2016 (7) TMI 382 - AT - Income Tax

Disallowance under section 40A(3) - Power of CIT(A) to enhance the assessment - principles of natural justice - Held that - Section 251(2) of the Act stipulates that the learned CIT(A) shall not enhance an assessment, or a penalty, etc. unless the appellant has had a reasonable opportunity of showing cause against such enhancement. As per the relevant portion of the learned CIT(A) s finding in the impugned order we find that the learned CIT(A) did not afford the assessee in the case on hand any opportunity whatsoever, let alone reasonable opportunity of showing cause against such enhancement and in our considered view this failure on the part of the learned CIT(A) being in violation of the basic principles of natural justice would render his enhancement unsustainable in law. We, therefore, in the interest of substantial justice set aside the learned CIT(A) s finding enhancing the assessee s income by ₹ 81,05,294/- under section 40A(3) of the Act, comprising the total actual payment of handling charges plus sweeping labour charges and restore the matter to his file for de novo consideration and adjudication thereon after affording the assessee adequate opportunities to make submissions, file details, documents, etc. required in this regard. - Decided in favour of assessee for statistical purposes. Disallowance under section 40(a)(ia) - payments made by the assessee for audit fees, legal fees and professional fees for non-deduction of tax at source - Held that - While making this disallowance under section 40(a)(ia) of the Act it is seen that neither the AO nor the learned CIT(A) has mentioned under which section of the Act the assessee was required to deduct tax at source on the aforesaid payments. Moreover, as observed that, the assessee s contentions that no disallowance under section 40(a)(ia) of the Act was called for since the parties to whom such payments were made during the year, i.e. Advocate, Lawyer, etc. had included the same in their respective returns of income; was also brushed aside without being addressed by the learned CIT(A) while recording his finding. We, therefore, in the interest of equity and justice set aside the findings of the authorities below and restore this issue to the file of the learned CIT(A) for de novo examination and adjudication thereon in accordance with law by way of a speaking order, after affording both the AO and the assessee, adequate opportunity of being heard and to file details/submissions required in this regard - Decided in favour of assessee for statistical purposes. Disallowance of clearing and forwarding charges - Held that - There is no dispute with the fact that the cash expenditure claimed to have been incurred for clearing and forwarding activities of the employees/ labourers of the assessee firm at Bombay Docks and JNPT, Nava Sheva are only supported by self made vouchers. In our view, the authorities below appear to have been reasonable in allowing 70% of the expenditure claimed and in disallowing only 30% thereof, considering the business activities of the assessee. From the details on record, we find that apart from raising this ground of appeal, the assessee has failed to place on record before us any material evidence to controvert the factual findings rendered by the authorities below on this issue. In this view of the matter, we find no reason to interfere with or deviate from the finding recorded by the learned CIT(A) in the impugned order and therefore uphold the disallowance of 30% of clearing and forwarding expenses - Decided against assessee

Summary

Issues Involved:
1. Disallowance under section 40A(3) of the Income Tax Act.
2. Disallowance under section 40(a)(ia) of the Income Tax Act.
3. Disallowance of clearing and forwarding charges.

Detailed Analysis:

1. Disallowance under Section 40A(3):
The assessee challenged the enhancement of disallowance by the CIT(A) from ?30,40,357/- to ?81,05,294/- under section 40A(3) of the Income Tax Act. The CIT(A) found the AO's disallowance of 20% of cash payments for stevedoring charges to be erroneous and baseless, as it was done without verifying the actual cash payments. Upon examination, the CIT(A) discovered that payments exceeding ?20,000/- were made in cash for handling charges and sweeping labour charges, thus attracting the provisions of section 40A(3). However, the Tribunal noted that the CIT(A) did not provide the assessee with a reasonable opportunity to show cause against the enhancement, violating principles of natural justice. Consequently, the Tribunal set aside the enhancement and remanded the matter back to the CIT(A) for de novo consideration after affording the assessee adequate opportunity to present its case.

2. Disallowance under Section 40(a)(ia):
The assessee contended that the disallowance of legal fees, audit fees, and professional fees totaling ?13,39,322/- under section 40(a)(ia) was erroneous, as these fees were already paid during the year and included in the recipients' returns of income. The Tribunal observed that neither the AO nor the CIT(A) specified under which section the tax was required to be deducted at source. Additionally, the CIT(A) did not address the assessee's contention regarding the inclusion of these payments in the recipients' returns. Therefore, the Tribunal set aside the findings of the authorities below and remanded the issue back to the CIT(A) for a fresh examination and adjudication, ensuring both the AO and the assessee are given adequate opportunities to present their cases.

3. Disallowance of Clearing and Forwarding Charges:
The assessee argued against the disallowance of ?1,95,395/- (30% of clearing and forwarding expenses amounting to ?6,51,318/-), claiming these expenses had to be paid in cash to dock authorities. The Tribunal noted that the expenses were supported only by self-made vouchers. Considering the nature of the business and the reasonableness of the authorities in allowing 70% of the claimed expenses, the Tribunal found no reason to interfere with the CIT(A)'s decision and upheld the disallowance of 30% of the clearing and forwarding expenses.

General Ground:
The Tribunal dismissed the general ground raised by the assessee as infructuous, as it did not require any adjudication.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, setting aside and remanding specific issues back to the CIT(A) for fresh consideration while upholding other disallowances. The order was pronounced in the open court on 3rd June 2016.