VERTEX MANUFACTURING CO. P LTD,MUMBAI vs. DCIT 8(3), MUMBAI

O R D E R Per Jason P Boaz, Accountant Member

This appeal by assessee is directed against the order of the CIT(A) -18, Mumbai dated 17.07.2014 for A.Y. 2011-12.

2.1 The assessee company, earlier engaged in the business of manufacturing of ‘Sentinel’ brand switches and fuses, which admittedly ceased since August 2008, filed its return of income for A.Y 2011-12 on 30.09.2011 declaring loss of Rs. 50,93,958/-. The return was processed u/s. 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) and the case was subsequently taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer (‘AO’) observed from an appraisal of the financial statements of the assessee that apart from other receipts aggregating to Rs.17,12,592/- from royalty, dividend, technical consultation charges, etc., sales of only Rs.8,628/- was credited to the Profit & Loss account which was part of the assessee’s opening stock, whereas various operational expenses, personnel expenses and financial expenses of Rs.58,78,226/- were debited resulting in business loss of Rs.34,65,789/-. According to the AO, expenditure by way of Director’s remuneration claimed (Rs.12,12,972/-) suffered disallowance u/s. 40A(2) of the Act in the A.Y. 2006-07 to 2008-09, which was confirmed by the learned CIT(A) and the matter had reached finality since the assessee did not prefer any further appeal. The AO, observing that since there was no business activity in the case on hand, was of the view that the claim of operating expenses like power/fuel etc., personnel expenses like Directors remuneration etc., and administrative expenses like motor car/conveyance, repairs, bank charges, professional fees, etc., remain unsubstantiated. In that view of the matter, the AO proceeded to disallow the expenses claimed to the extent of the assessee’s business loss of Rs.34,65,789/-. Disallowance u/s. 14A read with Rule 8D was also computed at Rs.13,37,567/-. In this manner, the AO completed the assessment u/s. 143(3) of the Act vide order dated 28.11.2013 determining the assessee’s loss at Rs.16,28,169/- 2.2 Aggrieved by the order of the assessment for A.Y. 2011-12 dated 28.11.2013, the assessee preferred an appeal before the CIT(A) 18, Mumbai, challenging the disallowance of expenses claimed amounting to Rs.34,65,789/- without affording the assessee and opportunity of being heard before making this disallowance. The assessee also challenged the disallowance u/s. 14A of the Act.

The learned CIT(A) dismissed the assessee’s appeal vide the impugned order dated.

17.07.2014.

3.1 Aggrieved by the order of the CIT(A) -18, Mumbai dted 17.07.2014 for A.Y. 2011-12, the assessee has preferred this appeal before the Tribunal raising the following grounds:-

“1. The learned CIT(Appeals) – 18 erred in confirming the addition on account of disallowance of expenses aggregating to Rs.34,65,789/- on the ground that the expenditure we increased in the absence of business activity. 2. The appellant craves leave to add, alter or amend any of the Grounds of appeal and submit a detailed statement of facts and case laws relied upon at the time of hearing.” 3.2 From the grounds raised (supra), the only issue before us in this appeal for adjudication in the disallowance of expenditure aggregating to Rs.34,65,789/- by the authorities below. At the outset of the hearing itself, the learned AR for the assesse submitted that while making the said disallowance of expenditure aggregating to Rs.34,65,789/- the AO had not afforded the assessee any opportunity of hearing or filing reply/rebuttal in the matter. According to the learned AR though ground of appeal no.2 was raised before the CIT(A) that no opportunity of hearing was afforded to the assessee before making the aforesaid disallowance, the learned CIT(A) has brushed away this claim by rendering a factually incorrect finding that the AO has given a show cause notice to the assessee to explain why the expenditure was debited to the profit and loss account when there was no business activity carried out during the year and that it was only after considering the assessee’s reply thereto that the AO made the disallowance of Rs.34,65,789/-. It was vehemently contended by the learned AR that no such show cause notice was issued by the AO or was received by the assessee. It was submitted that a perusal of the order of assessment dated 28.11.2013 for A.Y. 2011-12 clearly establishes that neither was any show cause notice issued by the AO to the assessee nor was any reply thereto filed by the assessee. It was contended that in these circumstances since the assessee was not afforded opportunity of hearing by the AO before making the aforesaid disallowance of expenditure, there has been violation of the principles of natural justice and on this short point alone, the finding of the authorities below be set aside at the threshold.

3.3 The learned DR, while placing support on the impugned order of the learned CIT(A); that the AO issued show cause notice to the assessee and adjudicated the matter after considering the assessee’s reply, submitted that he had no objection if the matter was set aside to the file of the AO for fresh adjudication of this matter after affording the assessee adequate opportunity in the matter since he could not controvert the assessee’s contention that show cause notice was not served.

3.4.1 We have heard both the parties and perused and carefully considered the material on record. As contended by the learned AR of the assessee, after perusal of the order of assessment for AY. 2011-12dated 28.11.2013, it does not appear to us that either any show cause notice was issued by the AO to the assessee proposing that the said disallowance was to be made or that the assessee had replied thereto. Even in the impugned order the learned CIT(A) has not given either the date or details of the AO’s show cause notice, if any, and neither the date nor details of the assessee’s reply thereto. Before us, the learned DR too was not able to controvert the averments of the assessee that no show cause notice was issued before making the said disallowance and, therefore, adequate opportunity was not afforded to the assessee to rebut the contentions of the AO. In these peculiar factual circumstances of the case on hand, we are of the view that the assessee was not afforded adequate opportunity of being heard in the matter before the AO proceeded to make the disallowance of expenditure aggregating to Rs.34,65,789/-.

In this view of the matter, we set aside the aforesaid disallowance made by the AO and resotre the said issue to the file of the AO for fresh consideration and adjudication thereon after affording the assessee adequate opportunity of being heard and file details/submissions required. It is ordered accordingly.

3.4.2 In view of our finding setting aside the issue of disallowance of expenditure aggregating to Rs.34,65,789/- to the file of the AO, we deem it appropriate to refrain from deciding the grounds raised in this regard on merits.

4 In the result, the assessee’s appeal for A.Y. 2011-12 is treated as allowed for statistical purposes.

Order pronounced in the open court on this day of 19th August 2016.