THE COMMISSIONER OF INCOMETAX vs. SRI C.V.SEBASTIAN

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ITA/450/2009HC KeralaKLHC01025211200916 December 2013Bench: HONOURABLE MR.JUSTICE A.M.SHAFFIQUE,HONOURABLE THE CHIEF JUSTICE DR. MANJULA CHELLUR6 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the disallowance made by the Assessing Officer under Section 40A(3) was not a prima facie adjustment permissible under Section 143(1)(a) without further inquiry. The Court noted that Section 40A(3) read with Rule 6DD requires the AO to examine whether the assessee's cash payments exceeding ₹10,000 fall under any of the exceptions provided in Rule 6DD. The AO failed to call for further details from the assessee to ascertain if the payments qualified for exceptions under Rule 6DD, which is a mandatory procedural step. The Court relied on the precedents cited by the assessee, emphasizing that the AO must give the assessee an opportunity to prove their claim before making such disallowances. Consequently, the Court found that the AO's action was not justified. The appeal was allowed, the intimation under Section 143(1)(a) was quashed, and the orders of the appellate authorities were set aside. The matter was remitted back to the AO to follow the prescribed procedure under Section 40A(3) and Rule 6DD, directing the AO to issue a notice to the assessee for producing supporting material within three months.

What were the facts?

The Revenue, Commissioner of Income Tax, Cochin, filed an appeal against the order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, for the assessment year 1996-97. The assessment was completed under Section 143(1)(a) of the Income Tax Act. The Assessing Officer (AO) made an adjustment by disallowing 20% of cash payments exceeding ₹10,000, amounting to ₹5,86,437, under Section 40A(3). The assessee, Sri. C.V. Sebastian (Chathamkandathil Traders), challenged this disallowance before the first appellate authority, who ruled in favor of the assessee. The ITAT confirmed the first appellate authority's order. The Revenue is now before the High Court challenging the ITAT's decision.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and in fact in holding that the disallowance of ₹5,86,437 made by the Assessing Officer in determining the total income does not come under the purview of prima facie adjustment prescribed under Section 143(1)(a) of the Income Tax Act? Assessee's Contentions: The assessee argued that the AO cannot unilaterally disallow a claim without providing an opportunity to the assessee to prove it. Reliance was placed on the decisions in Parikh Engineering and Body Building Co. Ltd. and another v. Union of India and others [ITR 238 page 554] and S.R.F. Charitable Trust v. Union of India and others [ITR 193 page 94]. Revenue's Contentions: The Revenue contended that the intimation under Section 143(1)(a) clearly indicated the disallowance of 20% of cash payments under Section 40A(3) as per the audit report. The Revenue argued that the AO had the power to make such adjustments under Section 143(1)(a).

Which sections of the Income-tax Act were involved?

Section 143(1)(a),Section 40A(3)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR & THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE MONDAY, THE 16TH DAY OF DECEMBER 2013/25TH AGRAHAYANA, 1935 ITA.No. 450 of 2009 ------------------- AGAINST THE ORDER IN ITA 272/COCH/2001 of I.T.A.TRIBUNAL, COCHIN BENCH DATED 30-01-2004 ............... APPELLANT/APPELLANT : ---------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT : --------------------------------- SRI.C.V.SEBASTIAN, CHATHAMKANDATHIL TRADERS, PROVISION DEALER MARKET P.O., MUVATTUPUZHA. BY ADVS. SRI.V.M.KURIAN SRI.MATHEW B. KURIAN SRI.K.T.THOMAS SRI.C.N.SREEKUMAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 16-12-2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

Manjula Chellur, C.J. & A.M. Shaffique, J. - - - - - - - - - - - - - - - - - - - - - - - - - - - - I.T.A. No. 450 OF 2009 - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 16th day of December, 2013 JUDGMENT Manjula Chellur, C.J. The substantial question of law framed for consideration in this appeal is as under: “Whether, on the facts and in the circumstances of the case the Tribunal is right in law and in fact in holding that the disallowance of Rs.5,86,437/- made by the Assessing Officer in determining the total income does not come under the purview of prima facie adjustment prescribed u/s.143(1) (a) of the I.T. Act ?” 2. This appeal is filed by revenue pertaining to the assessment year 1996-97. The assessment proceedings came to be completed under Section 143 (1)(a) of the Income Tax Act. At that point of time the assessing officer made certain adjustments. He added 20% of the cash payments made exceeding 10,000/- during the previous year relevant to the ₹ assessment year of 1996-97 as adjustment to the total income while sending the intimation to the assessee under Section 143

ITA No. 450 of 2009 -:2:- (1)(a). This came to be challenged before the first appellate authority which ended in Annexure B order. The appeal went in favour of the assessee. Therefore, the revenue challenged the order of the appellate authority before the appellate Tribunal which resulted in Annexure C order confirming the order of the first appellate authority. Aggrieved by the same the revenue is before us in this appeal. 3. According to the learned Standing Counsel, Annexure A intimation issued under Section 143(1) (a) of the Income Tax Act, clearly indicates that 20% of 29,32,184/- was ₹ disallowed under Section 40A(3) as per the audit report. Therefore, according to learned Standing Counsel, intimation under Section 143(1)(a) was given giving the details as indicated above. On perusal of Section 40A (3) read with Rule 6DD of the Income Tax Rules, it is clear that the assessing officer has to make such disallowance as required under Section 40A(3) only if there is proper material available either in the returns or the records accompanying the reports.

ITA No. 450 of 2009 -:3:- 4. Rule 6DD enumerates several circumstances where payment of cash could be made by the assessee even if it exceeds 10,000/- at the relevant point of time. Admittedly the ₹ respondent/assessee was dealing with a provision shop and as per Rule 6DD certain clauses allows him to make payments in cash exceeding 10,000/-. Before arriving at a conclusion that ₹ 20% of 29 lakhs and odd has to be disallowed in terms of Section 40A(3) of the Act, the assessing officer ought to have called for further details from the assessee in order to understand whether such claim could be made under Rule 6DD by the assessee. Apparently such exercise was not done by the assessing officer which is mandatory as laid down in the two decisions relied upon by the respondent assessee, i.e., Parikh Engineering and Body Building Co. Ltd. and another v. Union of India and others [ITR 238 page 554] and S.R.F. Charitable Trust v. Union of India and others [ITR 193 page 94]. These two decisions make it clear that the assessing officer cannot unilaterally disallow the claim made by the assessee unless and until he calls upon the assessee to prove the claim made by him. Only after giving such

ITA No. 450 of 2009 -:4:- opportunity, from the material placed on record, the assessing officer can disallow the claim as required under Section 40A(3) read with Rule 6DD of the Act. In the present case, no such exercise was undertaken. Hence, we are of the opinion, this deserves to be remitted back to the assessing officer to follow the procedure as provided under Section 40A(3) read with Rule 6DD and pass orders within three months from the date of receipt of a copy of this judgment. Assessing Officer is directed to issue required notice calling upon the assessee to produce material in support of the claim made by the assessee as indicated above. Hence Income Tax Appeal is allowed. Annexure A is quashed and Annexures B and C are set aside. Manjula Chellur, Chief Justice. A.M. Shaffique, Judge. ttb/17/12

ITA No. 450 of 2009 -:5:-

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