2022 (8) TMI 793 - AT - Income Tax

Tribunal overturns disallowance of club expenditure, stresses fair opportunity for Assessee

The Tribunal allowed the appeal regarding the disallowance of club expenditure, citing lack of proper opportunity and unjustified disallowance based on ... Disallowance based on tax audit report - tax auditor's disclosure in Form 3CD - intimation under section 143(1) and scope for prima facie adjustments - rectification under section 154 and opportunity of hearing / principles of natural justice - allowability of club membership fees as business expenditureDisallowance based on tax audit report - tax auditor's disclosure in Form 3CD - intimation under section 143(1) and scope for prima facie adjustments - rectification under section 154 and opportunity of hearing / principles of natural justice - allowability of club membership fees as business expenditure - Whether the disallowance of club membership/expenditure of Rs. 42,280/--reflected in clause 21(a) of Form 3CD but not disallowed in the return-could be sustained by the Assessing Officer and confirmed by the Commissioner (Appeals) by way of intimation under section 143(1) and subsequent rectification under section 154 without giving opportunity to the assessee, and whether the club fees were rightly disallowable. - HELD THAT: - The Tribunal found that the auditor's reporting of club entrance fees and subscriptions in clause 21(a) of Form 3CD was a disclosure of amounts and not an express statement of disallowability in the Annexure. The authorities below confirmed the disallowance summarily on the basis of the audit report (para 8), but such a prima facie adjustment could not be made by way of intimation under section 143(1) as none of the specific conditions in the said provision for making a prima facie adjustment were met and the matter was debatable on merits (para 9). Where a claim is debatable and the assessment was completed by intimation under section 143(1), the Assessing Officer ought not to make a disallowance without issuing a notice under section 142(1) and giving the assessee an opportunity or otherwise following the procedure for adjudication; summary disallowance and suo moto rectification without opportunity offend principles of natural justice (paras 9-10). On the substantive question, the Tribunal noted and relied upon the Supreme Court's view in CIT v. United Glass Mfg. Co. Ltd. that club subscription/membership may be allowable as business expenditure; had the assessee been given an opportunity, the claim could have been examined on merits (para 10). For these reasons the Tribunal held that the confirmation of disallowance by the CIT(A) was unsustainable and set aside the disallowance (para 11). [Paras 8, 9, 10, 11]The disallowance of Rs. 42,280/- based on the tax audit report/Form 3CD and sustained in the impugned orders is set aside; the appeal is allowed.Final Conclusion: The Tribunal allowed the appeal, set aside the disallowance of club membership/expenditure of Rs. 42,280/- (reported in Form 3CD) as improperly made by way of intimation/rectification without affording opportunity, and remitted that aspect by restoring the assessee's claim for adjudication on merits. Issues involved:Appeal against disallowance of club expenditure and TDS credit disallowance.Analysis:1. Disallowance of Club Expenditure:- The Assessee, a chartered accountancy firm, filed an appeal against the disallowance of club expenditure amounting to Rs. 42,280. The disallowance was based on the auditor's comments in the audit report.- The Assessee argued that the club expenditure was reported in Form 3CD for disclosure purposes only, following the Guidance Note on Tax Audit under section 44AB of the Income Tax Act, 1961. The disclosure did not constitute an incorrect claim under sections 143(1)(a)(ii) or 143(1)(a)(iv) of the Act.- The Assessee contended that the disallowance without proper opportunity violated principles of Natural Justice. Reference was made to various judgments supporting the Assessee's position.- The CIT(A) confirmed the disallowance without detailed analysis. However, the Tribunal observed that the disallowance based on the auditor's comments without meeting specific circumstances under sections 143(1)(a)(ii) or 143(1)(a)(iv) was unjustified. The Tribunal referred to relevant case laws and set aside the disallowance, allowing the Assessee's appeal.2. TDS Credit Disallowance:- The Assessee raised a ground related to the non-allowance of TDS credit amounting to Rs. 2,57,252 by the Assessing Officer. The credit was duly reflected in Form 26AS.- During the proceedings, the Assessee did not press this ground, indicating a concession on this issue.In conclusion, the Tribunal allowed the appeal regarding the disallowance of club expenditure, citing lack of proper opportunity and unjustified disallowance based on the auditor's comments. The TDS credit disallowance issue was not pursued by the Assessee during the proceedings. The judgment highlighted the importance of providing a fair opportunity to the Assessee and ensuring that disallowances are made in accordance with the relevant provisions of the Income Tax Act.