Adhoc disallowance of expense without specific finding is baseless

Today Retail Network Pvt Ltd Vs ITO (ITAT Delhi)

ITAT Delhi held that disallowance of expenditure on adhoc basis, as a percentage of gross profit, without any specific findings is baseless and liable to be deleted.

Facts- AO noticed that commission of Rs. 4,46,72,186/- was paid to Today Merchandise Pvt. Ltd. (fellow subsidiary). AO was of the opinion that the entire payment of commission was not for business reasons and basis the gross profit earned by the assessee, AO allowed 25% of commission and disallowed the balance.

CIT(A) directed AO to delete the disallowance stating that adhoc disallowance of any expenditure is not permissible and AO has to give specific findings as to the effect that either the expenditure is not supported with bills/vouchers or not recorded in the books of account or it is bogus and excess claim of expenditure in question is barred by provisions of the Act.

Conclusion- Held that that the disallowance has been made on adhoc basis, as a percentage of gross profit, we are of the considered view that such disallowance is baseless and the ld. CIT(A) has rightly deleted the same, which calls for no interference. Common grounds in both the appeals of the Revenue are dismissed.

FULL TEXT OF THE ORDER OF ITAT DELHI

The above captioned cross appeals by the assessee and the Revenue for A.Y 2012-13 are preferred against the order of the ld. CIT(A) – 9, New Delhi dated 30.09.2019. The Revenue has also filed an appeal for A.Y 2011-12 against the order of the ld. CIT(A) – 9, New Delhi dated 30.09.2019.

2. Since the cross appeals and appeal were heard together, they are being disposed of by this common order for the sake of convenience and brevity.

3. At the very outset, the ld. counsel for the assessee moved an application seeking permission to withdraw the appeal filed by the assessee in ITA No. 9127/DEL/2019. Noting the contents of the application, the said appeal is dismissed as withdrawn.

4. The impugned two appeals by the revenue have common ground relating to deletion of addition on account of disallowance of commission on sales, though the quantum of disallowance differs in both the years.

5. Since the underlying facts are common in both the years, we are taking up the facts for A.Y. 2011–12. On perusal of the related party transaction, the Assessing Officer noticed the following payments made to persons specified u/s 40A(2)(b) of the Act:

6. The assessee was asked to furnish details and justification of payment of commission to M/s Today Merchandise Pvt Limited. Vide letter dated 10.02.2014 the assessee submitted the justification of payment of commission with complete documents of services received, basis of payment, etc. The assessee also furnished copies of debit notes received from Today Merchandise Private Limited. The Assessing Officer was of the opinion that the entire payment of commission was not for business reasons and basis the gross profit earned by the assessee, the Assessing Officer allowed 25% of commission and disallowed the balance.

7. The assessee strongly agitated the matter before the ld. CIT(A) contending that the provisions of section 40A(2)(b) are not applicable, as both the payer and the payee are fellow subsidiaries of Living Media India Ltd, which is the holding company and fellow subsidiaries got covered under section 40A(2)(b) effective from A.Y 2013–14.

8. It was further explained that the payments have been made on the basis of debit notes received by the assessee and there is no difference between the invoice and debit note. It was also contended that payment of commission is on the basis of percentage to turn over and is never on the basis of percentage to gross profit.

9. After considering the facts and submissions, the ld. CIT(A) was of the opinion that adhoc disallowance of any expenditure is not permissible and the Assessing Officer has to give specific findings as to the  effect that either the expenditure is not supported with bills/vouchers or not recorded in the books of account or it is bogus and excess claim of expenditure in question is barred by provisions of the Act.

10. The ld. CIT(A) further observed that it is the duty of the Assessing Officer to pinpoint which particular expenditure was not substantiated, or was not for business exigencies while making the After referring to various judicial decisions, the ld. CITA directed the Assessing Officer to delete the impugned disallowance.

11. Before us, though the ld. DR strongly supported the findings of the Assessing Officer, but could not point out any factual error or infirmity in the findings of the ld. CITA

12. After considering the facts in totality and finding that the disallowance has been made on adhoc basis, as a percentage of gross profit, we are of the considered view that such disallowance is baseless and the ld. CIT(A) has rightly deleted the same, which calls for no interference. Common grounds in both the appeals of the Revenue are dismissed.

