2024 (9) TMI 1100 - AT - Income Tax

Revision u/s 263 - expenditure on SAP Software licence claimed as revenue - as per CIT statement of significant accounting policies and notes to the account , forming part of the financial statements for the relevant year clearly states that cost of software is treated as an intangible asset and amortized over a period of 5 years. As regards the commission and royalty expenditure, much less an inquiry into the admitted non-deduction of TDS, even the nature of services rendered by the foreign parties remains to be specified by the assessee - HELD THAT - Book treatment would not dictate the allowance or otherwise of an expenditure, where it is otherwise of revenue nature, which, however, would require a finding by the AO, absent, validating the finding by the competent authority of lack of proper inquiry, resulting in lack of due application of mind by the AO in framing the assessment. For instance, capitalization of an expenditure in accounts may not be fatal to its claim as revenue, but the contradiction, which is clear, would need to be explained, and which has as much as not been inquired into. An asset, even if intangible, is liable for depreciation, and cannot be claimed as an expense under the Act, which has no concept of deferred revenue expenditure. As regards commission and royalty expenditure, much less the nature of services rendered, there is nothing to suggest that tax has been deducted at source. The inquiries referred to by Sh. Bhatt are the mere beginning of the process of inquiry, to be taken to its logical end. Even as observed by the Bench during hearing, the AO has made only a semblance of an inquiry; rather, a pretence. It is only on a proper enquiry, which enables him to form a clear view in the matter, so as to issue definite finding/s of fact/s, on which law can then be applied, that it can be said that there has been due application of mind by the assessing authority, a failure whereof vitiates assessment, rendering it liable to revision. The impugned assessment, for the reasons afore-mentioned, clearly suffers from a complete lack of application of mind by the assessing authority, i.e., qua the expenses referred herein. We, accordingly, have no hesitation in upholding the impugned order qua the said aspects. Decided against assessee.

Summary

Issues:
Assessment under section 263 of the Income Tax Act, 1961 for Assessment Year 2016-17.

Analysis:
The appeal challenged an order under section 263 of the Income Tax Act, 1961, related to the assessment for the Assessment Year 2016-17. The appellant's representative argued that the Assessing Officer had not verified the claims adequately and accepted them without proper inquiry. The issues raised in the appeal were expenditure on SAP Software license, commission, and royalty paid to foreign parties without deduction of tax at source. The appellant's counsel provided responses to the notices and claimed that due inquiry had been made. The respondent's representative highlighted that the cost of software was treated as an intangible asset and amortized over a period of 5 years. Additionally, the nature of services rendered by foreign parties and the lack of TDS deduction were questioned.

The Tribunal referred to legal precedents emphasizing the importance of proper inquiry by the Assessing Officer. Lack of inquiry could render an assessment erroneous and prejudicial to the Revenue's interest, justifying revision under section 263(1) of the Act. The Tribunal cited cases where orders accepting the assessee's version without proper inquiry were deemed erroneous. It was noted that the AO's duty is not just to adjudicate but also to investigate, especially when circumstances warrant further inquiry. The Tribunal stressed that book treatment alone cannot determine the allowability of an expenditure, and proper inquiry is essential to ascertain the nature of expenses.

The Tribunal found that the impugned assessment lacked proper application of mind by the assessing authority regarding the expenses in question. It was observed that the AO's inquiry was superficial and inadequate, indicating a failure to form a clear view on the matter. Due to the lack of proper inquiry leading to a deficient application of mind, the assessment was deemed erroneous and prejudicial to the Revenue's interest. Consequently, the Tribunal upheld the order regarding the specified aspects. The Tribunal dismissed the appellant's other grounds as they were not pressed. Ultimately, the appeal was dismissed, affirming the impugned order.

This judgment highlights the significance of thorough inquiry and proper application of mind by the Assessing Officer in assessments to ensure compliance with the law and prevent erroneous decisions that could be prejudicial to the Revenue's interest.