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Facts
The assessee, engaged in software development, IT, networking, and rental income, faced a search action. The AO, in an assessment under section 153A read with section 143(3), reclassified Rs.2,31,500/- of business income from software development as "income from other sources" and disallowed business expenditure of Rs.21,36,809/-. The CIT(A) upheld these additions, leading to the appeal before the Tribunal.
Held
The Tribunal held that the recharacterization of business income and disallowance of expenses were unjustified, citing ample documentary evidence, consistency in past assessments, and the absence of incriminating material. It emphasized that the quantum of income does not determine business genuineness and directed the deletion of both additions.
Key Issues
1. Whether business income from software development can be reclassified as "income from other sources" and associated expenses disallowed without incriminating material or refuting evidence. 2. Whether the principle of consistency applies when similar business activities were accepted in prior assessment years. 3. Whether additions made under section 153A without incriminating material are sustainable, especially concerning the Abhisar Buildwell principle.
Sections Cited
250(6), 153A, 143(3), 132, 44AB
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Order PER LALIET KUMAR, J.M: Both the above appeals have been filed by the Assessee against the separate orders of Ld. CIT(A)-3, Gurgaon each dt. 28/06/2024 pertaining to Assessment Years 2020-21 and 2021-22. 2. Since the issues involved in both the above appeals are common and were heard together therefore they are being disposed off by this consolidated order for the sake of convenience and brevity.
We shall take for the Assessment Year 2020-21 as a lead case wherein the assessee has raised following grounds:
1. On the facts and circumstances of the case, the Ld. CIT(A) vide order u/s 250(6) dated 28.06.2024 has erred in confirming action of the AO vide order u/s 153A r.w.s 143(3)in treating the revenue from business and profession to the tune of Rs. 231500/- as income from other sources.
2. That the Ld. CIT(A) has erred in restricting the expenses to Rs. 31500/- against Rs. 2136809/-claimed in P&L Account.
3. That the Ld. CIT(A) has erred in confirming the action of the AO by not allowing the business expense of Rs. 2136809/- against receipts from development of software of Rs. 231500/-.
That the Ld. CIT(A) has erred in estimating the expenses at Rs. 31500/- against business receipts of Rs. 231500/-. That the said disallowance has been made without appreciating that all the expenses were purely related to business of the assessee. 5. That the Ld. CIT(A) has erred in confirming the action of the AO in shifting of business receipts of Rs. 231500/- as income from other sources without appreciating the fact that all the services were rendered to identified parties and were subject to GST. That the action of CIT(A) is purely based upon surmises and conjectures without there being any material to prove the negative. 6. That the CIT(A) has erred in confirming the action of the AO in shifting of business receipts of Rs. 231500/- as income from other sources without considering the f act that the nature of business is duly mentioned in the MOA and AOA filed before the AO. 7. That the Ld. CIT(A) has erred in sustaining the addition made by the AO without following the principle of consistency. That the CIT(A) has erred in not appreciating that the same business activities have duly been accepted by the AO in the past assessment year 2016-17. 8. That the CIT(A) has erred in not considering submissions made by the appellant vide reply dated 23.05.2024 and 05.06.2024. That the CIT(A) has failed to appreciate that all the receipts for service were received through banking channel and has ignored the party wise details, PAN, GST No, tax invoices, etc submitted during appellate proceedings. 9. That notwithstanding the aforesaid grounds, the Ld. CIT(A) has erred in confirming the action of the AO without appreciating that the books of accounts are subject to audit and all the business transactions are duly part of the audit report furnished during the appellate proceedings 10. That the appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed off.
4. Briefly the facts of the case are that the assessee is a private limited company engaged in the business of software development, IT and networking solutions, and also deriving rental income. A search and seizure action under section 132 of the Act was conducted on 28.01.2021 on the Desh Bhagat Educational Trust group, and the case of the assessee was centralized with the DCIT, Central Circle-II, Chandigarh. 4.1 The AO framed the assessment under section 153A read with section 143(3) of the Act on 30.03.2022 and made an aggregate addition of Rs.22,36,809/-, comprising of (i) disallowance of business expenditure amounting to Rs.21,36,809/- and (ii) treating business income of Rs.2,31,500/- as “income from other sources” after allowing notional expenses of Rs.31,500/-.
5. The assessee preferred an appeal before the CIT(A), who dismissed the same and upheld the additions made by the AO.
Aggrieved, the assessee is now in appeal before the Tribunal.
During the course of hearing the Ld. Counsel for the Assessee submitted that the assessee is a regularly assessed company engaged in software and networking solutions. The services rendered during the year under consideration totalledRs.2,31,500 and were billed through tax invoices, with GST charged and collected. All receipts were through proper banking channels.
7.1 It was further submitted that the department consistently accepted the assessee's business in earlier years. Notably, in A.Y. 2016–17, the assessment was completed under section 143(3), accepting business income and loss. The assessee had also suo motu disallowed certain expenses in the computation of income that were not related to the business.
7.2 The Ld. Counsel for the Assessee also submitted that the books of accounts were duly audited under the Companies Act and tax audit under section 44AB was also conducted. No adverse remarks were pointed out by the auditors regarding the business activities. Thus, the treatment of income from software development as “income from other sources” is wholly unwarranted and arbitrary.
