Facts of the Case

The assessee, Chintels India Limited, engaged in horticulture, agriculture, and real estate business, filed its return for AY 2008–09. No scrutiny notice under Section 143(2) was issued within the statutory limitation period. Thereafter, a search operation under Section 132 was conducted.

Subsequently, notice under Section 153A was issued for six assessment years. During assessment proceedings, the Assessing Officer found that the assessee had claimed depreciation on software allegedly purchased from Macro Infotech Limited amounting to Rs. 4.24 crores.

The Revenue’s investigation revealed that the supplier company was non-existent and allegedly engaged in providing accommodation entries and bogus invoices. The assessee claimed the software was used for project development and later handed over under a joint development arrangement.

The Revenue rejected this explanation due to lack of documentary evidence and disallowed depreciation. The CIT(A) and ITAT affirmed the addition.

 

Issues Involved

1. Whether an assessment becomes final where no notice under Section 143(2) is issued within the prescribed limitation?

2. Whether completed assessments can be reopened under Section 153A in absence of incriminating material?

3. Whether depreciation on software can be allowed when genuineness of purchase and actual use are not established?

 

Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee argued that for AY 2008–09, since no notice under Section 143(2) was issued within limitation, the assessment had attained finality and was not pending on the date of search.
  • It relied upon CBDT Circular No. 549 clarifying that non-issuance of scrutiny notice makes the return final.
  • It was contended that no incriminating material relating to AY 2008–09 was found during search.
  • Regarding software depreciation, the assessee argued that payment was made through banking channels and reflected in books of accounts.
  • It contended that the software was used as a marketing and development tool and later transferred under a business arrangement.
  • The assessee also argued violation of natural justice as statements relied upon by Revenue were not supplied.

 

Respondent’s Arguments (Revenue’s Contentions)

  • The Revenue argued that the assessment should be treated as pending as intimation under Section 143(1) was issued around the date of search.
  • It contended that Section 153A empowered reassessment following search.
  • On depreciation, Revenue argued that the supplier was a bogus concern.
  • No evidence existed proving actual installation, ownership, or use of software.
  • The claim of software transfer to another entity was unsupported by documentary proof.
  • Therefore, depreciation was rightly disallowed.

 

Court Findings / Observations

Issue 1: Completed Assessment under Section 143(2)

The Court held that where no notice under Section 143(2) is issued within the prescribed period, the assessment proceedings attain finality.

Mere processing under Section 143(1) does not make the assessment “pending.”

Thus, for AY 2008–09, the ITAT erred in treating the assessment as pending.

Issue 2: Section 153A and Finalized Assessments

The Court reaffirmed that finalized assessments cannot be disturbed in absence of incriminating material discovered during search.

Since no incriminating material was found for AY 2008–09, the Revenue could not disturb the completed assessment.

Issue 3: Depreciation on Software

For AY 2009–10 and AY 2010–11, the Court upheld disallowance of depreciation.

The assessee failed to establish:

  • Actual purchase
  • Ownership
  • Installation
  • Business usage
  • Transfer to third party

The Court held the transaction lacked commercial genuineness.

 

Court Order / Final Decision

For AY 2008–09 (ITA 581/2016)

Appeal allowed in favour of the assessee.

The Court held that the assessment had attained finality and could not be treated as pending.

For AY 2009–10 & AY 2010–11 (ITA 707/2016 & 731/2016)

Appeals dismissed.

Depreciation disallowance upheld in favour of Revenue.

 

Important Clarification

1. Finality of Return

Non-issuance of Section 143(2) notice within limitation grants finality to the return.

2. Scope of Section 153A

Completed assessments cannot be reassessed without incriminating material found during search.

3. Depreciation Claim

Depreciation on software requires proof of:

  • Genuine acquisition
  • Ownership
  • Actual business use

Paper entries alone are insufficient.

 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:3692-DB/SMD19072017ITA5812016.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.