2021 (6) TMI 287 - AT - Income Tax

Tribunal remands case on software company's business activities, stresses evidence examination

M/s Simto Property Developers Ltd Versus ACIT-10, Mumbai

The Tribunal remanded the case back to the Commissioner of Income Tax (Appeals) for fresh adjudication as the appellant, a software development company, ... Disallowance of depreciation, business expenses, non grant of set off of brought forward business loss and unabsorbed depreciation and treating the income shown from business as unexplained cash credit under section 68 - HELD THAT:- Various doubts raised by the assessing officer with regard to the technical capability of the concerned employees for developing software, lack of infrastructure, etc. have not been properly addressed by the assessee. It is a fact on record that in course of assessment proceedings, the assessee has furnished a software development agreement with a US based company, who allegedly entrusted the assessee with developing software. Assessee has furnished certain documentary evidence including copies of export invoices raised to the foreign buyer, proof of payment received through bank, banker’s certificate, bank statement showing payment received towards export of software, etc. However, neither the bank certificate nor the bank statement have been filed in the paper book or separately furnished before us for enabling us to record a conclusive finding on these evidences. The aforesaid documentary evidences stated to have been filed before the departmental authorities needs to be thoroughly examined in the context of assessee’s submission regarding development of software for a foreign buyer. As it appears, the departmental authorities have not properly enquired into these aspects by conducting necessary enquiries with the concerned bank or other regulatory authorities, including RBI, since it involves transactions with a foreign party involving repatriation of money from foreign country. One more aspect which has not been examined is, whether the assessee has carried on such software development activity, either with the same client or any other client, in the subsequent assessment years or it is a standalone transaction. If the assessee has continued with such business activity in subsequent years, then assessee’s claim can be accepted. However, all these aspects need to be properly enquired into by the departmental authorities, which appear to have not been done. We are inclined to restore the issue to the learned Commissioner of Income Tax (Appeals) for fresh adjudication after due opportunity of being heard to the assessee. The assessee is also permitted to bring fresh evidence on record to establish its claim of carrying on the business activity of software development. Learned Commissioner of Income Tax (Appeals) would be free to conduct proper enquiry either by himself or get it done through the assessing officer in terms of our observations hereinabove. Assessee’s claim of deduction towards expenses, depreciation as well as set off of brought forward loss and unabsorbed depreciation would ultimately depend upon the outcome of the issue as to whether the assessee has carried out any business activity or not. In view of the aforesaid, we set aside the impugned order of learned Commissioner of Income Tax (Appeals) and restore the issues back to his file for fresh adjudication in terms of our discussion above and only after providing due opportunity of being heard to the assessee. Grounds are allowed for statistical purposes. Issues:Non-compliance with Tribunal directions, disallowance of depreciation, disallowance of business expenses, non-grant of set off of brought forward losses and unabsorbed depreciation, treating business income as unexplained cash credit.Analysis:1. The appeal was against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2006-07. The appellant raised various grounds challenging the actions of the assessing officer and the CIT(A). The issues included non-compliance with Tribunal directions, disallowance of depreciation, disallowance of business expenses, and treatment of business income as unexplained cash credit under section 68 of the Act.2. The Tribunal noted that all issues were inter-connected and proceeded to address them collectively. The appellant, a software development company, had filed its return declaring nil income. The assessing officer treated the business income as unexplained credit under section 68, disallowed various deductions, and challenged the business activity. The Tribunal had previously directed a fresh assessment.3. The appellant contended that it had conducted software development activities and provided evidence of business operations, including a software development agreement with a US-based client. The appellant argued that all necessary evidence was submitted, and business activities were conducted, contrary to the assessing officer's findings.4. The departmental representative supported the assessing officer's decision, stating that the appellant failed to prove business activities. The assessing officer's report highlighted no business activity on the premises, raising doubts about the technical capabilities of employees and infrastructure for software development.5. The Tribunal reviewed the evidence and discrepancies in the appellant's submissions. While some documentary evidence was presented, critical aspects like bank certificates and statements were missing. The Tribunal emphasized the need for thorough examination of evidence, especially transactions with foreign entities, and continuity of business activities in subsequent years.6. Consequently, the Tribunal decided to remand the case back to the CIT(A) for fresh adjudication. The appellant was given the opportunity to present additional evidence to support its claim of conducting software development activities. The decision on deductions and set-offs depended on establishing the existence of business activities. The impugned order was set aside for reevaluation, and the appeal was allowed for statistical purposes.In conclusion, the Tribunal's judgment addressed the interconnected issues raised by the appellant regarding business activities, deductions, and treatment of income. The decision emphasized the importance of thorough examination of evidence and proper enquiry to determine the validity of the appellant's claims.