would only be academic in nature, hence, nowhere required for specific adjudication. In the result, the appeal of the assessee is hereby allowed.” 10.
In view of above facts of the case, since the review order 5. u/s 263 dated 26.03.2021 on the basis of which assessment order u/s 143(3) r.w.s. 263 dated 25.03.2022 was framed has been set aside by the Hon’ble ITAT, the assessment order u/s 143(3) r.w.s. 263 dated 25.03.2022 of the AO does not sustain, hence quashed and grounds of appeal of the appellant are allowed. In the result, appeal of the appellant is allowed. 6.
4. Accordingly, we don’t find any infirmity in the order of the ld. CIT(A) as once the order u/s.263 itself has been quashed, then consequent order u/s.143(3) / 263 does not stand. Thus, order of the ld. CIT(A) is confirmed. Consequently, the appeal of the Revenue is dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced on 22nd July, 2025.