AZURE KNOWLEDGE CORPORATION PRIVATE LIMITED,AHMEDABAD vs. THE DY.CIT, CIRCLE-1(1)(1), AHMEDABAD

In law and in the facts and circumstances of the appellant's case, Order u/s.143(3) is void-ab-initio since the Assessment Order was passed without passing draft Assessment Order.

In law and on the facts and in the circumstances of the case of appellant, the Ld. CIT(A) has erred in upholding disallowance of Interest Expense of Rs.35,76,692 u/s.36(1)(iii) on the basis of interest free advances given to BCCL, instead of deleting entire adjustment made by AO.

In law and on the facts and in the circumstances of the case of appellant, the Ld. CIT(A) has erred in not providing video hearing before (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 3 of 9 adjudicating the case, especially when Appellant specifically asked for the same to explain the case.

Per contra, Shri B.P. Srivastava, Ld. Sr. DR submitted that the Assessing Officer had rightly treated the subsidy of Rs.71,00,000/- as revenue receipt since as per Government of Gujarat’s subsequent communication it was evident that the software could not be considered as capital subsidy. He, therefore, strongly supported the orders of the lower authorities.

We have considered the rival submissions. It transpires that the assessee had received subsidy of Rs.2,40,19,437/- from Government of Gujarat as incentive under IT/ITES Policy (2016-21). Out of the total subsidy so received, a sum of Rs.1,41,31,000/- was treated as capital subsidy and netted off from the gross block of fixed assets and remaining amount of Rs.98,88,437/- was credited to Profit & Loss account and offered for tax. The subsidy of Rs.71,00,000/-, which is under dispute before us, was reduced from the intangible asset in the form of GIS software. The assessee has brought on record a copy of demand letter dated 01.06.2018 from the Director, IT& e-Governance, Government of Gujarat, whereby the assessee was required to deposit the subsidy of Rs.71,00,000/- which was not considered as capital subsidy in line of objection raised by the CAG. Notwithstanding the recovery of subsidy, the fact remains that this amount of Rs.71,00,000/- was given to the assessee by the Government of Gujarat as capital subsidy and accordingly it was accounted for in the books of the assessee as capital subsidy and reduced (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 5 of 9 from gross block of fixed assets. The assessee had subsequently reversed this entry and refunded the amount to the Government of Gujarat pursuant to the audit objection raised by the CAG. Merely because the assessee had refunded the subsidy of Rs.71,00,000/- afterwards, this does not change the nature of subsidy. The subsidy was received by the assessee as capital subsidy and also accounted for in its books of account as capital subsidy. It was not the case that the subsidy amount of Rs.71,00,000/- remained with the assessee, which required change of its nature. Had this amount remained with the assessee, the Revenue might have been correct in treating the same as revenue receipt. But when the subsidy was already refunded by the assessee to the Government of Gujarat, the same cannot be treated as revenue receipt in the hands of the assessee. The nature of the subsidy remained capital subsidy as long as it was appearing in the books of account of the assessee. Therefore, the Revenue was not correct in treating the sum of Rs.71,00,000/- as revenue subsidy and making addition in this regard. The addition made by the Assessing Officer was on wrong appreciation of facts of the case. The capital subsidy of Rs.71,00,000/- received by the assessee was correctly accounted for by netting off from the gross block of fixed assets. Therefore, no addition was called for in this regard by holding it as revenue subsidy. Accordingly, the addition made by the Assessing Officer is deleted. The ground taken by the assessee is allowed.

The next ground pertains to disallowance of depreciation of Rs.71,25,000/- on the software purchase. The Ld. AR explained that the assessee had purchased software worth Rs.2,85,00,000/- from Karnavati Infrastructure Projects Limited. In the course of assessment, the Assessing Officer had made verification by issuing notice u/s 133(6) of the (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 6 of 9 Act to the said party. As the vendor did not respond to the notice in time and also couldn’t satisfy the AO about all the queries, the purchase of software was treated as bogus and the AO had disallowed the depreciation of Rs.71,25,000/- claimed thereon. The Ld. AR explained that the vendor Karnavati Infrastructure Projects Limited had sent the reply to the Assessing Officer vide letter dated 26th November, 2019, a copy of which has been brought on record in the paper-book filed. The Ld. AR submitted that when the vendor had confirmed the sale of software to the assessee company, the Revenue was not correct in disallowing the depreciation claimed thereon.

