NELSOFT PRIVATE LIMITED,PUNE V. PCIT, PUNE-2, PUNE

ITA 926/PUN/2024

AI Insights

Neilsoft Private Limited appealed against the order of the PCIT, Pune-2, which set aside the assessment order for the year 2016-17. The original assessment had not included certain contingent liabilities in the taxable income, which the PCIT later identified as errors. The Tribunal found that the PCIT was justified in invoking section 263 of the Income Tax Act, as the original assessment did not adequately address these contingent liabilities, thus being prejudicial to the interests of the revenue.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 398150 (ITAT-PUNE)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-06-2025
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2016-2017
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANDEEP SENGUPTA
• Assessee Lawyers: S RAHUL MEHTA; YASH DAGA
• Keywords: Set aside; Opportunity of being heard; Bad and doubtful debts; Capital expenditure; Assessment record; Revision of order
• Section: 143(3); 142(1); 263; 37(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE BEFORE SHRI R. K. PANDA, VICE PRESIDENT AND SHRI VINAY BHAMORE, JUDICIAL MEMBER ITA No.926/PUN/2024 Assessment Year : 2016-17 Neilsoft Private Limited Pride Parmar Galaxy 10/10A, 8th Floor, Sadhu Vaswani Chowk, Station Road, Pune – 411001 Vs. PCIT, Pune-2 PAN : AAACN1300P (Appellant) (Respondent) Assessee by : S/Shri Rahul Mehta & Yash Daga Department by : Shri Sandeep Sengupta, CIT Date of hearing : 03-06-2025 Date of pronouncement : 05-06-2025 O R D E R PER R. K. PANDA, VP : This appeal filed by the assessee is directed against the order dated 12.03.2024 passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Ld. PCIT, Pune-2, relating to assessment year 2016-17. 2. Although a number of grounds have been raised by the assessee, however, these all relate to the order of the Ld. PCIT in setting aside the order passed by the Assessing Officer u/s 143(3) of the Act by invoking the provisions of section 263 of the Act. 2 ITA No.926/PUN/2024 3. Facts of the case, in brief, are that the assessee is a company engaged in business of engineering services. It filed its return of income on 25.11.2016 declaring taxable income of Rs.11,24,37,760/-. The case was selected for scrutiny through CASS and accordingly statutory notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee in response to which the AR of the assessee appeared from time to time and filed the requisite details. The Assessing Officer completed the assessment u/s 143(3) r.w.s. 144C(13) r.w.s. 143(3A) & 143(3B) of the Act on 13.04.2021 determining the total income of the assessee at Rs.12,98,07,827/- wherein an amount of Rs.1,73,70,067/- was added on account of TP adjustment. 4. In appeal the Tribunal deleted such TP addition vide ITA No.256/PUN/2021 order dated 07.01.2022. Subsequently on perusal of the assessment record the Ld. PCIT noticed certain discrepancies for which he issued a show cause notice to the assessee. The relevant extract of the same reads as under: \"2. Upon perusal of assessment record, it is seen from Tax Audit Report [Sr. No. 21(g) of 3CD form] that an amount of Rs.3,25,70,478/- on account of Provision of Rs.21,01,619 on account of Provision of Doubtful Debts respectively, was liability of a contingent nature. Further, it is noticed from the computation of income (COI) that only Rs.1,27,64,053/- on account of Provision of VPI has been added back and no addition on account of Provision of Doubtful Debts was made to the taxable income. Being expenditure of contingent nature, this should have been added back to the taxable income. The Assessing Officer during the course of assessment proceedings has not called for any explanation on this issue and assessed total income at Rs.12,98,07,827/- following the DRP directions by passing order u/s 143(3) r.w.s 144C(13) of the Income Tax Act 1961 on 13.04.2021. Therefore, it appears that amount of Rs.2,19,08,044/- [(Rs.3,25,70,478 - Rs. 1,27,64,053 = Rs.1,98,06,425/-) on account of Provision of VPI and Rs.21,01,619/- on account of Provision of Doubtful Debts], remained to be taxed. 3 ITA No.926/PUN/2024 3. For the reasons stated hereinabove, the order made by the Assessing Officer in your case for AY 2016-17 appears to be erroneous in so far as it is prejudicial to the interest of the revenue. Accordingly, and by virtue of the authority vested in the undersigned as per the provisions of section 263 of the Income Tax Act 1961, the said order is proposed to be revised under the said section. 5. You are hereby given an opportunity of being heard to explain as to why the proposed revision should not be carried out. For this purpose, your case is posted for hearing on 25.01.2024 at 04.30 PM.” 5. The assessee in response to the same furnished a reply stating that there is no error in the order of the Assessing Officer. However, the Ld. PCIT was not satisfied with the arguments advanced by the assessee and set aside the order passed by the Assessing Officer holding the same to be erroneous and prejudicial to the interest of Revenue by observing as under: “4. The claim of deduction of Rs.1,27,64,053/- has been described by the assessee to be in respect of the provision made by it for paying Variable Pay Incentive (VPI) to its employees. It has stated before me that VPI is a part of salary and it is mentioned in the appointment / yearly appraisal letters of the employees and since the amount is already determined or mentioned in the appointment letter or the yearly appraisal letter, VPI is not contingent on nature. Further, the assessee has also given a working of VPI that has been actually claimed as deduction by it in the computation of income filed by it. As regards the claim of 'provision for doubtful debts', the assessee has submitted that the deduction of Rs.21,01,619/- has been claimed correctly and also given a working of the same. 5. Having carefully considered the facts of this case and the assessee's submission, I do not find myself in agreement with its contention that there was no underassessment of income in its case. (i) As per the Income Tax Act, 1961, deduction for expenditure can be claimed under the provisions of section 37(1) in respect of expenditure not being in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee if it is laid out or expended wholly and exclusively for the purposes of its business. However, the prime condition for such claim under section 37(1) is that it should have crystallized during the impugned accounting year. This condition is admittedly not satisfied in respect of this claim of the assessee. 