Anubhav Sharma ORDER
Anubhav Sharma, Member (J)
1. The appeal has been filed by the Assessee against order dated 09.09.2020 in appeal no. CIT(A), Delhi-20/10485/2019-20 in assessment year 2011-12 passed by Commissioner of Income Tax (Appeals)-20, New Delhi (hereinafter referred to as the First Appellate Authority in short 'Ld. F.A.A.') in regard to the appeal before it, arising out of assessment order dated 10.12.2019 u/s. 154 of the Income Tax Act, 1961 passed by DCIT, CPC, Bangalore (hereinafter referred to as the Assessing Officer 'AO').
2. The facts in brief are the Assessee is a chartered accountancy firm engaged in providing services in the field of Assurance, Risk Advisory, Tax Advisory, Corporate Advisory and Outsourcing. During the relevant assessment year, the appellant had filed its return of income on 29.10.2017 at a total income of Rs. 2,08,91,050/-. The Ld. AO vide communication dated 17.07.2018 asked the appellant to file a response against the proposed adjustment of Rs. 1,11,216/-, being the amount of club expenditure reported in tax audit report. Against such communication, the appellant filed a response on 13.08.2018. The said response was not considered and an intimation under section 143(1) was passed on 04.02.2019 whereby the said amount was disallowed, and the total income was computed at Rs. 2,10,02,263/-. The appellant, thereafter, filed a rectification against the said intimation. However, vide rectification order, dated 14.05.2019, under section 154 of the Act the disallowances were made, thereby assessing the total income at Rs. 2,10,88,870/- and raising a demand of Rs. 1,11,850/-. The appellant filed an appeal against the rectification order under section 154 of the Act dated 14.5.2019 on 3.6.2019. Subsequent to the above rectification order, the appellant received another rectification order dated 10.12.2019 vide. The said rectification was as a suo-moto rectification done by the Department for which no showcase notice was given to the appellant.
3. Ld. CIT(A) had dismissed the appeal while confirming the disallowance of Rs. 4280/-. The assessee is in appeal raising following grounds:-
"(a) That the learned CIT(A) has erred on facts and in law in sustaining the disallowance of club expenditure amounting to Rs. 40,280/- stating that the same is based upon the comments made by the auditor in the audit report.
(b) That in this connection, the learned CIT(A) has not given credence to the fact that the same constitutes annual membership fees which was reported in clause 21(a) of Form 3 CD for disclosure purpose only in accordance with the Guidance Note on Tax Audit under section 44AB of the Income tax Act 1961 issued by the Institute of Chartered Accountants of India.
(c) That further in this connection, the learned CIT(A) has not given credence to the fact that the said disclosure neither amounts to any incorrect claim as per section 143(1)(a)(ii) of the Act and nor can it be considered as disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return as per section 143(1)(a)(iv) of the Act.
2. That the learned CIT(A) has erred in not adjudicating the ground related to not allowing the TDS credit of Rs. 2,57,252 by the learned Assessing Officer, which was rightly claimed by the appellant and which is also duly reflecting in Form 26AS.
3. The Appellant craves to leave, add, amend, modify, delete and/or change all or any of the grounds on/or before the date of hearing. "
4. Heard and perused the record.
5. At the time of arguments, Ld. AR for the assessee submitted that the assessee is not pressing the ground no. 2 and endorsement was made on the memo of appeal.
6. In regard to Ground no 1 with its sub grounds, it is submitted that disallowance was made of club expenditure of Rs. 40,280/- being incorrect claim u/s. 143(1)(a)(ii) & u/s. 143(1)(a)(iv) on the alleged contention that the same has been mentioned in clause 21(a) of Form 3CD but not disallowed u/s. 37 of the Act in the return. Assessee claims that the same was reported in clause 21(a) of Form 3CD for disclosure purposes only. That same is in accordance with the Guidance Note on Tax Audit under section 44AB of the Income tax Act 1961 issued by the Institute of Chartered Accountants of India. As per the said guidance note, 'the tax auditor is required to state the amount of expenditure incurred by the assessee in respect of various items. These expenses may be allowable or may not be allowable or may be allowable subject to certain limits. The amount of expenditure in respect of each of the items is required to be stated. '. It is argued that the said disclosure does not amount to any incorrect claim (as per section 143(1)(a)(ii) of the Act). Merely because the tax auditor reported the amount in clause 21(a) does not result in disallowance of the said expenditure under section 143(1)(a)(ii)/(iv) of the Act. Further, the said disclosure cannot be considered as disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return (as per section 143(1)(a)(iv) of the Act). It was also submitted that the issue regarding allowability of club expenses is no more res integra in view of the judgment of the Hon'ble Supreme Court in the case of CIT v. United Glass Mfg. Co. Ltd. 2012] 28 taxmann.com 429. It was submitted by Ld. AR that the said expenditure of Rs. 40,280/- was reported only for disclosure purpose and no portion of the same is disallowable under section 37 of the Act. Making of disallowance of such expenditure under section 143(1)(a) or 154 without giving proper opportunity to the assessee is against the principles of Natural Justice. Information contained in tax audit report does not enable Assessing Officer to make any prima facie adjustments under section 143(1)(a) of the Act and reliance was placed on judgement of Hon'ble Calcutta High Court in the case of Peerless General Finance & Investment Co. Ltd. v. CIT MANU/WB/0318/2009 : [2010] 320 ITR 622. Further reliance was placed on "(a) PCIT v. Bayer Vapi (P.) Ltd. MANU/GJ/0983/2019 : [2019] 106 taxmann.com 395 (High Court of Gujarat); (b) ACIT v. HT Media Ltd. MANU/ID/0315/2015 : [2016] 68 taxmann.com 421. M/s. Piyanshu Chemicals Pvt. Ltd. vs. DCIT, Circle-12(1) (ITA no. 2350/Kol/2019); Peerless General Finance & Investment Co. Ltd. vs. CIT MANU/WB/0318/2009 : [2010] 320 ITR 622 (Calcutta High Court); Mintri Tea Co. (P.) Ltd. vs. CIT MANU/WB/0082/2009 : [2009] 319 ITR 264 (Calcutta High Court); Chetas Gulabbhai Desai v. DCIT, CPC Bangalore (ITA No. 1934/MUM/2021.