7.3 It was also emphasized that no incriminating material was found during the search, and in such circumstances, no addition could have been made under section 153A as per the law laid down by the Hon’ble Supreme Court in Abhisar Buildwell Pvt. Ltd. [2023] 149 taxmann.com 399 (SC).
Per contra, the Ld. DR relied upon the order passed by the Ld. AO as well as the findings of the Ld. CIT(A). He submitted that the additions were rightly made on the ground that the assessee’s primary activity was rental in nature, and the business activity of software development was only a facade created to claim losses and reduce tax liability. The DR argued that the AO had rightly disallowed the expenses and reclassified the receipts as income from other sources, and the same was confirmed by the CIT(A) after considering the facts and material on record. Therefore, he supported the impugned order and prayed for dismissal of the appeal. It was submitted that the decision of Abhisar Buildwell is not applicable as the present case is not of concluded assessment.
We have heard the rival contention of the parties and perused the material available on the record. In the present case we find that the assessee received Rs.2,31,500/- during the year from software development services. The AO doubted the genuineness of this income and recharacterized it as “income from other sources”, alleging that the assessee had no real business activity.
9.1 During the course of the argument, the assessee has drawn our attention to the unrebutted documentary evidence which shows the rendering of services resulting in income and allowable expenditure, including:
GST-compliant tax invoices. Party-wise details with PAN. Receipt of payments through bank. Business objects duly reflected in Memorandum and Articles of Association (MOA and AOA) Confirmation letters. 9.2 In the absence of any contrary material brought on record by the AO to establish that the services were not rendered or the receipts were sham, the recharacterisation of this income, as income from other sources is unsustainable in law. The revenue from identifiable clients under valid tax invoices cannot be brushed aside based merely on assumptions unless contradictory / corroborative evidence clinching the issue is collected during the course of search or brought on record by the AO. Admittedly, no incriminating material was found during the course of search nor any evidence was relied upon by the Assessing Officer to recharacterize the income as income from other sources. In the light of above we are left with no other option but to allow the ground raised by the assessee.
9.3 Accordingly, the action of the AO in treating business income as income from other sources and taxing Rs.2,00,000/- (after estimating expenses of Rs.31,500/-) is not supported by facts or law. The addition is therefore deleted.
9.4 Disallowance of Business Expenses 9.4.1 The AO disallowed Rs.21,36,809/- claimed as business expenditure, holding that no business was carried out by the assessee. This disallowance was confirmed by the CIT(A) on the ground that the rental income was the main activity and the business income was marginal.
9.4.2 It is an established principle that the quantum of income is not determinative of the genuineness of business or the allowability of business expenditure. The assessee has consistently engaged in the business of IT and networking, as accepted in A.Y. 2016–17, and has placed audited accounts and tax audit reports on record. Though it was vaguely argued that the assessment order for the 2016-17 was passed prior to the search and therefore the same cannot be acted upon. Generally, this argument is permitted to be raised and is a plausible argument. However, in the absence of any material brought to our notice which belie the stand of the assessee cannot be permitted to be raised. The Assessing Officer has not brought on record that the assessee was not carrying the business activities and no positive evidence was brought on record.
9.4.3 The CIT(A) also overlooked the fact that the assessee had suo motu disallowed Rs.25.92 lakhs worth of non-business expenses (e.g., municipal taxes, unrelated depreciation), and the remaining expenses were linked to the operational business.
9.4.4 In the absence of any finding that expenses were either bogus or unrelated to business, the disallowance of Rs.21,36,809/- is unjustified. Hence, the same is directed to be deleted.
9.5 Principle of Consistency 9.5.1 The principle of consistency, as upheld by the Hon’ble Supreme Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC), mandates that where the facts remain the same, the treatment accorded in earlier years should ordinarily not be disturbed.
9.5.2 In the assessee’s case, the treatment of business income and expenditure has been accepted in earlier assessments, including under scrutiny u/s 143(3). Without any change in facts, the deviation made by the AO in the impugned year is contrary to settled law. 9.6 Jurisdiction under Section 153A 9.6.1 The assessee raised the legal ground that the additions made were not based on any incriminating material found during the course of search, and thus are not sustainable in view of the Hon’ble Supreme Court decision in Abhisar Buildwell (supra).
9.6.2 However, the CIT(A) has recorded that the assessment for A.Y. 2020–21 was not complete as on the date of search and was therefore an “unabated” assessment year. As such, the applicability of Abhisar Buildwell is disputed, and we deem it unnecessary to adjudicate this issue further, having already allowed the appeal on merits.
No other ground has been argued before us, and therefore the remaining grounds raised by the assessee are dismissed.
In the result, the present appeal of the Assessee is allowed.
Both the parties fairly submitted that the facts and circumstances of other appeal i.e Chd/2024 are exactly identical to the Appeal in ITA No. 833/Chd/2024 and similar contentions raised therein may be considered, therefore, our findings and directions given in ITA No. 833/Chd/2024 shall apply mutatis mutandis to this appeals also which is accordingly allowed.
In the result, both the above appeals filed by the Assessee are allowed.