4 ITA No.926/PUN/2024 The assessee's working of the net disallowable component of the 'Provisions for VPI’ is not supported by any credible evidence and on the other hand, at Column no. 21(g) of the tax audit report for A.Y. 2016-17, the Tax Auditor has clearly and unambiguously listed an amount of Rs.3,25,70,478/- as a provision made by the assessee in its books of account that is contingent in nature. The assessee's contention before me that it was a part of the salary is not supported by any evidence and again does not provide any strength to its stand. According to its own books of account, this expenses has not been clubbed under the head of 'salary & wages expenses' and was in the nature of mere provision and not an expenditure. Further, it is not disputed that the assessee, on being confronted with this issue, has not disputed or tried to provide any corrigendum thereto from the Tax Auditor. Therefore, under these facts and circumstances, I am convinced that the FAO, in this case, has erred in not disallowing the said claim of deduction of Rs.1,27,64,053/-, (ii) As regards, the claim of deduction of Rs.21,01,619 in respect of 'provision for doubtful debts', the assessee has once again given a working of its calculation whereby it has tried to justify the said claim. I notice that in respect of this claim too the tax auditor has given a clear and unambiguous finding about the contingent nature of this expense. The assessee has once again not tried to explain or dispute the Tax auditor's remark in this regard. Further, the Income Tax Act, 1961 does not allow for any claim of deduction in respect of such 'provisions', as has been discussed earlier. Also, as the said claim is not in respect of 'bad debts written off, the provisions of section 36(1)(vii) do not come into play. Directions 6. In view of the above facts, I am of the considered opinion that the order passed under section 143(3) on 13.04.2021 by the FAO is erroneous in so far as it is prejudicial to the interests of the revenue and the same is set aside for framing fresh assessment in respect of the issue discussed above in light of the observations made in this order. The assessment is to be completed within the stipulated time-frame after conducting the necessary enquiries and giving due opportunity of being heard to the assessee. Further, wherever applicable, the Assessing Officer is also directed to initiate penalty proceedings as per the provisions of the Income Tax Act, 1961.” 6. Aggrieved with such order of the Ld. PCIT, the assessee is in appeal before the Tribunal. 5 ITA No.926/PUN/2024 7. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. PCIT and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. It is an admitted fact that in the tax audit report the tax auditors have reported that an amount of Rs.3,25,70,478/- on account of provision for VPI and Rs.21,01,619/- on account of provision for doubtful debts are liability of contingent in nature. It is also an admitted fact that in the computation of income only an amount of Rs.1,27,64,053/- on account of provision for VPI has been added back and no addition on account of provision for doubtful debts was made to the taxable income. Since the expenditure on account of provision for VPI and provision for doubtful debts was of contingent in nature, this should have been added to the taxable income, however, the Assessing Officer during the course of assessment proceedings has neither called for any explanation on this issue nor the assessee filed any reply during the course of assessment proceedings. We find from the working of the net disallowance component of the ‘Provision for VPI’ that it is not supported by any credible evidence. Further, in column No.21(g) of the tax audit report, the tax auditor has clearly and unambiguously listed an amount of Rs.3,25,70,478/- as a provision made by the assessee in its books of account as contingent in nature. Since the tax auditor gave a clear and unambiguous finding about the contingent nature of the expenses and since the Assessing Officer has neither called for any explanation from the assessee nor the assessee filed any reply during the course of assessment proceedings, therefore, the order passed by the Assessing Officer, in our opinion, has become erroneous in so far as it is 6 ITA No.926/PUN/2024 prejudicial to the interests of Revenue. Therefore, the Ld. PCIT in our opinion is fully justified in invoking the jurisdiction u/s 263 of the Act and thereby setting aside the order to the file of the Assessing Officer with a direction to conduct necessary enquiries and pass the order after giving due opportunity of being heard to the assessee. In view of the above discussion and in view of the detailed reasoning given by the Ld. PCIT in setting aside the order u/s 263 of the Act, we do not find any infirmity in the same. Accordingly, the same is upheld and the grounds raised by the assessee are dismissed. 8. In the result, the appeal filed by the assessee is dismissed. Order pronounced in the open Court on 5th June, 2025. Sd/- Sd/- (VINAY BHAMORE) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 5th June, 2025 GCVSR आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपीलार्थी / The Appellant; 2. प्रत्यर्थी / The Respondent 3. 4. DR, ITAT, ‘A’ Bench, Pune गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune 7 ITA No.926/PUN/2024 S.No. Details Date Initials Designation 1 Draft dictated on 05.06.2025 Sr. PS/PS 2 Draft placed before author 05.06.2025 Sr. PS/PS 3 Draft proposed & placed before the Second Member JM/AM 4 Draft discussed/approved by Second Member AM/AM 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order "