Adhoc addition based on guess-work and surmises untenable: ITAT Delhi

Virtual Global Education Ltd. Vs ACIT (ITAT Delhi)

ITAT Delhi held that adhoc addition purely based on the guess-work and surmises is untenable in law. Accordingly, order set aside and assessment restored back to the file of AO for fresh assessment.

Facts- The assessee filed its return of income through e -mode on 28.09.2015, declaring income of INR 32,23,630/-. Thereafter, the case was selected for scrutiny and notice u/s 143(2) of the Income Tax Act, 1961 was issued on 17.03.2016 and served upon the assessee. In response to the statutory notices, Authorized Representative (“AR”) of the assessee attended the assessment proceedings. AO after providing due opportunity to the assessee, made addition of INR 3,74,08,810/- on the basis that the assessee could not explain and produce books of accounts alongwith supporting evidences. It is noted by the AO that the assessee was asked to explain on 28.12.2017 but no one appeared on behalf of the assessee and accordingly, 30% of total expenses of INR 12,46,96,031/- i.e. INR 3,74,08,810/ – was added back to the income of the assessee and assessed the income of the assessee u/s 143(3) of the Act vide assessment order dated 28. 12.2017 at INR 4,06,32,440/-.

CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.

Conclusion- Held that they made and sustained additions on the ground of failure on the part of assessee to furnish complete books of accounts alongwith supporting bills and vouchers. It is the case of the assessee that had adequate opportunity was given, it could have furnished the requisite documentary evidences. It is well-settled that the additions made on adhoc basis cannot be sustained. As such adhoc addition depends purely on the guess -work and surmises. If the assessee bring relevant supporting evidence, he must be given adequate opportunity in this regard. We therefore, looking to the facts of the present case, we are of the view to sub-serve the principles of natural justice, the assessee should be given a chance to prove his case. Hence, the impugned order is hereby, set aside and the assessment is restored to the file of AO for making assessment afresh.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal filed by the assessee is directed against the order passed by Ld.CIT(A), National Faceless Appeal Centre (“NFAC”), Delhi dated 30.04.2024 for the assessment year 20 15-16.

2. The assessee has raised following grounds of appeal:-

“On the facts and in the circumstances of the case and in law the Ld. CIT(A) at NFAC. Delhi erred in confirming the following actions of the Assessing Officer –

1. dismissing appeal against order passed u/s 143(3) of the I.T. Act, 1961 without providing due, proper or adequate opportunity of hearing;

2.  confirming the following actions of the Assessing Officer: – 

1. making an addition of Rs. 3,74,08,810/ – on account of adhoc disallowance at the rate of 30% of the total expenses claimed,

2. initiating penalty proceedings u/s 271(1)(c) of the Act.

All the above actions being arbitrary, fallacious, unwarranted and illegal must be quashed with directions for appropriate relief. ”

3. Facts giving rise to the present appeal are that the assessee filed its return of income through e -mod e on 28.09.2015, declaring income of INR 32,23,630/-. The reafter, the case was selected for scrutiny and notice u/s 143(2) of the Income Tax Act, 19 61 (“the Act”) was issued on 17 .03.2016 and served upon the assessee. In response to the statutory notices, Ld. Authorized Representative (“AR”) of the assessee attended the assessment proceedings. The Assessing Officer (“AO”) after providing due opportunity to the assessee, made addition of INR 3,74,08,810/- on the basis that the assessee could not explain and produce books of accounts alongwith supporting evidences. It is noted by the AO that the assessee was asked to explain on 28.12.2017 but no one appeared on behalf of the assessee and accordingly, 30% of total expenses of INR 12,46,96,031/- e. INR 3,74,08,810/ – was added back to the income of the assessee and assessed the income of the assessee u/s 143(3) of the Act vide assessment order dated 28. 12.2017 at INR 4,06,32,440/-.

