2025 (7) TMI 311 - AT - Income Tax

Correct head of income - Characterization of receipt - assessee is a regularly assessed company engaged in software and networking solutions - business income OR income from other sources - AO doubted the genuineness of this income and recharacterized it as income from other sources alleging that the assessee had no real business activity - HELD THAT - 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 re-characterisation 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 AO 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. Accordingly the action of the AO in treating business income as income from other sources and taxing after estimating expenses ois not supported by facts or law. Disallowance of Business Expenses - AO disallowed business expenditure holding that no business was carried out by the assessee - disallowance was confirmed by the CIT(A) on the ground that the rental income was the main activity and the business income was marginal - HELD THAT - 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. AO has not brought on record that the assessee was not carrying the business activities and no positive evidence was brought on record. 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. In the absence of any finding that expenses were either bogus or unrelated to business the disallowance is unjustified. Hence the same is directed to be deleted. Principle of Consistency - The principle of consistency as upheld in Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT mandates that where the facts remain the same the treatment accorded in earlier years should ordinarily not be disturbed. 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. Jurisdiction u/s 153A - 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 decision in Abhisar Buildwell 2023 (4) TMI 1056 - SUPREME COURT . 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.

Summary

The core legal questions considered by the Tribunal in these consolidated appeals pertain to the characterization of income and allowability of expenses in the context of assessments framed under section 153A read with section 143(3) of the Income Tax Act. Specifically, the issues are:

1. Whether the income of Rs. 2,31,500 received from software development services can be treated as "income from other sources" or should be recognized as business income.

2. Whether the disallowance of business expenses amounting to Rs. 21,36,809/- claimed against the said receipts was justified.

3. Whether the principle of consistency requires the AO and CIT(A) to follow earlier assessments accepting the business nature of income and expenses.

4. The applicability of the jurisdictional provisions under section 153A in the absence of incriminating material found during search and seizure proceedings.

Issue 1: Characterization of Income from Software Development Services

The relevant legal framework includes the provisions of the Income Tax Act regarding classification of income under various heads, and judicial precedents emphasizing the need for evidence to reclassify business income as income from other sources. The Tribunal referred to the absence of any incriminating material found during the search under section 132, and the lack of any contradictory evidence brought on record by the AO to disprove the genuineness of the software development income.

The Tribunal noted that the assessee had produced GST-compliant tax invoices, party-wise details with PAN, receipts through banking channels, and business objects in the Memorandum and Articles of Association (MOA and AOA) confirming the nature of the business. The Tribunal emphasized that mere surmises and conjectures without material evidence cannot justify recharacterization of income.

The AO and CIT(A) had relied on the argument that the primary activity was rental income and the software income was a facade, but the Tribunal found this unsubstantiated by evidence. The Tribunal applied the law to the facts and concluded that the reclassification of business income as income from other sources was unsustainable. The addition of Rs. 2,00,000/- (net of estimated expenses) was therefore deleted.

Issue 2: Disallowance of Business Expenses

The AO disallowed Rs. 21,36,809/- of business expenses on the premise that no real business was carried out. The CIT(A) upheld this disallowance, reasoning that rental income was the main activity and the software business was marginal.

The Tribunal relied on the principle that the quantum of income does not determine the genuineness of business or the allowability of expenses. It noted that the assessee had consistently carried on the IT and networking business, accepted in earlier assessments including scrutiny assessments under section 143(3). The Tribunal observed that the assessee had suo motu disallowed Rs. 25.92 lakhs of non-business expenses, demonstrating bona fide conduct.

In the absence of any positive evidence from the AO that the expenses were bogus or unrelated to the business, the Tribunal held the disallowance unjustified and directed deletion of the addition.

Issue 3: Principle of Consistency

The Tribunal applied the principle of consistency as enunciated by the Hon'ble Supreme Court in Radhasoami Satsang v. CIT, which mandates that where facts remain unchanged, treatment accepted in earlier years should ordinarily not be disturbed. The Tribunal found that the AO's deviation from earlier accepted treatment of business income and expenses without any change in facts was contrary to settled law.

Issue 4: Jurisdiction under Section 153A in Absence of Incriminating Material

The assessee contended that additions under section 153A could not be sustained without incriminating material found during search, relying on the Supreme Court decision in Abhisar Buildwell Pvt. Ltd. The CIT(A) recorded that the assessment year was "unabated" at the time of search, making the applicability of that decision disputed.

The Tribunal found it unnecessary to adjudicate this issue in detail since the appeal was allowed on merits. Thus, it refrained from commenting on the applicability of Abhisar Buildwell in this context.

Conclusions on Issues

The Tribunal concluded that the AO and CIT(A) erred in reclassifying the software development income as income from other sources without evidence and in disallowing legitimate business expenses. The principle of consistency was violated by the AO's approach. The additions made under section 153A were therefore deleted.

Significant Holdings and Core Principles

The Tribunal held:

"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."

"It is an established principle that the quantum of income is not determinative of the genuineness of business or the allowability of business expenditure."

"Where the facts remain the same, the treatment accorded in earlier years should ordinarily not be disturbed."

These principles underscore the necessity for the revenue to produce positive evidence before recharacterizing income or disallowing expenses, and the importance of consistency in tax assessments.

The Tribunal allowed the appeals and directed deletion of the additions made by the AO and confirmed by the CIT(A) for both assessment years, applying identical reasoning mutatis mutandis to the second appeal.