Non application of mind – HC Quashes Assessment Order

K. Sivasubramaniam (Deceased) Vs ITO (Madras High Court)

Introduction: The case of K. Sivasubramaniam (Deceased) vs ITO before the Madras High Court revolves around an assessment order dated 19.01.2021, which raised questions about the application of mind while passing the order. This article provides an in-depth analysis of the case, focusing on the dispute related to brokerage costs.

Background Information: The petitioner filed a Writ Petition seeking to quash the assessment order dated 19.01.2021 issued by the second respondent under Section 154 of the Income Tax Act, 1961, for the assessment year 2012-13.

Brokerage Cost Dispute: The primary issue in this case pertains to the brokerage cost of Rs. 58,75,569/- that the petitioner allegedly paid to various brokers. The brokers and their PAN details were provided in the assessment order.

Original Assessment Order: The original assessment order dated 16.12.2019 had stated that the petitioner claimed Rs. 58,75,771/- as a deduction for brokerage. However, the evidence produced only accounted for Rs. 14,95,241/-. This led to a significant discrepancy.

Subsequent Petition: In response to the original assessment order, the petitioner filed a petition under Section 154 of the Income Tax Act, 1961, on 19.01.2021. The impugned order was a result of this petition.

Impugned Order: The impugned order made an addition of Rs. 43,80,530/- for brokerage paid. It noted that the petitioner provided confirmation letters only from one broker, M/s. KPM Projects P. Ltd, and failed to produce evidence for the remaining brokers.

Non-Responsive Brokers: The petition claimed brokerage payments to several brokers, including R. Thiagarajan, K. Saravanan, and K. Sethuraman. These brokers did not respond or provide confirmation letters, and there was no evidence of these payments in their income tax returns.

Nature of Transactions: The respondents argued that transactions by cheque only proved the payment but not the nature of the transaction. They questioned whether these payments were indeed for brokerage related to land sales.

Excessive Brokerage Claim: The assessment pointed out that the petitioner’s claim of 7.7% as brokerage in this transaction was significantly higher than the industry average of 2%, which amounted to Rs. 15,24,280/-.

Conclusion: In conclusion, a careful examination of the impugned order and the Assessment Order dated 19.01.2021 suggests a lack of proper application of mind. As a result, the Madras High Court has quashed the impugned order and remitted the case back to the respondents for fresh consideration in accordance with the law. The amount of Rs. 40,04,017/- confirmed in the impugned order is treated as a Show Cause Notice, and the petitioner is given an opportunity to respond. This article provides an overview of the case’s background and the key issues surrounding brokerage payments and the assessment order.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

This Writ Petition has been filed, to quash the order dated 19.01.2021 passed by the second respondent under Section 154 of the Income Tax Act, 1961 for Assessment year 2012-13 reference PAN AABPS1313F.

2. The issue that survives for consideration in this case is relating to brokerage cost of Rs.58,75,569/- which was allegedly paid by the petitioner to the following brokers as detailed below:-

3. In the original Assessment Order dated 16.12.2019 passed under Section 144 r/w. 147 of the Income Tax act, 1961, wherein it has been stated that the petitioner has claimed Rs.58,75,771/- as deduction towards brokerage amount. Relevant portion of the said order is extracted hereunder:

“9. Claim of brokerage: In the return of income filed originally on 29.07.2012 assessee has claimed an amount of Rs.58,75,771/- as brokerage paid. this case, the assessee has only produced copies of cheques issued to one broker M/s. KPM projects of Rs.14,95,241/-during I&CI verification. Therefore, the difference between the brokerage claimed of Rs.58,75,771 and evidence produce for Rs.14,95,241/- is

4. The petitioner thereafter filed a petition under Section 154 of the Income Tax Act, 1961 on 19.01.2021, which has now culminated in the impugned order. Relevant portion of the impugned order reads as under:

(i) Brokerage paid: Addition made: Rs.43,80,530/-

In the return of income assessee claimed deduction of Rs.58,75,771/- under the head brokerage paid while computing capital gains on sale of immovable property. Assessee was asked to furnish confirmation letter from the brokers to whom he claimed to have paid brokerage vide letter dated 25-09-2019. However he filed confirmation letter only from M/s. KPM Projects P. Ltd to whom a sum of Rs.14,95,241/- was paid. Hence claim to that extent was allowed in the Assessment Order. Assessee filed details of other brokers and letters were sent to such parties requiring to furnish details of commission received during Financial Year 2011-12. However, the following persons to whom Assessee claimed to have paid brokerage have not responded:

• The assessee did not file confirmation letter from such parties.
• No evidence was filed to show that such receipts are reflected in the Income tax returns filed by such parties.
• The transactions by cheque only testifies the transaction and not the nature of transaction i.e claim that payments were made by cheque only goes to prove the payment and it does not prove whether such payments were towards brokerage for land sold by the assessee during the previous year.
• Claim of brokerage by assessee in this transaction is very huge i.e., 7.7% whereas the industry average is 2% i.e Rs.15,24,280/-.

Consider the above, the disallowance under this head is retained at Rs.40,04,017/- since the assessee failed to furnish evidence to that extent.”

5. The respondents in their counter stated as follows:

“6. The petitioner did not file confirmation letter from such parties and no evidence was filed to show that such receipts were declared in the Income tax returns filed by such parties. The transactions by cheque only testifies the transaction and not the nature of transaction i.e claim that payments were made by cheque only goes to prove the payment and it does not prove whether such payments were towards brokerage for land sold by the petitioner during the previous year.

7. It is submitted that the claim of brokerage by petitioner in this transaction is very huge i.e.7.7% whereas the industry average is 2% i.e Rs.15,24,280/-. Considering the above, the disallowance under this head was retained at Rs.40,04,017/- since the petitioner failed to furnish evidence to that extent. It is completely wrong to contend that the 2nd respondent has made a new case in order dt.19.01.2021 passed u/s.154 of the Act. It is submitted that the reasons given by the 2nd respondent are only consequential to the steps taken by the respondent in response to the petition u/s.154 filed by the petitioner herein and not any extraneous reasons.

6. A careful reading of the impugned order and also the Assessment Order dated 19.01.2021 indicates that there is a clear non application of mind while passing the impugned order. Considering the same, the impugned order dated 19.01.2021 passed by the 2nd respondent is quashed and the case is remitted back to the respondents, to pass fresh orders on merits and in accordance with law. The impugned order insofar as it confirms the amount of Rs.40,04,017/- as the amount added to the income of the petitioner, shall be treated as a Show Cause Notice. The petitioner shall file a reply to the same within a period of a period of two weeks from the date of receipt of a copy of this order and the 2nd respondent shall pass a fresh order within a period of six weeks thereafter.

7. With the above direction, this Writ Petition is disposed of. No 6/8 costs. Consequently, connected miscellaneous petitions are closed.