2014 (8) TMI 311 - AT - Income Tax

Tribunal sets aside order disallowing electricity expenses to directors, emphasizing opportunity of hearing

The Tribunal allowed the assessee's appeal regarding the disallowance of electricity expenses to directors under section 37 through the order passed under ... Notice u/s 154 not served – Rectification of order - Assessment enhanced but opportunity of being heard not given – Held that:- The original assessment of the assessee company was completed u/s 143(3) of the Act - relying upon Commissioner of Income-Tax Versus Hero Cycles Pvt. Limited And Others [1997 (8) TMI 6 - SUPREME Court] - rectification u/s 154 of the Act can only be made when glaring mistake of the fact and law has been committed in the impugned order and it is apparent from record - the rectification is not permissible if the question is debatable and the point which was examined on fact or in law cannot be dealt with as mistake apparent from record - the AO completed assessment u/s 143(3) of the Act without objecting to the claim of the assessee company pertaining to the electricity expenses for residence of the directors of the company. Also in Maharana Mills (P.) Ltd. vs Income-tax Officer [1959 (4) TMI 7 - SUPREME Court] - the object of providing the issue of notice in section 154 of the Act is that no order should be passed to the detriment of assessee without affording due opportunity of hearing to him and this provision is applicable where the assessment is enhanced by making certain disallowances or additions - the AO completed assessment u/s 143(3) of the Act and subsequently picked up the case again u/s 154 of the Act on debatable issue on the basis of 3CD Report of the auditor which was also before him at the time of original assessment - the AO passed order u/s 154 of the Act on the back of the assessee without affording due opportunity of hearing and the AO enhanced the assessment by making additions in regard to claim of expenditure pertaining to electricity bills of the residence of the directors of the company, which cannot be said to be a mistake apparent from record and order u/s 154 of the Act is not sustainable on debatable issue which was also under examination and verification by the AO during original assessment proceedings - the order passed by the AO u/s 154 of the Act is outside the ambit of section 154 of the Act – Decided in favour of Assessee. Issues:1. Validity of enhancement of assessment without notice under section 154.2. Disallowance of electricity expenses to directors under section 37 through section 154.Analysis:Issue 1: Validity of enhancement of assessment without notice under section 154The appeal was filed against the order of the CIT(A)-X, New Delhi for the assessment year 2008-09. The AO initially completed the assessment under section 143(3) of the Income Tax Act, 1961 and assessed the income of the assessee. Subsequently, the AO issued a notice under section 154, proposing an addition of a certain amount based on the auditor's report. The assessee contended that the rectification under section 154 can only be made for glaring mistakes of fact or law apparent from the record. The Tribunal noted that the AO had already examined and verified the claims of the assessee during the original assessment. The Tribunal held that the issue of disallowance was debatable and not a mistake apparent from the record. The Tribunal emphasized that the AO passed the order under section 154 without affording the assessee an opportunity of hearing, which is a mandatory requirement, especially when the assessment is enhanced. Therefore, the Tribunal concluded that the order passed by the AO under section 154 was unsustainable on a debatable issue and set it aside.Issue 2: Disallowance of electricity expenses to directors under section 37 through section 154The AO, based on the auditor's report, made a disallowance of electricity expenses reimbursed to directors under section 37 through the order passed under section 154. The CIT(A) upheld the AO's decision, stating that the auditors' comments were clear about the nature of the expenses. The Tribunal, however, observed that the claim was debatable as it involved allowances and benefits sanctioned to the directors. The Tribunal referred to the Supreme Court's decision in CIT vs Hero Cycles Pvt. Ltd., emphasizing that rectification under section 154 is not permissible for debatable issues. Additionally, the Tribunal highlighted the importance of providing an opportunity of hearing to the assessee before passing an order that could be detrimental. Consequently, the Tribunal allowed the assessee's appeal on this ground, setting aside the disallowance of electricity expenses to directors under section 37 through the order passed under section 154.In conclusion, the Tribunal allowed the assessee's appeal on the second ground related to the disallowance of electricity expenses to directors under section 37 through the order passed under section 154, emphasizing the importance of providing an opportunity of hearing and the inapplicability of section 154 to debatable issues.