ITAT Quashes Rs. 49.79 Cr Additions; Held Consolidated Accounts Ignored

The assessee company, engaged in software development, filed its return declaring Rs. 40.21 crore income. During scrutiny, the AO added Rs. 49.79 crore as unexplained income under Section 68 by comparing the assessee’s standalone financials with its consolidated group accounts, which included revenue of its wholly owned foreign subsidiaries. The AO also disallowed Rs. 4.11 crore as capital expenditure on software and added Rs. 57.21 lakh as prior period loss related to the sale of investments.

The CIT(A) upheld the additions, leading the assessee to approach the Tribunal.

Issue Raised: Does using consolidated group financials rather than the assessee’s independent audited accounts allow for income tax additions, and were related disallowances on software and prior-period expenses justified without conducting a proper factual inquiry?

ITAT’s Decision: The ITAT ruled that consolidated group results prepared for disclosure purposes under corporate law are not relevant for tax assessment; only standalone financials are. Since the alleged income was from foreign subsidiaries that were subject to separate taxes abroad, it revoked the Rs. 49.79 crore addition. Regarding the software expense, the Tribunal reversed the disallowance after acknowledging that recurring license fees and cloud subscriptions were revenue in nature. The Tribunal pointed out factual disagreements with the Rs. 57.21 lakh investment adjustment and remanded the case for verification.

Thus, the tribunal directed the AO to pass a fresh order after giving the assessee due hearing.

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