2023 (5) TMI 1372 - AT - Income Tax

AO directed to reconsider Section 40A(3) disallowance for State Government payments after proper hearing

Harshdeep Singh Juneja Versus The Deputy Commissioner of Income Tax, Circle-1 (1), Raipur (C.G.)

Harshdeep Singh Juneja Versus The Deputy Commissioner of Income Tax, Circle-1 (1), Raipur (C.G.) - TMI Issues Involved:1. Sustainability of disallowance under Section 40A(3) of the Income-tax Act, 1961.2. Consideration of the assessee's response to the proposed adjustment under Section 143(1)(a) of the Act.Issue-wise Detailed Analysis:1. Sustainability of Disallowance under Section 40A(3):The primary issue revolves around the disallowance of Rs. 57,62,920/- made by the CPC, Bengaluru under Section 40A(3) of the Income-tax Act. The assessee, an individual holding an FL-2 license on behalf of his partnership firm, had incurred expenses towards purchases made from the State Government of Chhattisgarh in a manner not prescribed under Section 40A(3). The auditor reported this in the audit report filed in Form 3CD. The CPC, Bengaluru, after issuing a show-cause notice to the assessee, proceeded with the disallowance despite the assessee's objections, which highlighted that the payments were made in cash as the State Government did not accept any other mode of payment. The Tribunal noted that the assessee had attempted to bring his case within the exception provided under Rule 6DD(b) of the Income Tax Rules, which allows payments in cash if made to the Government and required to be made in legal tender. The Tribunal held that the CPC, Bengaluru should have considered the assessee's explanation or provided reasons for rejecting it. The Tribunal thus restored the issue to the file of the A.O. for fresh adjudication, instructing the A.O. to consider the assessee's objections and afford a reasonable opportunity of being heard.2. Consideration of the Assessee's Response to the Proposed Adjustment:The Tribunal emphasized that the response filed by the assessee to the proposed adjustment was not considered by the CPC, Bengaluru, which violated the mandate of the '2nd proviso' to Section 143(1)(a) of the Act. The provision requires that any response received from the assessee must be considered before making any adjustment. The Tribunal found that the CPC, Bengaluru had summarily brushed aside the assessee's objections without providing cogent reasons, thereby rendering the mechanism under Section 143(1)(a) unworkable. The Tribunal observed that the legislature had set out a specific manner and methodology for making adjustments under this section, which must be followed ritually. Consequently, the Tribunal restored the matter to the A.O. for fresh adjudication, ensuring that the assessee's objections are duly considered.Conclusion:The Tribunal set aside the order of the CIT(A) and restored the matter to the A.O. for fresh adjudication, instructing the A.O. to consider the assessee's objections and provide a reasonable opportunity of being heard. The appeal of the assessee was allowed for statistical purposes.