Top Stories Non reply to Section 133(6) of the Income Tax Act, Notice cannot necessarily lead to Disallowance of Petty Expenses: ITAT [Read Order] Non reply to Section 133(6) of the Income Tax Act, 1961, notice cannot necessarily lead to disallowance of petty expenses, rules, ITAT By Aiswarya Krishnadas – On February 21, 2024 10:00 am – 2 mins read In a significant ruling the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) observed that non reply to Section 133(6) of the Income Tax Act, 1961, notice cannot necessarily lead to disallowance of petty expenses The AO’s failure to acknowledge that the issuance of credit/debit notes is a regular year-end practice for the taxpayer to achieve benchmarking of markup is a misstep. Once such transactions are deemed to be at arm’s length, no further additions or attributions can be made to the taxpayer’s income.

The reconciliation of accounts by the taxpayer from Assessment Year (A.Y.) 2015-16 to A.Y. 2020-21 through credit and debit notes has already been duly noted and detailed in the preceding table. The Dispute Resolution Panel ( DRP ) failed to recognize the judgment of the Honorable Supreme Court in the case of DIT (International Taxation) vs. Morgan Stanley, as reported in 292 ITR 416 ( SC ). It was noteworthy that the assesse consistently benchmarked its international transactions using the cost plus 15% markup method, a practice consistently accepted by the tax department during the assessment process, resulting in the issuance of an assessment order under Section 143(3) of the Income Tax Act. The bench has determined that the revenue’s allegation regarding the credit note being an afterthought holds no merit.

The credit note was appropriately accounted for in the sales for benchmarking purposes, with the corresponding adjustment being made by the Associated Enterprise ( AE ). Moreover, the benchmarking process was duly accepted by the Assessing Officer ( AO ). Once a transaction has been benchmarked at arm’s length and no adverse findings have been made, no further additions or attributions can be made. The two member bench of the tribunal comprising Saktijit Dey ( Vice President ) and Dr. B.R.R Kumar ( Accountant member ) observed that the Assessing Officer (AO) erred in assuming that the non-response to Section 133(6)  of the  Income Tax Act,  notices automatically warrants the disallowance of petty expenses ranging from Rs. 9,000 to Rs. 1,00,000. In the absence of any other evidence indicating the non-incurrence of these expenses, the mere lack of response to notices cannot justify their disallowance. The assessee has furnished primary and direct evidence along with PAN and address details, hence no disallowance can be made solely on the grounds of non-compliance with notices issued under Section 133(6) of the Income Tax Act. The appeal of the assessee was allowed.