AZURE KNOWLEDGE CORPORATION PRIVATE LIMITED,AHMEDABAD V. THE DY.CIT, CIRCLE-1(1)(1), AHMEDABAD

ITA 2012/AHD/2024

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The case involves Azure Knowledge Corporation Private Limited appealing against the order of the National Faceless Appeal Centre (NFAC), which upheld the disallowances made by the Assessing Officer under various sections of the Income Tax Act, 1961 for the Assessment Year 2017-18. The main issues revolved around the treatment of a capital subsidy as a revenue receipt, disallowance of depreciation on purchased software, and disallowance of interest expenses on advances given to Bennet Coleman & Co. Limited (BCCL). The Tribunal found that the subsidy was correctly treated as a capital subsidy and that the depreciation on the software purchase was unjustly disallowed. The Tribunal also noted that the interest disallowance was incorrectly applied as the advance to BCCL was made in a prior year and did not impact the current year's finances.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 774463 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2017-2018
• Appeal Filed On: 29-11-2024
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B.P. SRIVASTAVA
• Assessee Lawyers: BIREN SHAH
• Keywords: Depreciation; Audit objection; Bogus
• Section: 143(3); 133(6)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “A” BENCH, AHMEDABAD BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND SHRI NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER ITA No.2012/Ahd/2024 Assessment Year: 2017-18 Azure Knowledge Corporation Private Limited, Azure House, Nr. Town Hall, Ahmedabad – 380 006. (Gujarat). [PAN – AAFCS 3464 A] Vs. The Deputy Commissioner of Income Tax, Circle – 1(1)(1), Ahmedabad, Income Tax Office, Vejalpur, Ahmedabad – 380 051 (Gujarat). (Appellant) (Respondent) Assessee by Shri Biren Shah, AR Revenue by Shri B.P. Srivastava, Sr. DR Date of Hearing 14.08.2025 Date of Pronouncement 04.09.2025 O R D E R PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER: This appeal is filed by the assessee against the order of the National Faceless Appeal Centre (NFAC), Delhi (in short “the CIT(A)”) dated 09.10.2024 for the Assessment Year (A.Y.) 2017-18 in the proceedings under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 2. The brief facts of the case are that the assessee had filed its return of income for the A.Y. 2017-18 on 28.11.2017 declaring total income of Printed from counselvise.com ITA No.2012/Ahd/2024 (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 2 of 9 Rs.45,19,410/-. The case was selected for scrutiny under CASS. The assessment was completed under Section 143(3) on 27.11.2019 at total income of Rs.2,23,88,384/-. In the course of assessment, the Assessing Officer had made additions on account of disallowance of subsidy on intangible asset, disallowance of depreciation on intangible asset, disallowance under Section 36(1)(iii) of the Act and disallowance under Section 36(1)(va) of the Act. 3. Aggrieved with the order of the Assessing Officer, the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was dismissed. 4. Now, the assessee is in second appeal before us. The following grounds have been taken in this appeal: - “1. In law and in the facts and circumstances of the appellant's case, the order passed by the learned CIT(A) u/s. 250 of the Income-tax Act is void ab initio being bad in law. 2. In law and in the facts and circumstances of the appellant's case, Order u/s.143(3) is void-ab-initio since the Assessment Order was passed without passing draft Assessment Order. 3. In law and on the facts and in the circumstances of the case of appellant, the Ld. CIT(A) has erred in upholding the addition of Rs.71,00,000/- treating capital subsidy as revenue receipt, instead of deleting entire adjustment made by AO. 4. In law and on the facts and in the circumstances of the case of appellant, the Ld. CIT(A) has erred upholding disallowance of depreciation of Rs.71,25,000. 5. In law and on the facts and in the circumstances of the case of appellant, the Ld. CIT(A) has erred in upholding disallowance of Interest Expense of Rs.35,76,692 u/s.36(1)(iii) on the basis of interest free advances given to BCCL, instead of deleting entire adjustment made by AO. 6. In law and on the facts and in the circumstances of the case of appellant, the Ld. CIT(A) has erred in not providing video hearing before Printed from counselvise.com ITA No.2012/Ahd/2024 (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 3 of 9 adjudicating the case, especially when Appellant specifically asked for the same to explain the case. 7. The appellant craves leave to add, alter or amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.” 5. The first two grounds taken are general in nature and were not pressed by the Ld. AR. Hence, the same are dismissed. 