2022 (4) TMI 1603 - AT - Income Tax

CPC's disallowance of entire expenditure under section 143(1) unwarranted for debatable issues not prescribed

ITAT Delhi held that CPC's disallowance of entire expenditure under section 143(1) was unwarranted as the adjustment did not fall under prescribed limbs ... Disallowance of entire expenditure by the CPC u/s 143(1) - assessee submitted that the adjustment made by the CPC Bangalore does not fall under any of the limbs prescribed u/s 143(1) as debatable issue cannot be subject matter of adjustment u/s 143(1) - rectification application rejected - Also assessee contention that in case of charitable society, even if benefit u/s 11 and 12 of the Act is denied and its income was brought to tax as “Income from Other Sources”, all relevant expenditures are also to be allowed u/s 57(iii) of the Act. HELD THAT:- CPC, Bangalore, processed the return u/s 143(1) of the Act and disallowed the expenses as claimed in the return of income. Assessee filed rectification application before the AO, which was rejected by the AO and the ld. CIT(A) also dismissed the appeal filed by the assessee holding that since the status of the assessee is AOP (Trust) on which there is no threshold limit, therefore, the calculation of the tax rate at maximum marginal rate is correct. However, the AO did not elaborate regarding the disallowance of entire expenditure claimed by the assessee i.e. 143(1) by the CPC, Bangalore. A perusal of the same shows that the adjustment made by the CPC, Bangalore, does not fall under any of the limb prescribed u/s 143(1) of the Act. Further, the submission the ld. Counsel that no such adjustment was made in earlier Assessment Years and there is no change in the facts during the year under consideration, also could not be controverted by the ld. DR. Even otherwise also, as find in the case of DDIT (E) vs Petroleum Sports Promotion Board [2014 (3) TMI 298 - DELHI HIGH COURT] has held that in case of a charitable society even if benefit u/s 11 & 12 of the Income Tax Act, 1961 is denied and its income was brought to tax as income from other sources, all relevant expenditures were also to be allowed. Thus adjustment made by the CPC, Bangalore, and confirmed by the ld. CIT(A) is not warranted being contrary to provisions of section 143(1) - Decided in favour of assessee. Issues Involved:1. Disallowance of entire expenditure claimed by the assessee.2. Applicability of tax rates and threshold limits for the assessee.3. Scope of adjustments permissible under Section 143(1) of the Income Tax Act.4. Powers of the CIT(A) to enhance the assessed income.Detailed Analysis:Disallowance of Entire Expenditure Claimed by the Assessee:The assessee, a registered society running a religious institution, filed its income tax return showing taxable income after reducing certain expenditures. The CPC, Bangalore disallowed the entire claimed expenditure of Rs. 4,85,564/- while processing the return under Section 143(1) and assessed the gross receipt as income. The CIT(A) upheld this disallowance, stating that the expenses were not incurred for earning donations or interest, thus not deductible under Section 57 of the Act. The Tribunal, however, found merit in the assessee's argument that such disallowance is contrary to the provisions of Section 143(1), which only allows adjustments for arithmetical errors or apparent incorrect claims. The Tribunal directed the AO to allow the claimed expenditure, referencing the Delhi High Court's decision in the case of Petroleum Sports Promotion Board, which allowed relevant expenditures even when income was taxed under 'Income from Other Sources'.Applicability of Tax Rates and Threshold Limits:The assessee argued that it should not be taxed at the maximum marginal rate as it is a registered society, not a trust. The CIT(A) agreed that the rate applicable should be the same as that for an individual, allowing the threshold limit of Rs. 2,50,000/-. However, the CIT(A) enhanced the assessed income by disallowing expenditures not related to earning the income. The Tribunal upheld the applicability of individual tax rates and the threshold limit, directing the AO to compute the tax accordingly.Scope of Adjustments Permissible Under Section 143(1):The Tribunal examined the scope of adjustments under Section 143(1) and found that the disallowance made by the CPC, Bangalore did not fall under the permissible adjustments, which include correcting arithmetical errors or disallowing incorrect claims apparent from the return. The Tribunal emphasized that issues requiring verification of expenditures are debatable and should be addressed through scrutiny assessments under Section 143(2), not adjustments under Section 143(1).Powers of the CIT(A) to Enhance the Assessed Income:The CIT(A) exercised its powers under Section 251 to enhance the assessed income by disallowing expenditures claimed in the income and expenditure account but not forming part of the ITR. The Tribunal acknowledged the CIT(A)'s wide powers to enhance income but found that the enhancement in this case was not justified as the expenditures were related to the assessee's activities and should have been allowed. The Tribunal directed the AO to allow the expenditures for the relevant assessment years, thereby setting aside the CIT(A)'s enhancement.Conclusion:The Tribunal allowed the appeals filed by the assessee, directing the AO to allow the claimed expenditures and compute the tax based on the applicable individual tax rates and threshold limits. The adjustments made by the CPC, Bangalore under Section 143(1) were found to be unwarranted and contrary to the provisions of the Income Tax Act. The Tribunal's decision emphasized the need for proper scrutiny assessments for debatable issues and upheld the principles laid down by higher judicial authorities.