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Facts
The assessee, a private limited company, filed a return declaring a loss. The CPC made an addition of Rs. 2,48,36,404/- for software expenses written off as work-in-progress. The AO did not discuss this disallowance in the assessment order passed u/s 143(3) but simply adopted the addition made u/s 143(1).
Held
The Tribunal held that the disallowance of Rs. 2,48,36,404/- was mentioned in the reasons for selection of the case, and therefore, the CIT(A) should have adjudicated the claim of disallowances of capital expenditure written off u/s 37(1) on merit. The matter is remitted to the CIT(A).
Key Issues
Whether the CIT(A) erred in not adjudicating the disallowance of software expenses on merit when it was mentioned in the reasons for selection of the case, despite the AO not discussing it in the assessment order.
Sections Cited
143(1), 143(3), 144B, 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI JAGADISH
आदेश / O R D E R
PER JAGADISH, A.M : Aforesaid appeal filed by the assessee for Assessment Year (AY) 2020-21 arises out of the order of Learned Commissioner of Income Tax (NFAC), Delhi [hereinafter “CIT(A)”] dated 12.11.2024 in the matter of assessment framed by the Assessing Officer [AO] u/s. 143(3) r.w.s 144B of the Income-tax Act,1961 (hereinafter “the Act”) on 20.09.2023.
The effective ground of appeal in this appeal of assessee is against dismissing the ground of appeal on the addition of software expenses of Rs.2,48,36,404/- made in computation of income u/s. 143(1) of the Act as the A.O has not discussed anything on these disallowances in the impugned order u/s. 143(3) of the Act.
1. 3. The assessee is a private limited company in the business of providing information technology staffing services, recruitment assistance and providing IT enabled services. The assessee has filed return of income declaring loss of Rs.1,71,66,985/-. The CPC, Bengaluru in the intimation u/s. 143(1) of the Act has made addition of Rs. 2,48,36,404/- on the basis of tax audit report in Para No.21(a) that Rs. 2,48,36,404/- is capital work in progress written off debited to profit and loss account. As per the assessment order this issue was also mentioned in the reasons for selection of the case for scrutiny and background facts. The A.O in the order passed u/s. 143(3) of the Act has not discussed the above disallowance and simply copied income computed u/s. 143(1) of the Act of Rs. 78,25,080/- and assessed the total income at Rs.78,25,080/-. The assessee preferred appeal before the Ld. CIT(A) and the Ld. CIT(A) has not adjudicated the issue on merit and dismissed the ground observing that A.O has not discussed anything on these disallowances in the assessment order passed u/s. 143(3) of the Act.
The Ld. Authorized Representative (AR) of the assessee has submitted that the expenses of Rs. 2,48,36,404/- includes salary of Rs.85,651,997/- and consultancy of Rs.1,62,84,407/- incurred on in house software improvement for the purpose of its business namely providing contract staff insurance and recruitment assistance to the clients. The Ld. AR has submitted that the expenses were incurred in the immediately preceding year and shown as work in progress and claimed as deduction after written off WIP during the year u/s 37(1) as the expenditure were only for the purpose of business competitiveness and operational efficiency and client’s satisfaction. The Ld. AR has submitted that the assessee during the assessment proceedings has made the submission however, the A.O has merely copied the adjustment made in 143(1) of the Act in the assessment order passed u/s 143(3) of the Act and the Ld. CIT(A) has not adjudicated the same.
On the other hand, the Ld. Departmental Representative (DR), has relied on the orders of lower authorities.
We have heard the rival submissions, and perused the materials available on record. The A.O in the order passed u/s. 143(3) of the Act has assessed the total income at Rs. 78,25,080/- as computed in the processing u/s. 143(1) of the Act. It is evident from the assessment order that A.O in the reasons for selection of case in para 1(b)(i) has mentioned that capital work in progress written off Rs. 2,48,36,404/- is disallowed and added to the total income on the basis of note in tax audit report in processing u/s. 143(1) of the Act and this is an admitted fact that the nature of the expenditure is of capital in nature and the assessee claimed this expenditure in profit and loss account, therefore, it is rightly disallowed in processing u/s. 143(1) of the Act.
The Ld. CIT(A) has noted that the addition of Rs. 2,48,36,403/- made u/s. 37 of the Act is not emanating from the order u/s. 143(3) of the Act as the A.O has not discussed anything on this disallowance in the assessment order. We are of opinion that the disallowance of Rs.2,48,36,404/- was mentioned in the reasons for selection of the case and therefore, the Ld CIT(A) should have adjudicated the claim of disallowances of capital expenditure written off u/s 37(1) of the Act.
We, accordingly remit the matter to the file of Ld CIT(A) to adjudicate the issue on merit after affording due opportunity of being heard to the assessee. The assessee is also directed to cooperate with the proceedings and appear before the Ld. Addl. CIT(A) on the date of hearing without fail. In view of the above, the appeal filed by the assessee is allowed for statistical purposes only.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced on 22nd May, 2025.