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Income Tax Appellate Tribunal, “C(SMC
Before: Shri A. T. Varkey, JM]
This is an appeal preferred by the assessee against the order of Ld. CIT(A)-4, Kolkata dated 28-08-2019 for the assessment year 2017-18.
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
2 ITA No. 2350/Kol/2019 M/s. Piyanshu Chemicals Pvt. Ltd., AY- 2017-18 has shown the amount to be disallowed in the return of income and the CPC has merely matched the different columns and made the disallowances. Hence, according to Ld. CIT(A), there seems no error in the computation made by the AO (CPC). So, he dismissed the assessee’s ground of appeal. Aggrieved, the assessee is in appeal before this Tribunal.
I have heard both the sides and have perused the material available on record. It is noted that the assessee’s return of income was processed by the CPC, Bangalore wherein the assessee had declared total income of R.11,93,30,100/-. Later the assessee received communication of proposed adjustment of Rs.7,10,679/- u/s. 143(1)(a) of the Act from the DCIT, CPC on 12.07.2018. This figure of Rs.7,10,679/-, according to Ld. AR, was a difference between the figure of Rs.11,70,671/- which was added back (disallowed) by the assessee in the return of income and the amount of Rs.18,81,350/- mentioned in the form 3CD Tax Audit Report which was the club expenses of the assessee company [i.e. (Rs.18,81,350 – Rs.11,70,671) = Rs.7,10,679]. Though the assessee clarified on 11.08.2018 pursuant to the communication of proposed adjustment dated 12.07.2018 the DCIT, CPC ignored the explanation and stuck to its stand and determined the total income at Rs.12,00,40,780/- by increasing the business income by Rs.7,10,679/-. The detailed break- up figure of Rs.18,81,350/- (as shown in the Tax Audit Report) and Rs.11,70,671/- which was disallowed/added back by the assessee in the return of income is as under: “Break-up of Rs.18,81,350/- [As disallowed in 143(1)] Club Expenditure Rs.18,80,285/- Penalty on Provident Fund Rs. 498/- Penalty on Entry Tax Rs. 567/- Total Rs.18,81,350/-
Break-up of Rs.11,70,671/- (Suo moto disallowed in computation) Expenditure incurred on CSR Activities Rs.11,57,883/- Interest on late payment of TDS Rs. 11,723/- Penalty on PF Rs. 498/- Penalty on Entry Tax Rs. 567/- Total Rs.11,70,671/-
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.
3 ITA No. 2350/Kol/2019 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. 438. It further appears that the tax audit report did not contain any break-up of the amount or the further information required in the light of the two provisos to s. 438. The tax auditor did not specify in-the tax audit report the amount inadmissible under s. 438. 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
4 ITA No. 2350/Kol/2019 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.
Order is pronounced in the open court on 19th February, 2020.
Sd/- (Aby. T. Varkey) Judicial Member
Dated :19th February, 2020
Jd.(Sr.P.S.)
Copy of the order forwarded to: Appellant – M/s. Piyanshu Chemicals Pvt. Ltd. 53A, Mescab Centre, 4th 1. floor, Tiljala Road, Topsia, Kolkata-700046. Respondent – DCIT Circle-12(1), Kolkata. 2 3. CIT(A)-4, Kolkata (sent through e-mail)
CIT- , Kolkata. 5. DR, ITAT, Kolkata. (sent through e-mail) By order,
/True Copy, Assistant Registrar