7. Ld. DR however submitted that there is no fault in the findings of Ld. Tax Authorities below.
8. Appreciating the matter on record it can be observed that the ld. CIT(A) has confirmed the disallowance of Rs. 42,280/- with following findings:-
"4.5 Another disallowance contested by the appellant relates to disallowance of Rs. 42,280/- made by the AO. Since the said disallowance is based upon the comments made by the Auditor in the audit report, therefore, the same is hereby confirmed."
9. At the outset, it can be observed that Ld. CIT(A) has confirmed the disallowance with the very summary observations without going on the facts of the case. The copy of Form 3CD available at page no. 105 of the paper book shows that in clause 21(a) of the particulars of expenditures incurred, under head of club entrance fees and subscription has been shown with regard to Gymkhana Club at Rs. 14,407/-, Holiday Club Rs. 3,263/- and Panchshila Club rs. 22,610/-, totaling to Rs. 42,280/-. The auditors have not shown these expenditure to be disallowable as required to be disclosed in Annexure available at page no. 73 of the paper book. When admittedly the assessment was completed with intimation u/s. 143(1) of the Act then the disallowance based upon comments of auditor in audit report could not have been made as none of the specific circumstances mentioned u/s. 143(1)(a)(ii) or 143(1)(a)(iv) of the Act are met out. If at all a disallowance was to be made an opportunity of hearing by issuance of notice u/s. 142(1) was therefore required. In Chetas Gulabbhai Desai v. DCIT, CPC Bangalore (supra) the Mumbai Bench has dealt similar case of disallowance of club membership fee reflected in Tax Audit Report as processed under section 143(1) of the Act, and held;
5. The Hon'ble Jurisdictional High Court in the case of Bajaj Auto Finance Ltd. vs. CIT reported as MANU/MH/0820/2018 : 404 ITR 564(Bom) has held that debatable claim cannot be disallowed by way of an intimation u/s. 143(1) of the Act. The relevant extract of the observations made by Hon'ble High Court in this regard are reproduced herein under:
"10. In the present facts, it is undisputed that the decision of Gujarat High Court was referred to in the computation of income. Thus, the Assessing Officer could not have disallowed the claim on a prima facie view that the same is inadmissible. In fact, there can be no dispute that even according to the Assessing Officer, the issue was debatable. This is evident from the fact when the applicant assessee had filed an application under section 154 of the Act for deletion of the adjustment made of provision of bad debts by intimation under Section 143(1)(a) of the Act, it was disallowed on the ground that it is a debatable issue. This itself would indicate that whether the claim of a provision for bad debts is deductible under Section 36(1)(vii) of the Act or not is debatable. Further, the above claim for deductions as made by the applicant was by following the decision of the Gujarat High Court in Vithaldas Dhanjibhai (supra). Thus, a debatable issue. Therefore, the same could not have been disallowed by way of an intimation under section 143(1)(a) of the Act.".
6. In view of the undisputed facts and the decision of Hon'ble Bombay High Court, referred above, we find that the authorities below have erred in disallowing assessee's claim of expenditure in proceedings u/s. 143(1) of the Act and thereafter, rejecting assessee's application u/s. 154 of the Act. Ergo, the impugned order is set-aside and appeal by the assessee is allowed."
10. Assessee infact had had claim on merits also on the basis of judgment of Hon'ble Supreme Court of India in CIT v. United Glass Mfg. Co. Ltd. (supra) wherein Hon'ble Apex Court has considered the question of club expenses and held that the Club Membership Fees for subscription is allowable as a business expenditures and had it been given opportunity under law to explain same would have been allowed.
11. Thus, the findings of Ld. CIT(A) cannot be sustained. The ground no. 1. (a), (b) & (c) as raised are sustained and the appeal is allowed. The impugned order of ld. CIT(A) and the assessment order qua the impugned disallowance of Rs. 42,280/- is set aside.
Order pronounced in the open court on 17th August, 2022.
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