Section 10AA Deduction Allowed Despite Late Filing of Form 56F: ITAT Bangalore Clarifies Procedural vs Substantive Requirements

Background of the Dispute

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT Bangalore) in Graymatter Software Services Private Limited Vs DCIT examined whether a claim for deduction under Section 10AA of the Income Tax Act 1961 can be rejected solely because Form 56F (the prescribed audit report) was not filed along with the original return of income under Section 139(1), even though it was furnished later during the proceedings.

The core controversy revolved around whether the timing of filing Form 56F is a mandatory condition affecting eligibility or merely a procedural requirement capable of being cured subsequently, so long as the audit report is ultimately on record and the assessee otherwise satisfies all substantive conditions for deduction under Section 10AA.

Facts of the Case

Assessee and Return Filing

  • The assessee, Graymatter Software Services Private Limited, is a private limited company operating as a registered SEZ unit engaged in software exports.
  • Commercial operations commenced in July 2012, making the unit eligible for deduction under Section 10AA, subject to fulfillment of the statutory conditions.
  • For Assessment Year 2018-19, the assessee filed its return of income on 30.11.2018, declaring total income of Rs. 1,54,45,870/-.
  • The assessee claimed deduction under Section 10AA amounting to **Rs. 1,06,67,165/-`.

Requirement of Form 56F

  • Under Section 10AA(8) read with Section 10A(5), an assessee claiming deduction is required to furnish an audit report in Form 56F, duly certified by an accountant.
  • Section 10A(5) provides that the deduction “shall not be admissible unless” the assessee furnishes the report in the prescribed form before the specified date referred to in Section 44AB.
  • In this case, the assessee did obtain the audit report in Form 56F, but failed to file it along with the return of income.
  • The assessee subsequently filed Form 56F on 30.11.2019, i.e., after the due date but before completion of all proceedings.

CPC Processing and Rectification

  1. The return was selected for scrutiny under Section 143(2).
  2. On 13.03.2020, the Centralized Processing Centre (CPC), Bangalore issued a communication under Section 143(1)(a) proposing to disallow the deduction of Rs. 1,06,67,165/- for non-filing of Form 56F along with the original return.
  3. The processing under Section 143(1) was completed on 11.06.2020, and the claim under Section 10AA was disallowed.
  4. The assessee filed a rectification application under Section 154 on 26.06.2020, pointing out that Form 56F had already been filed and that the lapse was only procedural.
  5. The rectification request was rejected, and the denial of deduction under Section 10AA was maintained.

First Appeal before CIT(A)

  • The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) – 4, Mumbai against the order passed under Section 154.
  • The CIT(A) upheld the CPC’s action and confirmed the disallowance of the deduction under Section 10AA.
  • The appellate authority accepted the view that when the statute prescribes that a thing must be done in a particular manner, it has to be done in exactly that manner, and no deviation is permissible.

Aggrieved, the assessee carried the matter to the ITAT Bangalore challenging the denial of deduction and consequential interest under Section 234B and Section 234C.

Grounds Raised by the Assessee

The assessee’s grievance before the Tribunal can be broadly grouped as follows: