2022 (7) TMI 272 - AT - Income Tax

Rectification of mistake u/s 154 - addition on account of doubtful nature or non genuineness of the expenditure whether when the entire expenditure as claimed by the assesses on software development has been disallowed while framing the assessment under section 143(3), question of disallowance of any depreciation on the same would not arise? - HELD THAT - We find that in the original order dated 31.12.2020 the AO had disallowed an expenditure for violation of provisions regarding tax deduction at source and the disallowance was made u/s. 40(a)(ia) of the Act. In the assessment completed u/s. 154, AO has made a further disallowance being the depreciation on such software development expenses. We find that since the disallowance of software development expenses in the original assessment was made on account of non deduction of TDS, which is a specific provision in the shape of a penal provision whereby the disallowance is made if the assessee fails to deduct TDS at source. AO did not make the addition on account of doubtful nature or non genuineness of the expenditure, therefore, the depreciation on such expenditure disallowed by passing u/s. 154 is not justified as there was no mistake apparent from record found in the original assessment order. Had it been a case of disallowing expenditure of software development due to the findings that such expenditure was not genuine then the issue of disallowance of depreciation would have become an issue of rectification u/s. 154 - Decided in favour of assessee.

Summary

Issues:
1. Rectification u/s. 154 of the Income Tax Act, 1961 - Validity and scope of rectification order.
2. Admissibility of additional ground of appeal under Section 154(1A).
3. Disallowance of depreciation on software development expenses.
4. Justification of disallowance of depreciation on software development expenses.
5. Applicability of Section 12A registration to pending proceedings.

Issue 1: Rectification u/s. 154 of the Income Tax Act, 1961 - Validity and scope of rectification order:
The appeal was filed against the order of the ld. CIT(A)-IV, Lucknow, for Assessment Year 2008-09. The assessee contended that the rectification order passed u/s. 154 was beyond the purview of the provisions of Section 154 as there was no apparent mistake from the original order. The Assessing Officer disallowed depreciation on software development expenses in the rectification order, which was originally disallowed under section 40(a)(ia) due to non-deduction of TDS. The Tribunal held that since the original disallowance was due to TDS non-compliance and not the genuineness of expenses, the rectification disallowance of depreciation was not justified as no mistake was apparent in the original assessment order.

Issue 2: Admissibility of additional ground of appeal under Section 154(1A):
The assessee sought to admit an additional ground of appeal based on Section 154(1A), arguing that the rectification order was contrary to the law. The Tribunal allowed the additional ground, citing the case of 'NTPC Ltd. vs. CIT' for support. The ld. DR did not object to the admission of the additional ground, leading to its consideration and subsequent dismissal based on the specific provisions of Section 154(1A.

Issue 3: Disallowance of depreciation on software development expenses:
The Assessing Officer disallowed depreciation on software development expenses in the rectification order. The Tribunal noted that the original disallowance under section 40(a)(ia) was for TDS non-compliance, not the genuineness of expenses. As such, the disallowance of depreciation was deemed unjustified as no apparent mistake was found in the original assessment order. The Tribunal allowed Ground Nos. 1 to 4 based on this reasoning.

Issue 4: Justification of disallowance of depreciation on software development expenses:
The Tribunal found that the disallowance of software development expenses in the original assessment was due to TDS non-compliance, a penal provision, and not the genuineness of expenses. Therefore, the disallowance of depreciation on such expenses in the rectification order was deemed unjustified as no mistake was apparent from the original assessment order. Had the original disallowance been based on the genuineness of expenses, the issue of depreciation disallowance would have been a valid subject for rectification u/s. 154.

Issue 5: Applicability of Section 12A registration to pending proceedings:
The assessee argued that the registration granted u/s 12A for Asstt. Year 2009-10 should apply to pending proceedings, leading to the income being exempt u/s 11. The Tribunal did not address this issue specifically in the judgment, as Ground No. 5 was dismissed as not pressed.

In conclusion, the Tribunal partly allowed the appeal of the assessee based on the invalidity of the disallowance of depreciation on software development expenses in the rectification order, emphasizing the distinction between TDS non-compliance and the genuineness of expenses in the original assessment.