M/S PIYANSHU CHEMICALS PVT. LTD.,TOPSIA vs. D.C.I.T.,CIRCLE-12(1), KOLKATA

The main grievance of the assessee is against the action of the Ld. CIT(A) in confirming the action of the AO(CPC) in making disallowance of Rs.7,10,679/- u/s. 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”).

Brief facts of the case are that the assessee had filed an appeal before the Ld. CIT(A) against the intimation dated 02.02.2019 u/s. 143(1) of the Act passed by the DCIT(CPC), Bangalore. On appeal, the Ld. CIT(A) in the impugned order observed that the assessee company had filed return of income on 27.10.2017 declaring total income of Rs.11,93,30,100/-. Subsequently, the return was processed by CPC and intimation u/s. 143(1) was made on 12.07.2018 regarding certain inconsistencies in disallowances u/s. 37 of the Act. According to Ld. CIT(A), the assessee company had filed its response to the CPC on 11.08.2018. However, the AO (CPC) did not consider the same (reply of assessee) and passed the intimation order u/s. 143(1) of the Act on 02.02.2019 determining the total income of Rs.12,00,40,780/- by making an adjustment of Rs, 7,10,679/-. Then the Ld. CIT(A), dismissed the assessee’s ground of appeal by observing that the assessee himself

As noted above the AO(CPC) has disallowed the figure of Rs.7,10,679/- being the difference of Rs.18,81,350 – Rs.11,70,671. According to ld. AR, the confusion happened because amount of club expenses was wrongly reported by the auditor in the Tax Audit Report in column no. 21(a) and on the basis of which disallowance was made by CPC u/s. M/s. Piyanshu Chemicals Pvt. Ltd., AY- 2017-18 143(1) of the Act. The Ld. AR drew our attention to page A1 of the paper book wherein I find that a certificate of the auditor has been enclosed which states that this was an inadvertent error made by him. Therefore, the main contention of the Ld. AR is that the mistake of the auditor/clerical error in the Tax Audit Report cannot be the basis for disallowance of expenses which has been legally spent by the assessee wholly and exclusively for business purposes and, according to him, is an allowable claim which has been added in the hands of the assessee without giving proper opportunity of being heard. Thus, according to ld. AR, the club expenses from which Rs.7,10,679/- was disallowed was incurred by the assessee for the purpose of the business and is allowable u/s. 37 of the Act and could not have been disallowed that too partly without proper scrutiny. I find force in the argument of the Ld. AR since AO could not have resorted to disallowance merely on the basis of a tax audit report which was flawed and without considering the plea/explanation/clarification given by the assessee pursuant to the communication made by the CPC proposing the adjustment. After considering the explanation of the assessee if the CPC was not satisfied with the reply of the assessee, then it had to issue notice u/s. 143(2) of the Act as decided by the Hon’ble jurisdictional High Court. In this regard it is gainful to refer to the decision of the Hon’ble Calcutta High Court in the case of Peerless General Finance & Investment Co. Ltd. Vs. CIT 228 CTR 72 wherein it has been held that – “It is also necessary for the AO to examine second proviso before making any disallowance. A disallowance cannot be made under s. 438 simply because payment was not made within the previous year. From the facts it appears that the information contained in the tax audit report did not enable the AO to make any prima facie adjustments under s. 143(l)(a) with reference to the provisions of s.

Therefore, it appears to us that it was necessary for the AO to issue a notice under s. 143(2) for the purpose of making a proper assessment under s. 143(3).”

Therefore, in the present case, I am of the opinion that based on the audit report during the proceedings u/s. 143(1) of the Act, no adjustment/disallowance/addition of the expenditure claimed by the assessee on account of club expenses could not have been disallowed without issue of notice u/s. 143(2) of the Act as held by the Hon’ble High court in Peerless General Finance Co. Ltd. (supra). Further, I note that the assessee had already suo moto disallowed expenditure incurred on CSR activities amounting to Rs.11,57,883/-, interest on late payment of TDS, penalty of PF and penalty of entry tax total mounting to Rs.11,70,671/-. So, the allowability of club expenses which assessee claimed could not M/s. Piyanshu Chemicals Pvt. Ltd., AY- 2017-18 have been disallowed without giving proper opportunity to the assessee, which omission on the part of AO [CPC] is against the principles of Natural Justice and it cannot be sustained. Therefore, I allow the appeal of the assessee and direct deletion of addition of Rs.7,10,679/-.

In the result, the appeal of assessee is allowed.