2023 (5) TMI 1372 - AT - Income Tax

Disallowance u/s.40A(3) vide intimation u/s.143(1) - assessee had incurred expenses towards purchases made from the State Government of Chhattisgarh - HELD THAT - The legislature while enlarging the provisions of Section 143(1)(a) of the Act had set out the aforesaid manner and methodology which is to be ritually followed before making any adjustment. We are unable to persuade ourselves to subscribe to the manner in which the objections/response filed by the assessee to the proposed adjustment had been brushed aside; or in fact dispensed with by the CPC, Bengaluru, which as observed by us hereinabove, had rendered the entire mechanism provided u/s.143(1)(a) of the Act as redundant and otiose. As we cannot remain a mere spectator of the aforesaid whimsical exercise carried out by the CPC, Bengaluru which violates the clear mandate of Section 143(1)(a) of the Act, therefore, in all fairness in order to safeguard an assessee from being saddled with a tax liability which is not as per the mandate of law; and at the same time prevent leakage of any revenue to which the Government exchequer would be duly entitled for, restore the issue to the file of the A.O for afresh adjudication. A.O shall in the course of set-aside proceedings, as per the mandate of 2nd Proviso to Section 143(1)(a) of the Act consider the claim that was raised by the assessee vide its objection/response that was uploaded by him on 24.01.2019 (18 57 41) to the proposed adjustment that was intimated by the CPC, Bengaluru vide communication dated 21.01.2019, wherein he had claimed that no disallowance u/s.40A(3) of the payment made by him towards purchase of beer from State Government of Chhattisgarh was called for in his hands. We, thus, set-aside the order of the CIT(Appeals) and restore the matter to the file of the A.O. Needless to say, the A.O shall in the course of set-aside proceedings afford a reasonable opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Sustainability of disallowance under Section 40A(3) of the Income-tax Act, 1961.
2. Consideration of the assessee's response to the proposed adjustment under Section 143(1)(a) of the Act.

Issue-wise Detailed Analysis:

1. Sustainability of Disallowance under Section 40A(3):
The primary issue revolves around the disallowance of Rs. 57,62,920/- made by the CPC, Bengaluru under Section 40A(3) of the Income-tax Act. The assessee, an individual holding an FL-2 license on behalf of his partnership firm, had incurred expenses towards purchases made from the State Government of Chhattisgarh in a manner not prescribed under Section 40A(3). The auditor reported this in the audit report filed in Form 3CD. The CPC, Bengaluru, after issuing a show-cause notice to the assessee, proceeded with the disallowance despite the assessee's objections, which highlighted that the payments were made in cash as the State Government did not accept any other mode of payment. The Tribunal noted that the assessee had attempted to bring his case within the exception provided under Rule 6DD(b) of the Income Tax Rules, which allows payments in cash if made to the Government and required to be made in legal tender. The Tribunal held that the CPC, Bengaluru should have considered the assessee's explanation or provided reasons for rejecting it. The Tribunal thus restored the issue to the file of the A.O. for fresh adjudication, instructing the A.O. to consider the assessee's objections and afford a reasonable opportunity of being heard.

2. Consideration of the Assessee's Response to the Proposed Adjustment:
The Tribunal emphasized that the response filed by the assessee to the proposed adjustment was not considered by the CPC, Bengaluru, which violated the mandate of the "2nd proviso" to Section 143(1)(a) of the Act. The provision requires that any response received from the assessee must be considered before making any adjustment. The Tribunal found that the CPC, Bengaluru had summarily brushed aside the assessee's objections without providing cogent reasons, thereby rendering the mechanism under Section 143(1)(a) unworkable. The Tribunal observed that the legislature had set out a specific manner and methodology for making adjustments under this section, which must be followed ritually. Consequently, the Tribunal restored the matter to the A.O. for fresh adjudication, ensuring that the assessee's objections are duly considered.

Conclusion:
The Tribunal set aside the order of the CIT(A) and restored the matter to the A.O. for fresh adjudication, instructing the A.O. to consider the assessee's objections and provide a reasonable opportunity of being heard. The appeal of the assessee was allowed for statistical purposes.