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Facts
The assessee, a partnership firm, filed its return of income for AY 2020-21 declaring a total income. The CPC determined a higher demand. The assessee's claim was rejected by the CPC without issuing a notice, and an order was passed under section 143(1). An application for rectification was rejected. The assessee filed an appeal against the impugned order.
Held
The tribunal noted that no opportunity of being heard was provided to the assessee before the CPC made adjustments. Relying on a High Court decision, it was held that an opportunity must be given before any adjustments are made. The issue of whether the assessee, as a contractor, falls under Section 194C and whether the disallowance under Section 40a(ia) was correctly applied, was not adjudicated by the AO or CIT(A).
Key Issues
Whether the AO erred in passing the order u/s 154 without providing an opportunity of being heard? Whether the disallowance u/s 40a(ia) was correctly applied to sub-contract expenses which are direct costs for a civil contractor?
Sections Cited
143(1), 154, 40a(ia), 194C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA
आदेश / O R D E R
PER DINESH MOHAN SINHA, JM:
Captioned appeal filed by the assessee, pertaining to assessment year 2020-21, is directed against the order passed by the National Faceless Appeal Centre [(in short “NFAC/Ld. CIT(A)”] vide order dated 21.05.2024, which in turn assessment order passed by Assessment Unit, Income Tax Department / Assessing Officer under section 154 of the Income Tax Act, 1961 (in short “the Act”), vide order dated 22.08.2022.
Grounds of appeal raised by the assessee are as follows;
1. On the facts and in the circumstances of the case as well as law on the subject, the Assistant Director of Income Tax, CPC (hereinafter referred as Learned AO) has erred in passing the order u/s 154 of the Income Tax Act without providing any opportunity of being heard as required u/s 154(3) of the IT Act/First Proviso to Section 143(1).
2. The Learned AddI/JCIT (A) (herein after referred as the Learned CIT(A), has erred in law and facts in retaining disallowance expenditure u/s 40a(ia) of Income Tax Act, 1961.
3. On the facts and in the circumstances of the case as well as law on the subject, learned CIT(A) has erred in holding that provisions of Section 40a(ia) are applicable to items covered u/s 28(1). 4. Appellant craves liberty to urge additional ground and to alter or delete any ground(s) either before or in the course of the hearing of the appeal.
Additional Grounds raised by the assessee are as follows;
ITEM NO 3 Intimation without providing Opportunity of being heard:
1. 1. Intimation u/s 143(1) r.w.s. 154 was passed without providing opportunity of being heard to the assessee in accordance with First Proviso to Section 143(1). ITEM NO 4 Wrong applicability of provision of Section 40(a)(ia): 1. CPC has made addition by way of disallowance u/s 40a(ia) without considering fact that non obstacle clause of section 40a(la) are not applicable to Purchase / Direct Expenses allowed as deduction u/s 28(i).
2. Assessee is engaged in the business of Civil Construction as Government Contractor. Sub Contract Expenses are Purchase of Service directly in relation to Sales of Services and the same falls under Trading Account of the Assessee. Assessee has incurred Sub Contract Expenses and deducted TDS thereon. The said expenses are Purchase Cost / in nature of Direct Cost adjustable against revenue for the purpose of determining the profit u/s 28(i). Such Expenses do not come under purview of Section 30 to Section 38 and accordingly not covered u/s 40a(ia). The appellant craves leave to add to alter, amend, modify, substitute, delete and/or rescind all or any of the Grounds of Appeal on or before the final hearing, if necessity so arises.
4. Briefly facts of the case that the appellant is Partnership firm and his present jurisdiction of assessment is with ITO Ward 1(2)(5), Rajkot. The appellant had 2 filled his return of income for Assessment Year 2020-21 on 27.03.2021 u/s. 139 declaring total income of Rs. 11,46,740/-. The Learned Assistant Director of Income Tax, CPC Bangaluru has determined demand of Rs. 83,10,320/-. That the Ld. CPC rejecting the claim of the assessee without issued of notice u/s. 143(1) clause 1 of the Act, and an order u/s. 143(1) of the Act passed on 22.08.2022. The assessee filed an application for rectification u/s. 154 of the Act, and the application was rejected by the Ld. ADIT/ CPC, Bengaluru.
That the assessee filed an appeal against the impugned order dated 22.08.2022 and rectified the order.
“In view of the above, I find no infirmity in the disallowance made by the CPC u/s. 40a(ia) for non-compliance of TDS provisions. The disallowance made is clearly as per the provisions of the Income Tax Act, 1961 and I concur with such disallowance/addition. Therefore, the appeal filed by the appellant is dismissed. In the result, the present appeal filed by the appellant stands dismissed.”
During the course of hearing, Ld. AR of the assessee prayed an opportunity to be given to the assessee to present the case before lower authority reject the appeal. However, Ld. AR of the assessee further submitted that all TDS has been deposited with department.
Ld. Sr. DR for the revenue relied on the order of the Ld. CIT(A) and not objected to the prayer of the assessee.
We have heard both the parties and perused the material available on record. We note that the no opportunity was given before the Ld. CPC, Bangaluru to the assessee. However, Before the Honourable Kolkata High Court in the case of CIT v. Natwarlal Chowdary Charitable Trust (1189 ITR 656), which has since decided the issue in favour of the appellant in accordance with the provisions of the first proviso to sub-section 1 of section 143, that an opportunity has to be provided to it before any adjustments are made in the return. We further note that the assessee is a contractor and undertake Work Contracts, Advertising Contracts, Broadcasting and telecasting contracts, Carriage of goods and passenger contracts, Supply of labour contracts. The assessee clearly covered under the section 194C of the Act. We further note that the assessee has moved an application for an additional ground during the appellate proceedings before the Ld. CIT(A). We further note that the issue covered in this case, that the appellant is contractor comes under the section 194C of the Act. The issue has not been adjudicated by the Ld. AO. We have note that the issue needs to be consider by the Ld. AO and as well as by the Ld. CIT(A). In the interest of justice, this issue is clearly covered u/s. 194C or u/s. 40a(ia) of the Act We set aside the order of Ld. AO and remit the matter back to the file of Ld. AO for fresh adjudication on merit after giving due opportunity to the assessee of being heard.
In the result, this appeal of the assessee is allowed for statistical purposes, in above terms.
Order pronounced in the open court on 17/02/2025