4. Aggrieved against this, the assessee preferred appeal before Ld.CIT(A), who after considering the submissions, also sustained the addition and dismissed the appeal of the assessee.

5. Aggrieved against the order of Ld.CIT(A), the assessee preferred appeal before this Tribunal.

6. Apropos to the grounds of appeal, Ld. Counsel for the assessee submitted that the lower authorities have not given sufficient opportunity to the assessee and the impugned addition has been made on adhoc basis without giving any justification. He submitted that even the order of Ld.CIT(A) is non-speaking and he has not adverted to the submissions of the assessee. He therefore, prayed that the matter may be restored to the Assessing Authority as the assessee would suffer irreparable loss if the opportunity to represent its case is not provided to the assessee.

7. On the other hand, Ld. DR for the Revenue opposed these submissions and supported the orders of the authorities below.

8. We have heard Authorized Representatives of the parties and perused the material available on record and gone through the orders of the authorities below. We find that there was no meaningful representation on behalf of the assessee before the lower authorities . We find merit into the contention of the assessee that the impugned addition has been made on adhoc basis. The AO in the assessment order reproduced the ledger account and made addition on adhoc basis on the ground that the supporting evidences were no t supplied. It is recorded by AO that the assessee failed to supply complete books of accounts. We find that Ld.CIT(A) has confirmed the addition by observing as under:-

 2. “In the grounds of appeal, the assessee objects to assessing income at Rs.4,06,32,440/ – against the returned income of Rs.32,23,630/–without specifying any particular reason.

3. In ground no.2, the assessee objects to making an addition of Rs.3,74,08,810/ – on account of expenses claimed under various heads @ 30%on ad-hoc basis. It is evident from the extracts of submissions of the assessee that ledgers were not maintained properly and most of the payments were in cash and no bills / vouchers have been produced for verification. Further assessee has not produced its bank statement which could substantiate cash withdrawals from the bank to meet out its requirement of cash payment. The action of the AO disallowing 30% of the expenses under the circumstances is justified. The disallowance o f expenditure is confirmed.”

9. Further, the AO in para 6 of the assessment order has observed as under:-

“6. The AR of the assessee was asked to appear on 28 December 2017, but nobody appeared and no vouchers and bills were produced. Considering the complete non verifiability of the expenses and 30% of the expenses Rs. 3,74,08,810/- (Expenses = Rs. 12,46,96,031) are disallowed and added back to the income of the assessee.

Consequently I am satisfied that to the extent of Rs. 3,74,08,810/- the assessee has concealed/ furnished inaccurate particulars of its income and penalty proceedings u/s 271(1) (c) are being initiated separately.

(Addition: Rs. 3,74,08,810)

With these remarks, total income is recomputed as under:

Assessed at Rs. 4,06,32,440/ -. Issue necessary forms. Charge interest u/s 234A, 2348, 2340 and 234D, as necessary, as per Income-Tax Act. Penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961, have been initiated separately. Computation of tax and interest is as per IT’NS 150 enclosed with the assessment order.”

10. From the findings of both the authorities below that they made and sustained additions on the ground of failure on the part of assessee to furnish complete books of accounts alongwith supporting bills and vouchers. It is the case of the assessee that had adequate opportunity was given, it could have furnished the requisite documentary evidences. It is well-settled that the additions made on adhoc basis cannot be sustained. As such adhoc addition depends purely on the guess -work and surmises. If the assessee bring relevant supporting evidence, he must be given adequate opportunity in this regard. We there fore, looking to the facts of the present case, we are of the view to sub-serve the principles of natural justice, the assessee should be given a chance to prove his case. Hence, the impugned order is hereby, set aside and the assessment is restored to t he file of AO for making assessment afresh. The assessee is hereby directed to co -operate in the assessment proceedings. It would file the relevant evidence to the satisfaction of AO. Hence, the Grounds raised by the assessee are allowed for statistical purposes.

11. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open Court on 24th September, 202 4.