13. Second grievance in A.Y 2011–12 in ITA No. 9361/DEL/2019 relates to the deletion of disallowance of Rs.1 ,31 ,78,278/– on account of difference in sales as per VAT Return and Sales as per the profit and loss account.

14. While scrutinizing the return of income, Assessing Officer noticed that as per VAT Return the assessee has shown sales/gross turnover at 32,37,68,870/-. However, as per the financial statements furnished by the assessee, the same has been shown at Rs. 25,05,56,212/–.

15. The assessee was asked about the difference and on receiving no plausible reply, the Assessing Officer made the addition of Rs. 1,31,78,278/–.

16. Before the ld. CITA, the assessee strongly contended that, in fact, there is no difference and furnished re-conciliation. It was also brought to the notice of the ld. CIT(A) that the Assessing Officer has not gone through the Schedule 11 of Financial statement wherein the entire reconciliation has been provided.

17. After scrutinizing the details furnished by the assessee, the ld. CIT(A) was convinced that no sales have been made outside the books and there is no difference between the turnover as shown in the VAT Return and as shown in the financial statements.

18. Being satisfied, the ld. CIT(A) deleted the impugned addition.

19. Before us, the ld. DR supported the findings of the Assessing Officer.

20. On the other hand, the ld. counsel for the assessee reiterated what has been stated before the first Appellate authority.

21. We have carefully considered the orders of the authorities below. It is true that the assessee has furnished the details under Schedule 11 of the Financial Statements and had the Assessing Officer gone through the said Financial Statements, he would have seen that there is no such difference in the alleged turnover. Further, we find that it is not the case of the Assessing Officer that the assessee has made sales outside its books of accounts. We find that rectification is available in the audited financial statement itself. Therefore, we do not find any error or infirmity in the findings of the ld. CIT(A). This ground is also dismissed.

22. Second grievance in A.Y 2012-13 in ITA No 9362/DEL/ relates to the deletion of addition of Rs. 54,41,961/– on account of credit appearing in the books of accounts of Reebok India Ltd, which has not been accounted in the books of account of the assessee.

23. During the course of assessment proceedings, the Assessing Officer received information of the assessee’s transaction with Reebok India Co. Ltd obtained directly from the party u/s 133(6) of the Act. On comparison of copy of account of the assessee sent by Reebok India Limited, the Assessing Officer noticed a difference of Rs. 90,76,128/–.

24. Assessee was asked to reconcile the difference. As per the reconciliation filed by the assessee, the Assessing Officer found that there is a credit amount given by Reebok India Co. Ltd to the assessee amounting to Rs. 54,41,961/–, which has not been shown by the assessee. Accordingly, the Assessing Officer added the amount of Rs. 54,41,961/– to the income of the assessee.

25. Before the ld. CIT(A), the assessee explained that when sale invoice is raised by Reebok, and no goods have been received by the assessee, then, on informing Reebok India Co Ltd, the same was corrected by them in their books of account, and the assessee did not pass any entry in its books of account. It was explained that it is because of this Reebok India Co. Ltd first made credit entry and since the assessee did not receive any goods, it did not pass any entry in its books of account.

26. The ld. CIT(A) was convinced with such accounting treatment and directed the Assessing Officer to delete the impugned addition.

27. Before us, the ld. DR strongly supported the findings of the Assessing Officer but could not point out any factual error in the impugned accounting entry.

28. We have carefully considered the orders of the authorities below. The only reason for making the addition is that Reebok India Co. Ltd has passed a credit entry in its books of account, which was not there in the books of the assessee. Explanation of the assessee that when the assessee does not receive any goods, it does not pass any entry and the other party, i.e. Reebok India Co. Ltd, having debited the assessee, passes credit entry in their books of account and, therefore, there is no difference. We do not find any error in such accounting treatment and, therefore, do not find any reason to interfere with the findings of the ld. CIT(A). This ground is also dismissed.

29. In the result, the appeal of the assessee in ITA No. 9127/DEL/2019 as well as the appeals of the Revenue in ITA Nos. 9361 and 9362/DEL/2019 are dismissed.

The order is pronounced in the open court on 15.06.2023.