Faceless Assessment Completed Without SCN: ITAT Deletes Rs. 1.64 Crore Addition

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the relief granted by the Commissioner of Income Tax (Appeals), holding that additions made during faceless assessment proceedings could not survive where no show cause notice or draft assessment order was issued to the assessee before finalising the assessment. The bench of Raj Kumar Chauhan (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that the Assessing Officer failed to follow the mandatory procedure prescribed under the faceless assessment regime and proceeded to make additions without granting proper opportunity to the assessee. The appeal arose from Assessment Year 2018-19, where the Assessing Officer had made several additions and disallowances relating to computer maintenance expenses, building maintenance expenses, auditor payments, variation in turnover, and payments made to key managerial personnel. According to the records, the assessee company had originally filed its return on the basis of unaudited books because its statutory audit could not be completed before the due date. The company stated that it had discovered serious misappropriation of funds by former employees and management personnel handling financial affairs during FY 2017-18. Consequently, the parent company replaced the management and statutory auditors and lodged an FIR with the Economic Offences Wing, New Delhi. The new statutory auditor was appointed on 17 January 2019 and subsequently completed the audit. The assessee later submitted audited financial statements and revised computation of income during the assessment proceedings. However, the Assessing Officer treated the revised audit exercise as an “after-thought” and proceeded to make several additions. These included disallowance of 30% expenditure under Section 40(a)(ia), 50% disallowance of payments made to specified persons under Section 40A(2)(b), and separate disallowances relating to computer maintenance, building maintenance, auditor payments, and turnover differences between audited and unaudited accounts. Buy Now: Income Tax Judgments E-Compilation : April 2026 Before the CIT(A), the assessee argued that the entire assessment proceedings were vitiated because no show cause notice or draft assessment order was issued despite adverse variations being proposed under the faceless assessment scheme. The assessee also placed on record details showing that throughout the proceedings only notices under Sections 143(2) and 142(1) had been issued, and no draft assessment order was ever served. The assessee relied upon various High Court rulings, including KL Trading Corporation v. National E-Assessment Centre, contending that where prejudicial variation is proposed under faceless assessment, issuance of a show cause notice is mandatory. The CIT(A) accepted the assessee’s contentions and deleted the additions after holding that the Assessing Officer had acted merely on assumptions without granting opportunity to explain the claims and without examining the supporting material already available on record. While dealing with computer maintenance expenses of ₹29.32 lakh, the appellate authority accepted that the assessee was engaged in the software business where substantial expenditure on software maintenance and operational support is normal business expenditure and not capital in nature. Similarly, the addition relating to building maintenance was deleted after the CIT(A) observed that there is no prohibition on a tenant incurring repair and maintenance expenses for rented premises and that the Assessing Officer’s suspicion merely because the assessee did not own the building was unjustified. The disallowance of ₹51.72 lakh paid to auditors was also deleted after the appellate authority found that the Assessing Officer had ignored documentary evidence relating to statutory audit, taxation matters, and company law services rendered by the audit firm. On the issue of turnover differences amounting to ₹1.64 crore between audited and unaudited accounts, the assessee argued that the Assessing Officer selectively accepted enhanced turnover figures from audited accounts while ignoring corresponding revised expenditure figures and higher taxes already paid on the revised computation. The CIT(A) agreed and held that the Assessing Officer could not adopt a “pick and choose” approach by accepting only facts favourable to Revenue while rejecting related expenditure claims without examination. The appellate authority also deleted the disallowance relating to managerial remuneration under Section 40A(2)(b), observing that the Assessing Officer had not brought any material on record to establish that the payments were excessive or unreasonable having regard to fair market value or business needs, as required under the statute. Upholding the CIT(A)’s findings, the ITAT noted that all relevant materials had already been placed before the Assessing Officer, but the officer failed to consider them on merits and instead rejected the audited figures solely because they were filed later during the assessment proceedings. The Tribunal held that the Assessing Officer accepted the increase in revenue disclosed in audited accounts but rejected the corresponding expenditure claims without following due process prescribed under Section 144B governing faceless assessments. Finding no infirmity in the order of the CIT(A), the ITAT dismissed the Revenue’s appeal. Case Details Case Title: ACIT Versus Tumlare Software Services Pvt. Ltd. Citation: JURISHOUR-1136-ITA-2026(DEL) Case No.: ITANo.3114/DEL/2023 Date: 06.05.2026 Counsel For Appellant: Manish Kumar, CA Counsel For Respondent: Ankush Kalra, Sr. DR Click Here To Read Order Read More: CESTAT Reduces Penalty in EPCG Fraud Case Involving Third-Party Shipping Bills

Faceless Assessment Completed Without SCN: ITAT Deletes Rs. 1.64 Crore Addition

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