2016 (4) TMI 83 - AT - Income Tax

Tribunal upholds disallowance of software depreciation for multiple assessment years, deeming transactions fictitious.

The Tribunal dismissed the appeals for AY 2008-09, 2009-10, and 2010-11, upholding the disallowance of depreciation on software purchases. The Tribunal ... Depreciation - ownership and actual use of asset - Existence of software asset - requirement of documentary and technical evidence (installation reports, source code, development life cycle records) - Evidence from search/requisition - role of post search information regarding accommodation entries and bogus invoices - Assessment in case of search - pending assessment and abatement under section 153A - Natural justice - opportunity to confront post search information and cross examine witnessesAssessment in case of search - pending assessment and abatement under section 153A - Whether the assessment for AY 2008-09 abated on initiation of search or could be proceeded with under section 153A - HELD THAT: - The Tribunal examined the dates of search authorization and processing of return. The Panchnama showed the search authorization dated 25.03.2010 and the intimation under section 143(1) was dated 27.03.2010. Section 153A only causes abatement of assessments that were pending on the date of initiation of the search. Because the search was initiated on 25.03.2010, the assessment for AY 2008-09 was still pending as on that date and therefore did not abate. Consequently the Assessing Officer was competent to assess/reassess AY 2008-09 (and the six years prescribed) afresh under section 153A. The assessee's contention that processing under section 143(1) amounted to a concluded assessment was rejected. [Paras 11, 13]Assessment for AY 2008-09 did not abate on account of the search and could be proceeded with under section 153A; the additional ground alleging abatement is dismissed.Depreciation - ownership and actual use of asset - Existence of software asset - requirement of documentary and technical evidence (installation reports, source code, development life cycle records) - Evidence from search/requisition - role of post search information regarding accommodation entries and bogus invoices - Natural justice - opportunity to confront post search information and cross examine witnesses - Whether depreciation claimed on software purchased from M/s Macro Infotech Ltd. is allowable for AYs 2008-09, 2009-10 and 2010-11 - HELD THAT: - The Tribunal upheld the factual findings of the Assessing Officer and the CIT(A) that the assessee failed to prove the existence, ownership and actual use of the alleged software. Although invoices and cheque payments were produced, enquiries showed the supplier's addresses to be non existent and linked to an accommodation entry operator; no independent evidence of software installation or use (such as installation/test reports, source code, hard coded documentation, software development life cycle records, or demonstrable hardware additions) was furnished. The cancellation agreement relied upon did not establish the assessee's proprietary rights or demonstrable transfer/use by the alleged user, and the claim that the software was destroyed was unsupported by corroborative evidence from the purported recipient. The Tribunal held that payment by cheque and ledger entries alone were insufficient where the supplier lacked credentials and the alleged asset was not demonstrably used. The Tribunal also rejected the plea that lack of opportunity to confront or cross examine the entry operator vitiated the proceedings, noting that the AO had made independent enquiries and had given the assessee specific opportunity to produce evidence of existence and use, which was not provided. [Paras 33, 34, 35, 36, 37]Disallowance of depreciation on the software is confirmed for AY 2008-09, and the same reasoning is applied to confirm disallowances for AY 2009-10 and AY 2010-11; all three appeals are dismissed.Final Conclusion: The Tribunal dismissed the assessee's appeals: the assessment for AY 2008-09 was not abated and could be completed under section 153A, and the claim for depreciation on software purchased from M/s Macro Infotech Ltd. was disallowed for AYs 2008-09, 2009-10 and 2010-11 due to failure to prove existence, ownership and use of the asset and insufficiency of the evidence relied upon by the assessee. Issues Involved:1. Disallowance of depreciation on software purchases.2. Violation of principles of natural justice.3. Use of information from the Directorate of Income Tax (Investigation).4. Verification of the genuineness of software transactions.5. Ownership and usage of the software by the assessee.6. Application of section 153A in the context of search and seizure.Detailed Analysis:1. Disallowance of Depreciation on Software Purchases:The primary issue revolves around the disallowance of depreciation claimed by the assessee on software purchases amounting to Rs. 4,24,25,050 from M/s Macro Infotech Ltd. The Assessing Officer (AO) disallowed the depreciation, amounting to Rs. 84,84,910 for AY 2008-09, Rs. 1,35,75,856 for AY 2009-10, and Rs. 81,14,514 for AY 2010-11, citing that the transactions were bogus. The AO's findings were based on the investigation which revealed that M/s Macro Infotech Ltd was a non-existent entity used for providing accommodation entries and bogus bills. The assessee failed to provide concrete evidence of the software's existence, ownership, and usage in their business operations. The Tribunal upheld the AO's disallowance, emphasizing the lack of substantial evidence to prove the software's existence and usage.2. Violation of Principles of Natural Justice:The assessee contended that the principles of natural justice were violated as they were not given an opportunity to confront the information and documents received by the AO from the Directorate of Income Tax (Investigation) and were not allowed to cross-examine Shri Tarun Goyal. The Tribunal noted that the AO did provide an opportunity to the assessee to justify its claim but the assessee failed to produce satisfactory evidence. The Tribunal found no merit in the assessee's argument, stating that the AO's conclusions were not solely based on the information from the Directorate but were also supported by further inquiries.3. Use of Information from the Directorate of Income Tax (Investigation):The AO relied on information from the Directorate of Income Tax (Investigation), which indicated that Shri Tarun Goyal operated a network of bogus companies, including M/s Macro Infotech Ltd, which issued fake bills. The Tribunal supported the AO's reliance on this information, noting that the assessee could not substantiate the genuineness of the software transactions or the existence of M/s Macro Infotech Ltd.4. Verification of the Genuineness of Software Transactions:The Tribunal scrutinized the evidence provided by the assessee, including invoices, payment details, and bank statements. It found inconsistencies and a lack of credible evidence to prove the software's existence and installation. The Tribunal highlighted that the supplier's address was fictitious and the assessee could not demonstrate the supplier's capability to provide the software.5. Ownership and Usage of the Software by the Assessee:For depreciation to be allowed, the assessee must prove ownership and usage of the asset. The Tribunal noted that the assessee failed to provide evidence of the software's installation, usage, or any supporting documentation like installation reports or software development life cycle documents. The Tribunal also found the assessee's claim that the software was handed over to Sobha Developers Ltd and subsequently destroyed to be unsubstantiated.6. Application of Section 153A in the Context of Search and Seizure:The assessee argued that the provisions of section 153A could not be applied as there was no incriminating material found during the search. The Tribunal rejected this argument, stating that the assessment for AY 2008-09 was pending at the time of the search and hence, the AO was required to assess the total income afresh. The Tribunal upheld the AO's actions under section 153A, confirming that the assessments were valid.Conclusion:The Tribunal dismissed the appeals for AY 2008-09, 2009-10, and 2010-11, upholding the disallowance of depreciation on the software purchases. The Tribunal found that the assessee failed to substantiate the existence, ownership, and usage of the software, and the transactions with M/s Macro Infotech Ltd were deemed to be fictitious. The Tribunal also upheld the application of section 153A, validating the reassessment proceedings initiated by the AO.