6. The 3rd ground pertains to addition of Rs.71,00,000/- treating the capital subsidy received by the assessee as revenue receipt. Shri Biren Shah, Ld. AR of the assessee explained that subsidy of Rs.71,00,000/- was received from the Government of Gujarat under the scheme to promote the capital investment in plant & machinery, under IT/ITES policy. He explained that the assessee is engaged in the business of providing information and technology enabled services in the sector of Knowledge Process outsourcing (KPO) and Business Process outsourcing (BPO). The subsidy received by the assessee was deducted from the intangible asset. He explained that subsequently the Government of Gujarat had withdrawn the subsidy of Rs.71,00,000/- on the basis of audit objection of CAG for the reason that as per IT/ITES policy of capital subsidy, software could not be considered in capital subsidy. Accordingly, this amount was recovered by the Government of Gujarat and was reversed by the assessee in the year 2019-20. In this regard, the Ld. AR has drawn our attention to the copy of subsidy scheme document of Government Notification and the bank records, which have been brought on record. The Ld. AR submitted that the Assessing Officer had wrongly held that the subsidy of Rs.71,00,000/- received on computer software was not as per the incentive scheme of Government of Gujarat and, therefore, it was not a capital subsidy but a revenue subsidy. The Ld. AR submitted that this Printed from counselvise.com ITA No.2012/Ahd/2024 (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 4 of 9 finding of the Assessing Officer was incorrect. He contended that considering the fact that the assessee had received subsidy under the capital subsidy scheme of Government of Gujarat and had also reduced the same from the block of plant & machinery, the addition made by the AO was not correct. 7. Per contra, Shri B.P. Srivastava, Ld. Sr. DR submitted that the Assessing Officer had rightly treated the subsidy of Rs.71,00,000/- as revenue receipt since as per Government of Gujarat’s subsequent communication it was evident that the software could not be considered as capital subsidy. He, therefore, strongly supported the orders of the lower authorities. 8. We have considered the rival submissions. It transpires that the assessee had received subsidy of Rs.2,40,19,437/- from Government of Gujarat as incentive under IT/ITES Policy (2016-21). Out of the total subsidy so received, a sum of Rs.1,41,31,000/- was treated as capital subsidy and netted off from the gross block of fixed assets and remaining amount of Rs.98,88,437/- was credited to Profit & Loss account and offered for tax. The subsidy of Rs.71,00,000/-, which is under dispute before us, was reduced from the intangible asset in the form of GIS software. The assessee has brought on record a copy of demand letter dated 01.06.2018 from the Director, IT& e-Governance, Government of Gujarat, whereby the assessee was required to deposit the subsidy of Rs.71,00,000/- which was not considered as capital subsidy in line of objection raised by the CAG. Notwithstanding the recovery of subsidy, the fact remains that this amount of Rs.71,00,000/- was given to the assessee by the Government of Gujarat as capital subsidy and accordingly it was accounted for in the books of the assessee as capital subsidy and reduced Printed from counselvise.com ITA No.2012/Ahd/2024 (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 5 of 9 from gross block of fixed assets. The assessee had subsequently reversed this entry and refunded the amount to the Government of Gujarat pursuant to the audit objection raised by the CAG. Merely because the assessee had refunded the subsidy of Rs.71,00,000/- afterwards, this does not change the nature of subsidy. The subsidy was received by the assessee as capital subsidy and also accounted for in its books of account as capital subsidy. It was not the case that the subsidy amount of Rs.71,00,000/- remained with the assessee, which required change of its nature. Had this amount remained with the assessee, the Revenue might have been correct in treating the same as revenue receipt. But when the subsidy was already refunded by the assessee to the Government of Gujarat, the same cannot be treated as revenue receipt in the hands of the assessee. The nature of the subsidy remained capital subsidy as long as it was appearing in the books of account of the assessee. Therefore, the Revenue was not correct in treating the sum of Rs.71,00,000/- as revenue subsidy and making addition in this regard. The addition made by the Assessing Officer was on wrong appreciation of facts of the case. The capital subsidy of Rs.71,00,000/- received by the assessee was correctly accounted for by netting off from the gross block of fixed assets. Therefore, no addition was called for in this regard by holding it as revenue subsidy. Accordingly, the addition made by the Assessing Officer is deleted. The ground taken by the assessee is allowed. 9. The next ground pertains to disallowance of depreciation of Rs.71,25,000/- on the software purchase. The Ld. AR explained that the assessee had purchased software worth Rs.2,85,00,000/- from Karnavati Infrastructure Projects Limited. In the course of assessment, the Assessing Officer had made verification by issuing notice u/s 133(6) of the Printed from counselvise.com ITA No.2012/Ahd/2024 (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 6 of 9 Act to the said party. As the vendor did not respond to the notice in time and also couldn’t satisfy the AO about all the queries, the purchase of software was treated as bogus and the AO had disallowed the depreciation of Rs.71,25,000/- claimed thereon. The Ld. AR explained that the vendor Karnavati Infrastructure Projects Limited had sent the reply to the Assessing Officer vide letter dated 26th November, 2019, a copy of which has been brought on record in the paper-book filed. The Ld. AR submitted that when the vendor had confirmed the sale of software to the assessee company, the Revenue was not correct in disallowing the depreciation claimed thereon. 