ITAT Ahmedabad Remands Azure Knowledge's ₹2.46 Cr. Software Dispute, Directs Double Disallowance Check

On 19 October, the Income Tax Appellate Tribunal (ITAT), Ahmedabad, remanded Azure Knowledge Corporation Pvt. Ltd.'s dispute over Rs. 2.46 crore in software-related intangible assets to the Assessing Officer for fresh verification, including examination of the company's claim for customisation and development expenses and alleged duplicate disallowances.

A Bench of Vice-President Dr. B.R.R. Kumar and Judicial Member Tapas Ram Misra set aside the order of the Commissioner of Income Tax (Appeals) in the company's appeal for Assessment Year 2018–19, directing the Assessing Officer to verify the disputed expenditure and recompute the assessed income after checking whether certain expenses had been disallowed twice. It observed:

“The nature and source of the expenditure claimed to have been incurred towards customization of the software, its accounting treatment, and its eligibility to be capitalized as an intangible asset require proper verification with reference to the books of account, invoices, agreements, ledger accounts, payment details, salary records, and other supporting documents.”

Azure Knowledge Corporation, which operates in the knowledge process outsourcing (KPO) and business process outsourcing (BPO) sectors, had reported additions of Rs. 9.15 crore to its intangible assets during the relevant assessment year.

During assessment, the Assessing Officer found that the company had furnished supporting documents for only Rs. 6.68 crore. The officer treated the remaining Rs. 2.46 crore as unexplained investment under Section 69 of the Income Tax Act, 1961, taxed it under Section 115BBE and disallowed depreciation of Rs. 30.83 lakh attributable to the disputed amount.

The company explained that the intangible assets included software purchased from Alliance Group International Inc., USA, customs duty and expenditure incurred on customisation and development to meet its business requirements. It contended that the expenditure was recorded in its books of account and that the difference largely related to customisation costs, including employee salaries and other related expenses.

Azure Knowledge Corporation also challenged the computation of its assessed income, arguing that certain expenses had already been disallowed in its revised return and that subsequent adjustments had resulted in duplicate disallowances. It further raised objections concerning the absence of a draft assessment order and the opportunities provided during the assessment proceedings.

The Tribunal directed the Assessing Officer to examine the genuineness of the customisation expenses with reference to the company's books of account, invoices, agreements, ledger accounts, payment details, salary records and other supporting documents.

It clarified that the claim could not be decided merely on the difference between the amount recorded in the books and the supporting documents furnished during assessment. The depreciation claim would depend on the determination of the disputed expenditure.

On the alleged duplicate disallowances, the Bench directed the Assessing Officer to examine the original and revised returns, the intimation issued under Section 143(1), the computation of income, the tax audit report and the assessment order to determine whether the company had already disallowed the disputed amounts. It observed:

“The computation of total income requires verification with reference to the original return, revised return, intimation issued under Section 143(1), computation of income, tax audit report, and assessment order. The Assessing Officer is required to verify whether the disputed amounts had already been disallowed by the assessee and whether any duplication has occurred while computing the assessed income.”

Accordingly, the ITAT restored the matter to the Assessing Officer for fresh adjudication, directing the officer to provide the company a reasonable opportunity to submit evidence and explanations before passing a speaking order. It allowed the appeal for statistical purposes.

For Azure Knowledge Corporation: Authorised Representative Biren Shah

For Revenue: Senior Departmental Representative Amit Pratap Singh