Disallowance by CIT(A) of expense without any specific opportunity to the assessee in the matter of rendering of services not justified

Optsoe Consultant Private Limited Vs. ITO (ITAT Mumbai)- The dispute is regarding allow ability of expenditure amounting to Rs. 40,20,822/- on account of payments made to the directors as sub-contract charges. The assessee co had been incorporated for undertaking contracts for providing various liaisoning activities in the telecom sector. It had entered into a contract with Chinese company, M/s. ZTE Corporation for providing such services as per which it had received contract charges of Rs. 41,18,969/-.

The assessee had sub contracted various services to be provided to its two directors to whom total payments of Rs. 40,20,822/- had been made which the assessee claimed as revenue expenditure. The AO in the assessment order did not question the allow ability of claim as revenue expenditure. He thus accepted the claim as revenue expenditure without any examination and made  dis allowance under the provisions of section 40(a)(ia) on the ground that deduction of tax at source had not been made fully. CIT(A) on detailed examination noted that no evidence had been produced by the assessee regarding rendering of actual services by the directors. He has therefore directed the AO to disallow the entire claim as non revenue expenditure for want of evidence. However, we note from the show cause letter dated 7.10.2010 issued by the CIT(A) to the assessee that CIT(A) had only asked the assessee to justify the admissibility of the expenditure. No specific query had been raised to  produce evidence regarding services rendered. In assessment year 2006-07 on which the ld. Authorised Representative has relied also the actual rendering of the services had not been examined and similar was the position in assessment year 2008-09. Therefore, in our view, the issue regarding rendering of actual services by the directors requires fresh examination as CIT(A) has disallowed the claim without any specific opportunity to the assessee in the matter of rendering of services. The assessee has also filed some additional evidence which in our view will be useful while deciding, the issue of rendering of the services. We, therefore, admit the same, and set aside the order of CIT(A) and restore the matter back to him for passing a fresh order after necessary examination of additional evidence filed by the assessee and in accordance with law and after providing proper opportunity of hearing to the assessee.

 INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 2713/Mum/2011 – Assessment Year: 2007- 08

M/s. Optsoe Consultant Private Limited

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