CPC if not satisfied with reply of assessee, has to issue notice u/s 143(2) before making disallowance

CPC if not satisfied with reply of assessee, has to issue notice u/s 143(2). No disallowance to be made merely on the basis of tax audit report 

ABCAUS Case Law Citation:
ABCAUS 3267 (2020) (02) ITAT

Important case law relied upon by the parties:
Peerless  General Finance & Investment Co. Ltd. Vs. CIT 228 CTR 72

In the instant case, the assessee had challenged the order passed by the CIT(A) by confirming the action of the AO(CPC) in making disallowance u/s 143(1) of the Income-tax Act, 1961 (the Act).

The assessee company had filed return of income. Subsequently, the return was processed by CPC and intimation u/s 143(1)(a) proposing adjustments to be made regarding certain inconsistencies in disallowances u/s 37 of the Act.   

The assessee company filed its response to the CPC. However, the AO(CPC) did not consider the reply of assessee and passed the intimation order u/s 143(1) of the Act determining the  total income by making  an  adjustment by way of disallowances u/s 37 of the Act.   

The assessee filed an appeal before the CIT(A) against the intimation u/s 143(1) of the Act passed by the DCIT(CPC), Bangalore. However, CIT(A) dismissed the assessee’s ground of appeal by observing that the assessee himself had shown the amount to be disallowed in the return of income and the CPC had merely matched the different columns and made the disallowances.   

Hence, according to the CIT(A), there was no error in the computation made by the AO (CPC). So, he dismissed the assessee’s ground of appeal. 

Aggrieved, the assessee was in appeal before the Tribunal.

According to the assessee, the confusion happened because  amount  of  club  expenses  was  wrongly  reported  by  the  auditor  in  the  Tax  Audit Report in column no. 21(a) and on the basis of which disallowance was made by CPC u/s 143(1) of the Act.

The assessee produced a certificate of the auditor stating that it was an inadvertent error made by him. Therefore, the mistake of the auditor/ clerical error in the Tax Audit Report could not be the basis for disallowance of expenses which had been legally spent by the assessee wholly and exclusively for  business purposes  and was an  allowable  claim  which  had been added in the hands of the assessee without giving  proper opportunity of being heard.

The Tribunal concurred with the argument of the assessee that since Assessing Officer (AO) could not have resorted to disallowance merely on the basis of tax  audit  report which  was  flawed    and without considering  the plea/explanation/clarification given by the assessee pursuant to the communication made by the CPC proposing the adjustment. 

The Tribunal observed that after considering the explanation of the assessee if CPC was not satisfied with the reply of the assessee, then it had to issue notice u/s 143(2) of the Act as decided by the Hon’ble jurisdictional High Court.  

Therefore, The Tribunal opined that based on the audit report during the proceedings u/s  143(1) of the Act,  no  adjustment/disallowance/addition of the expenditure claimed by the  assessee on account of club expenses could not have been disallowed without issue of notice u/s 143(2) of the Act.

The Tribunal held that the allowability of club expenses which assessee claimed could not had been disallowed without giving proper opportunity to the assessee, which omission on the part of AO [CPC] was against the principles of Natural Justice and could not be sustained.  

Accordingly, the appeal of the assessee was allowed and the addition as directed to be deleted.

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