2022 (3) TMI 1015 - AT - Income Tax

Disallowance of expenditure while processing the return u/s 143(1) by the CPC - Return of income was processed u/s. 143(1) and Expenditure incurred towards club membership, entrance fee and subscription fee disallowed - No opportunity was granted to the assessee to put forth his stand - The assessee filed rectification petition u/s. 154 of the Act before the CPC. - The CPC rejected assessee s petition for rectification. - HELD THAT - In the instant case since return of the assessee was processed u/s. 143(1) of the Act, no opportunity was granted to the assessee to put forth his stand before disallowing the expenditure. In the First Appellate proceedings, the CIT(A) dismissed the appeal of assessee against the order passed u/s. 154 of the Act on the ground that the issue raised is debatable. If that be so, the CPC has erred in disallowing the assessee s claim of expenditure while processing the return of income u/s. 143(1) - Revenue cannot in unilateral proceedings disallow expenditure without affording an opportunity to the assessee. What cannot be done u/s. 154 on the ground of debatability ,cannot be done u/s. 143(1) of the Act to the assessee s claim on which two views are possible A debatable issue cannot be a subject matter of adjustment u/s. 143(1) of the Act. In the case of Bajaj Auto Finance Ltd. vs. CIT 2018 (2) TMI 1716 - BOMBAY HIGH COURT has held that debatable claim cannot be disallowed by way of an intimation u/s.143(1) Thus we find that the authorities below have erred in disallowing assessee s claim of expenditure in proceedings u/s. 143(1) of the Act and thereafter, rejecting assessee s application u/s. 154 of the Act. Ergo, the impugned order is set-aside and appeal by the assessee is allowed.

Summary

Issues: Disallowance of expenditure under section 143(1) of the Income Tax Act, 1961 and rectification petition under section 154 of the Act.

Analysis:
1. The appellant filed an appeal against the order of the Commission of Income Tax (Appeals) for the Assessment Year 2018-19, challenging the disallowance of expenditure towards club membership, entrance fee, and subscription fee totaling ?35.00 lakhs. The Central Processing Centre (CPC) disallowed the claim during the processing of the appellant's return under section 143(1) of the Act.

2. The appellant subsequently filed a rectification petition under section 154 of the Act, which was rejected by the CPC. The Commission of Income Tax (Appeals) upheld the rejection, stating that the issue was debatable and fell outside the purview of section 154. The appellant appealed to the Tribunal against this decision.

3. During the proceedings, it was argued that before disallowing any expenditure, the appellant must be given an opportunity to be heard. As the return was processed under section 143(1) of the Act, the appellant was not granted this opportunity, leading to the disallowance of the expenditure without proper consideration of the appellant's position.

4. The Tribunal referred to a judgment by the Hon'ble Bombay High Court in a similar case, stating that debatable claims cannot be disallowed through an intimation under section 143(1) of the Act. The Tribunal found that the authorities erred in disallowing the appellant's expenditure and rejecting the rectification application under section 154 of the Act. Therefore, the impugned order was set aside, and the appeal by the appellant was allowed.

5. The Tribunal emphasized that unilateral disallowance of expenditure without affording the appellant an opportunity to present their case is not permissible under the law. The judgment highlighted the importance of providing a fair hearing to the taxpayer before making any adjustments or disallowances, especially in cases where the issue is debatable.

6. Ultimately, the Tribunal ruled in favor of the appellant, overturning the decisions of the lower authorities and allowing the appeal. The judgment underscored the need for procedural fairness and adherence to legal principles in matters concerning the disallowance of expenditures under the Income Tax Act, 1961.