Case Law Details
Durga Signal Infra Pvt. Ltd. Vs ACIT (ITAT Kolkata)
Introduction: The Income Tax Appellate Tribunal (ITAT) Kolkata, in the case of Durga Signal Infra Pvt. Ltd. vs ACIT, has ruled that no disallowance should be made under Section 37(1) of the Income Tax Act on site expenses incurred for railway business. This decision came in response to an ad-hoc disallowance made by the Assessing Officer, which was further upheld by the Commissioner of Income Tax (Appeals).
Analysis: The crux of the case was the ad-hoc disallowance @ 20% of total site expenses amounting to Rs.3,67,37,203/-. The Assessing Officer had made this disallowance after observing that the assessee had not provided any documentary evidence supporting the claim of site expenses. The Commissioner of Income Tax (Appeals) dismissed the assessee’s appeal against this disallowance.
However, ITAT noted that the assessee had produced a detailed list of particulars in respect of site expenses and that there was no basis for adopting a 20% disallowance without pointing out any defects in the information provided by the assessee. Furthermore, no such disallowance had been made in preceding or subsequent years.
Taking into account these factors, ITAT, Kolkata held that there was no rationale behind the ad-hoc disallowance made by the Assessing Officer and thus, deleted it. It found that the Assessing Officer had failed to provide a compelling reason for the disallowance, and therefore it was in violation of Section 37(1) of the Income Tax Act.
Conclusion: The ruling by ITAT Kolkata in Durga Signal Infra Pvt. Ltd. vs ACIT reinforces the principle that business expenses should not be disallowed without proper justification. The tribunal emphasized the need for a rational basis when making an ad-hoc disallowance, and in its absence, the benefit of doubt should be given to the assessee.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi vide Appeal No. ITBA/NFAC/S/250/2022-23/1050540758(1) dated 09.03.2023 passed against the assessment order by ACIT(OSD), Ward-1(1), Kolkata u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 29.12.2017 for AY 2015-16.
2. Sole issue raised by the assessee in this appeal is in respect of ad-hoc disallowance @ 20% of total site expenses of Rs.3,67,37,203/-. The disallowance is of Rs.61,54,501/-.
3. Brief facts of the case are that assessee is engaged in the business as a Railway contractor and supplier. It filed its return of income on 30.09.2015 reporting a loss of Rs.13,45,191/-. Case was selected for scrutiny assessment under CASS for which statutory notices were served on the assessee and were duly complied with. In the course of assessment, Ld. AO noted that assessee has claimed huge expenses in the P&L Account amounting to Rs.13,99,71,432/-which principally resulted in a loss of Rs.17,25,690/-. Ld. AO called for details and explanations towards major expenses claimed under the head “Other Expenses/Miscellaneous expenses”. In this respect assessee produced a detailed list of particulars for site expenses claimed in the P&L Account for an amount of Rs.3,67,37,203/-. However, Ld. AO by observing that assessee has not provided any documentary evidence in support of claim of site expenses, adopted an ad-hoc rate of 20% to disallow the site expenses after reducing the component of sales tax from it (20% of Rs.3,67,37,203/- less sales tax Rs.59,64,698/- = Rs.61,54,501/-). Aggrieved, assessee went in appeal before the Ld. CIT(A), who dismissed the same.
4. Before us, Ld. Counsel for the assessee emphasized that Ld. AO himself has noted that assessee has produced a detailed list of particulars in respect of site expenses. Further, nothing has been specifically pointed out in respect of defect or shortcoming in the claim of the assessee. Ld. Counsel also referred to a comparative chart to demonstrate the quantum of site expenses which had been claimed regularly by the assessee both in the preceding year as well as subsequent years vis-à-vis the turnover of the assessee. From the said chart, ld. Counsel submitted that claim of assessee towards site expenses is more or less range bound from 19.1% in AY 2017-18 to 25.52% in AY 2016-17. He also submitted that no such disallowance has been made in the preceding as well as subsequent years and that there is no basis of adopting 20% to make an ad-hoc disallowance without pointing out any defect in the information and details furnished by the assessee. The comparative chart is reproduced as under:
4.1. Ld. Counsel also submitted that in the impugned order, Ld. AO himself has noted that assessee is engaged in the job of installing electronic signalling system for Railways and has submitted a breakup of the site expenses claimed. According to Ld. Counsel, the ad-hoc disallowance made is ought to be deleted.
5. Per contra, Ld. Sr. DR submitted that reference to proceding as well as subsequent years has no bearing on the year under consideration and that the assessee had merely produced a list in respect of site expenses claimed which is not supported by any other documentary evidence. Hence, he urged before the bench to confirm the actions of the authorities below.
6. We have heard the rival contentions and gone through the material placed before us. We note that assessee is a company engaged in the business as railway contractor and supplier. Assessee has furnished the break-up of site expenses which it has claimed in its P&L Account. Ld. AO has adopted ad-hoc percentage of 20% to make a disallowance towards site expenses without giving any rational basis for the same. Ld. AO while making a disallowance has reduced the component of sales tax from the total amount of the site expenses. Further, assessee has furnished a comparative analysis of the claim of site expenses in the preceding as well as subsequent years as tabulated above. Section 37(1) of the Act provides for allowing expenditure incurred by the assessee for the purpose of its business if they are not in the nature of capital expenditure or personal expenses and not being expenditure of the nature prescribed in section 30 to 36. In the present case before us, none of the authorities below as well as Ld. Sr. DR could bring on record any material to dislodge the claim of the assessee and substantiate the ad-hoc disallowance by adopting a rate of 20% for the same. Considering the facts on record and the submissions made by the Ld. Counsel, as well as the provision of section 37(1), we delete the ad-hoc disallowance made by the Ld. AO and confirmed by the Ld. CIT(A). Accordingly, grounds taken by the assessee in this respect are allowed.
7. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 23rd June, 2023.