10. Per contra, Shri B.P. Srivastava, the Ld. Sr. DR submitted that the vendor did not give any details about its original/first purchase before its re-sale to the assessee company. He further submitted that the vendor Karnavati Infrastructure Projects Limited was not dealing in sale of software and related product’s business, hence the genuineness of the purchase was under doubt. Therefore, the disallowance of depreciation as made aby the Assessing Officer was correct. The Ld. Sr. DR strongly supported the orders of the lower authorities on this issue. 11. We have considered the rival submissions. It is found from the Balance Sheet of the assessee company that the assessee had shown addition of Rs.3,70,91,504/- under the head “Computer Software” and the capital subsidy of Rs.71,00,000/- was reduced from this block of fixed asset. The purchase of computer software was duly confirmed by the vendor Karnavati Infrastructure Projects Limited. According to the Revenue, the software purchased by the assessee was not the first purchase but it was re-sale of used software and, therefore, the assessee was not eligible for capital subsidy. This is altogether a different aspect Printed from counselvise.com ITA No.2012/Ahd/2024 (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 7 of 9 and not connected with the present disallowance. Merely because the vendor Karnavati Infrastructure Projects Limited could not produce the evidence for original purchase of software made by it, the purchase as shown by the assessee could not have been disallowed. The purchase of computer software by the assessee was duly confirmed by Karnavati Infrastructure Projects Limited. The copy of bills and vouchers as well as the payment details for purchase of software were duly brought on record by the assessee and no infirmity was found therein by the AO. It is not the case of Revenue that the payment made by the assessee for purchase of this software was ultimately returned back to it, as no such finding has been brought on record by the AO. It further transpired that the depreciation on this software was not disallowed by the Revenue in the subsequent years. Thus, the Revenue had treated the purchase of software as genuine in the subsequent years. Considering the evidences as brought on record, the Revenue was not correct in disallowing the depreciation on purchase of software during the current year. Accordingly, the addition of Rs.71,25,000/- in respect of disallowance of depreciation is deleted. The ground taken by the assessee is allowed. 12. The next ground pertains to disallowance of interest expense of Rs.35,76,692/- under Section 36(1)(iii) of the Act. The Ld. AR explained that the assessee had given advance of Rs.2,98,05,733/- to Bennet Coleman & Co. Limited (BCCL) for brand advertisement. The Assessing Officer had noticed that no advertisement expense in the name of BCCL was claimed during this year. Therefore, this advance was not considered as being for business purpose and the Assessing Officer had held that the loans and advances availed by the assessee was diverted towards this interest free advance to BCCL. Accordingly, the Assessing Officer had Printed from counselvise.com ITA No.2012/Ahd/2024 (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 8 of 9 made disallowance of interest expenses of Rs.35,76,692/- u/s 36(1)(iii) of the Act. The Ld. AR explained that this advance was given by the assessee in the Financial Year 2007-08, in support of which the ledger account for that year was brought on record. Further, the assessee had claimed advertisement expense of Rs.77,47,598/- in that year and the balance amount was carried forward to the subsequent years. The Ld. AR further submitted that no such disallowance was made in any of the earlier years, even though the advance was outstanding since the Financial Year 2007-08. He further submitted that the own funds available with the assessee were much in excess of the amount of advance and, therefore, no disallowance under Section 36(1)(iii) of the Act was called for. 13. Per contra, the Ld. Sr. DR supported the orders of the lower authorities. 14. We have considered the rival submissions. The Assessing Officer had admitted in the assessment order that the advance to BCCL was made in the Financial Year 2007-08 and the amount was outstanding in the books of account since then. It is not the case that the advance was made by the assessee in the current year. The contention of the assessee that no disallowance u/s 36(1)(Iiii) of the Act was made in the earlier years had also not been disputed by the Revenue. It is further found that the Assessing Officer did not establish the nexus between the advance given by the assessee to BCCL with the interest-bearing funds. Otherwise also, this nexus was to be established in the Financial Year 2007-08 when the advance was given for the first time and not in the current year. Considering these facts, we do not find any justification for making the disallowance of interest u/s 36(1)(iii) of the Act in the current year, when no such disallowance was made in any of the earlier years. Accordingly, Printed from counselvise.com ITA No.2012/Ahd/2024 (Assessment Year: 2017-18) Azure Knowledge Corporation Pvt. Ltd. vs. DCIT Page 9 of 9 the addition of Rs.35,76,692/- in respect of disallowance of interest is deleted. 15. The other grounds are general in nature and were not pressed by the Ld. AR. Hence, the same are dismissed. 16. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on this 4th September, 2025. Sd/- Sd/- (SANJAY GARG) (NARENDRA PRASAD SINHA) Judicial Member Accountant Member Ahmedabad, the 4th September, 2025 PBN/* Copies to: (1) The appellant (2) The respondent (3) The PCIT (4) The CIT(A) (5) Departmental Representative (6) Guard File By order TRUE COPYE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad Printed from counselvise.com "