Debatable claim cannot be disallowed by section 143(1) of Income Tax Act 1961

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) in the case of Shri Sanatan Dharam Mandir Sabha Vs. ITO held that debatable issue cannot be subject matter of adjustment u/s 143(1)1 of the Act.

In this matter, the assesse is a registered society duly registered with Registrar of Society Delhi. It has neither applied nor received any registration u/s 12A of the Act. For the assessment year 2013-14, the assesee filed its return of income in ITR-7 showing taxable at Rs. 2,18,060/- after reducing the application of income of Rs. 4,85,564/- from gross receipts of Rs. 7,03,624/-. The income was shown under the head “Income from Other Sources”. The CPC Bangalore processed the return u/s 143(1) and disallowed the expenses of Rs.4,85,564/- claimed in the return. Further the CPC, Bangalore denied the benefit of threshold limit and charged the income tax at maximum marginal rate on the gross receipt. The assessee filed an application u/s 154 before the AO on 31.05.2018. The AO, however, rejected the application of the assessee by 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.

Before the ld. CIT(A), the assessee submitted that the AO is not justified in rejecting the rectification application of the assessee by holding that the assessee is AOP (Trust), whereas the assessee is not a trust but a registered society. The provisions of section 2(31) was brought to the notice of the ld. CIT(A). It was further submitted that disallowance of the entire expenditure of Rs.4,85,564/- is beyond the scope of provisions of section 143(1) of the Act. Further, the CPC, Bangalore was not correct in denying benefit of threshold limit and charging income tax at maximum marginal rate on gross profit. However, the Ld. CIT(A) was not fully satisfied with the arguments advance by the assesse and held that the rate applicable in case of the assesse will be same as that of an individual will be applicable. Further, CIT(A) rejected the other grounds i.e. confirming the disallowance of entire expenditure incurred by the assessee at Rs.4,85,564/- .

Aggrieved with the order passed by CIT(A), assesse filed appeal before ITAT. The ld. Counsel for the assessee referring to the provisions of section 143(1) of the Act submitted that the adjustment made by the CPC Bangalore does not fall under any of the limbs prescribed u/s 143(1) of the Act. Further, there is no such adjustment made in earlier Assessment Years and there is no change in facts during the year under consideration. Referring to the decision of the Hon’ble Delhi High Court in the case of Deputy Director of Income Tax (E) Inv. Vs Petroleum Sports Promotion Board, reported in [2014] 362 ITR 235 (Del.), he submitted that Hon’ble Delhi High Court in the said decision has held that in case of 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 under section 57(iii) of the Act. He accordingly submitted that in view of the decision of the Hon’ble Delhi High Court, the adjustment made by the CPC, Bangalore and confirmed by the Ld.n CIT(A) is not warranted being contrary to Provisions of section 143(1) of the Act. The Ld AR also submitted that the adjustment made by disallowing entire expenditure requires verification of all expenditure by providing due opportunity to the assessee to substantiate its claim, which is a debatable issue which can be permitted by issuing scrutiny notice u/s 143(2) of the Act only and not permitted by way of adjustment. For the above proposition, he relied on the decision of the Hon’ble Delhi High Court in the case of Abhishek Cement Ltd. vs Union of India, reported in [2012] 349 ITR 1(Del.) and the decision of the Hon’ble Bombay High Court in the case of Bajaj Auto Finance Ltd. vs Commissioner of Income Tax, reported in [2018] 404 ITR 564 (Bom.). The ld. DR, on the other hand, heavily relied on the order of the ld. CIT(A). ITAT was of the view that the adjustment made by the CPC, Bangalore, and confirmed by the ld. CIT(A) is not warranted being contrary to provisions of section 143(1) of the Act. Accordingly, the order of the Ld. CIT(A) is set-aside and the AO is directed to allow the claim of expenditure of Rs.4,85,564/-from the gross receipt.