2014 (1) TMI 1406 - HC - Income Tax

Court overturns disallowance under Income Tax Act, stresses due process

The court found that the disallowance made by the Assessing Officer under Section 143(1)(a) of the Income Tax Act was improper as the officer failed to ... Disallowance u/s 40A(3) - Payment of expenditure in cash - ITAT deleted the addition on the ground that Prima facie adjustment u/s 143(1)(a) can not be made - Held that:- Decision in S.R.F. Charitable Trust v. Union of India and others [1991 (10) TMI 38 - DELHI High Court] followed - The assessing officer cannot unilaterally disallow the claim made by the assessee unless and until he calls upon the assessee to prove the claim made by him. Only after giving such opportunity, from the material placed on record, the assessing officer can disallow the claim as required under Section 40A(3) read with Rule 6DD of the Act - Before arriving at a conclusion that 20% of 29 lakhs and odd has to be disallowed in terms of Section 40A(3) of the Act, the assessing officer ought to have called for further details from the assessee in order to understand whether such claim could be made under Rule 6DD by the assessee - The issue has been restored for fresh adjudication. - Decided in favor of revenue. Issues:- Whether the disallowance made by the Assessing Officer under Section 143(1)(a) of the Income Tax Act is justified.Analysis:The appeal in question pertains to the assessment year 1996-97, where the Assessing Officer disallowed Rs.5,86,437/- as an adjustment to the total income under Section 143(1)(a) of the Income Tax Act. The first appellate authority ruled in favor of the assessee, a decision upheld by the appellate Tribunal. The core issue revolves around whether the disallowance made by the Assessing Officer falls under the purview of prima facie adjustment prescribed under Section 143(1)(a) of the Act.Upon examination, it was found that the Assessing Officer disallowed 20% of cash payments exceeding Rs.10,000/- during the relevant year as per the audit report. However, the court noted that before such disallowance under Section 40A(3) of the Act, the Assessing Officer should have sought further details from the assessee to ascertain if the claim could be made under Rule 6DD. Failure to conduct this necessary exercise rendered the disallowance improper.Referring to legal precedents, including the cases of Parikh Engineering and Body Building Co. Ltd. and S.R.F. Charitable Trust, the court emphasized that the Assessing Officer cannot unilaterally disallow a claim without giving the assessee an opportunity to prove its validity. The court directed the matter to be remitted back to the Assessing Officer to follow the prescribed procedure under Section 40A(3) read with Rule 6DD. The Assessing Officer was instructed to issue a notice to the assessee to produce material supporting the claim, with a mandate to pass orders within three months from the date of the judgment.In conclusion, the Income Tax Appeal was allowed, Annexure A was quashed, and Annexures B and C were set aside. The judgment highlighted the importance of due process and adherence to the statutory provisions before making any disallowances, ensuring fair treatment of the assessee in income tax assessments.