Per contra, Shri B.P. Srivastava, the Ld. Sr. DR submitted that the vendor did not give any details about its original/first purchase before its re-sale to the assessee company. He further submitted that the vendor Karnavati Infrastructure Projects Limited was not dealing in sale of software and related product’s business, hence the genuineness of the purchase was under doubt. Therefore, the disallowance of depreciation as made aby the Assessing Officer was correct. The Ld. Sr. DR strongly supported the orders of the lower authorities on this issue.

We have considered the rival submissions. It is found from the Balance Sheet of the assessee company that the assessee had shown addition of Rs.3,70,91,504/- under the head “Computer Software” and the capital subsidy of Rs.71,00,000/- was reduced from this block of fixed asset. The purchase of computer software was duly confirmed by the vendor Karnavati Infrastructure Projects Limited. According to the Revenue, the software purchased by the assessee was not the first purchase but it was re-sale of used software and, therefore, the assessee was not eligible for capital subsidy. This is altogether a different aspect (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 7 of 9 and not connected with the present disallowance. Merely because the vendor Karnavati Infrastructure Projects Limited could not produce the evidence for original purchase of software made by it, the purchase as shown by the assessee could not have been disallowed. The purchase of computer software by the assessee was duly confirmed by Karnavati Infrastructure Projects Limited. The copy of bills and vouchers as well as the payment details for purchase of software were duly brought on record by the assessee and no infirmity was found therein by the AO. It is not the case of Revenue that the payment made by the assessee for purchase of this software was ultimately returned back to it, as no such finding has been brought on record by the AO. It further transpired that the depreciation on this software was not disallowed by the Revenue in the subsequent years. Thus, the Revenue had treated the purchase of software as genuine in the subsequent years. Considering the evidences as brought on record, the Revenue was not correct in disallowing the depreciation on purchase of software during the current year. Accordingly, the addition of Rs.71,25,000/- in respect of disallowance of depreciation is deleted. The ground taken by the assessee is allowed.

The next ground pertains to disallowance of interest expense of Rs.35,76,692/- under Section 36(1)(iii) of the Act. The Ld. AR explained that the assessee had given advance of Rs.2,98,05,733/- to Bennet Coleman & Co. Limited (BCCL) for brand advertisement. The Assessing Officer had noticed that no advertisement expense in the name of BCCL was claimed during this year. Therefore, this advance was not considered as being for business purpose and the Assessing Officer had held that the loans and advances availed by the assessee was diverted towards this interest free advance to BCCL. Accordingly, the Assessing Officer had (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 8 of 9 made disallowance of interest expenses of Rs.35,76,692/- u/s 36(1)(iii) of the Act. The Ld. AR explained that this advance was given by the assessee in the Financial Year 2007-08, in support of which the ledger account for that year was brought on record. Further, the assessee had claimed advertisement expense of Rs.77,47,598/- in that year and the balance amount was carried forward to the subsequent years. The Ld. AR further submitted that no such disallowance was made in any of the earlier years, even though the advance was outstanding since the Financial Year 2007-08. He further submitted that the own funds available with the assessee were much in excess of the amount of advance and, therefore, no disallowance under Section 36(1)(iii) of the Act was called for.

Per contra, the Ld. Sr. DR supported the orders of the lower authorities.

We have considered the rival submissions. The Assessing Officer had admitted in the assessment order that the advance to BCCL was made in the Financial Year 2007-08 and the amount was outstanding in the books of account since then. It is not the case that the advance was made by the assessee in the current year. The contention of the assessee that no disallowance u/s 36(1)(Iiii) of the Act was made in the earlier years had also not been disputed by the Revenue. It is further found that the Assessing Officer did not establish the nexus between the advance given by the assessee to BCCL with the interest-bearing funds. Otherwise also, this nexus was to be established in the Financial Year 2007-08 when the advance was given for the first time and not in the current year. Considering these facts, we do not find any justification for making the disallowance of interest u/s 36(1)(iii) of the Act in the current year, when no such disallowance was made in any of the earlier years. Accordingly,

The other grounds are general in nature and were not pressed by the Ld. AR. Hence, the same are dismissed.

In the result, the appeal of the assessee is partly allowed.