ITAT found Disallowance of expenditure by lower authority excessive & unreasonably high

Metal Cans and Closures Pvt Ltd Vs ACIT (ITAT Lucknow)

ITAT Lucknow held that amount of disallowance of expenditure, on presumption of leakage in the form of expenditure of personal nature, reduced as found that total amount of disallowance by lower authority was excessive and unreasonably high.

Facts- Vide assessment order passed u/s 143(3) of the Income Tax Act, 1961, the assessee’s total income was assessed at Rs.6,28,91,316/- as against returned income of Rs.6,25,16,280/-. Notably, an addition of Rs.3,75,036/- was made on account of disallowance out of expenses under the heads conveyance, loading & unloading expenses, misc. expenses, repair & maintenance, telephone expenses, travelling expenses and vehicle running & maintenance expenses.

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

Conclusion- Held that the disallowance has been made by the Assessing Officer and confirmed by learned CIT(A) on the basis of generalized observation that there was possibility of leakage in the form of expenditure of personal nature. In the aforesaid facts and circumstances, we are of the view that the disallowance of a total amount of Rs.3,75,036/- is excessive and unreasonably high. In our view, a disallowance of Rs.10,000/- would be just and fair in the facts and circumstances of this specific case. Accordingly, out of total disallowance of Rs.3,75,036/-; an amount of Rs.10,000/- is sustained; and the Assessing Officer is directed to delete the remaining disallowance of Rs.3,65,036/-.

FULL TEXT OF THE ORDER OF ITAT LUCKNOW

(A) This appeal vide I.T.A. No.28/Lkw/2021 has been filed by the assessee for assessment year 2016-17 against impugned appellate order dated 27/02/2021 vide DIN & Order No.ITBA/NFAC/S/250/2020-21/1031075524(1) of learned Commissioner of Income Tax (Appeals) [learned “CIT(A)” for short]. The grounds of appeal are as under:

“1. Because the CIT(A)/NFAC has erred on facts and in law in upholding the disallowance of Rs.3,75,036/- being 10% of the expenses claimed under different heads, without pointing out any defect or discrepancy in the bills, vouchers and books produced during assessment proceedings, the disallowance made is misplaced, misconceived, bad in law and be deleted.

2. Because the CIT(A)/NFAC has erred on facts and in law in upholding the disallowance on adhoc basis only on presumption, while details of all the expenses were filed and no defects were pointed out therein, the disallowance made is arbitrary and bad in law and be deleted.

3. Because in any case and in all circumstances of the case, the adhoc disallowance made by the AO and upholding by the CIT(A)/NFAC without appreciating the fact the entire expenses incurred being vouched and verifiable, the accounts being tax audited, the details being furnished, no defects having being pointed out, the adhoc and arbitrary disallowances made be deleted.

4. Because all the expenses incurred and deduction claimed being wholly and exclusively for the purposes of business, the disallowance being arbitrary, without any basis, the same be deleted.

5. Because the CIT(A)/NFAC has erred on facts and in law in upholding the disallowance merely on the basis “However, simultaneously, the A.R. has stated that possibility of leakage in the form of personal nature expenditure etc. in the claim cannot be ruled” which sentence was never uttered verbally or in writing by the A.R. any time before the Assessing Officer. Moreover, it is a general statement, the CIT(A)/NFAC has erred on placing reliance on the same and upholding the disallowance. ”

(A.1) In this case assessment order dated 10/12/2018 was passed u/s 143(3) of the Income Tax Act, 1961 (“IT Act” for short) whereby the assessee’s total income was assessed at Rs.6,28,91,316/- (rounded off to Rs.6,28,91,320/-) as against returned income of Rs.6,25,16,280/-. In the aforesaid assessment order, an addition of Rs.3,75,036/- was made on account of disallowance out of expenses under the heads conveyance, loading & unloading expenses, misc. expenses, repair & maintenance, telephone expenses, travelling expenses and vehicle running & maintenance expenses. The relevant portion of the assessment order is reproduced as under:

“In response to specific query to produce ledger accounts of the above expenses included under the head “Other Expenses”. The assessee produced Books of accounts, Ledger accounts, bills, vouchers, etc. in respect of the above expenses, which have been looked into. From the perusal of ledger accounts, it was noticed that at various times expenditure debited under the above heads have been paid in cash. From the perusal of bills/vouchers, it was seen that payments made in cash were debited on the basis self-made vouchers, which are not open to complete verification. Accordingly, during the course of discussion and examination of books of accounts, the AR of the assessee was asked to show cause that in absence o f supporting evidences for the day to day expenditure under the above heads particularly with reference to the expenditure incurred in cash, as to why 10% of Rs.37,50,366/-, which comes to Rs.3,75,036/- out of the total expenditure debited under the above heads may not be disallowed to cover up any possible leakages. The A.R. of the assessee has stated that expenditure incurred either through cheques or in cash was for the business purposes only. He has further stated that in the trade dealt with by the assessee, some expenditure had to be incurred in cash on the basis of self-made vouchers. However, simultaneously, the A.R. has stated that possibility of leakage in the form of personal nature expenditure, etc. in the claim cannot be ruled out. Therefore, keeping in view the totality of the facts, an amount o f Rs.3,75,036/- is disallowed out of total expenditure debited under the above heads and added to the total income of the assessee.”

(B) The assessee filed appeal in the office of learned CIT(A) against the aforesaid assessment order dated 10/12/2018. Vide impugned appellate order dated 27/02/2021, the learned CIT(A) dismissed the assessee’s appeal and confirmed the aforesaid addition of Rs.3,75,036/- on account of disallowance out of various expenses. The relevant portion of the order of learned CIT(A) is reproduced as under:

“Ld. A.O. during examination found that expenditure in cash were incurred on several occasions. Cash payments were made through self-made vouchers. During the assessment proceedings, the A.R. o f the appellant was asked to show cause that “in absence of supporting evidences for the day to day expenditure under the above heads particularly with reference to the expenditure incurred in cash, as to why 10% of Rs. 37,50,366/-, which comes to Rs. 3,75,036/- out o f the total expenditure debited under the above heads may not be disallowed to cover up any possible leakages.” The A.R. stated that expenditure incurred either through cheques or in cash for the business purposes only. The A.R. further stated that in the trade dealt with by it, some expenditure had to be incurred in cash on the basis of self-made vouchers. The Ld. A.O. has further mentioned in the assessment order that “However, simultaneously, the A.R. has stated that possibility of leakage in the form of personal nature expenditure, etc. in the claim cannot be rules out.” Therefore, Assessing Officer disallowed an amount of Rs.3,75,036/- and added to the total income of the appellant. During appellate proceedings, the appellant has mainly submitted that ad-hoc addition has been made by the A.O. without pointing out any item of disallowance or discrepancy. The accounts have been audited. The payments are vouched. There is no dispute that the expenditure debited have not been incurred for the purpose of business and thus, addition should be deleted. In support, the appellant has placed reliance upon the various judgments which have been reproduced in the foregoing paras. I have also carefully gone through those judgements. The judgements relied upon can easily be distinguished on one issue. As already mentioned above that during the assessment proceedings, the A.R. of the appellant was agreed that possibility of leakage in the form of personal nature expenditure, etc., in the claim cannot be ruled out. This aspect o f admittance of fact has not been dealt with in any of judgements relied upon by the appellant. Therefore, the judgements relied upon by the appellant are not applicable in the present case as the fact is distinguishable. The A.R. was agreed that non business expenditure may have been debited to P&L account and therefore, the ld. A.O made 10% ad hoc disallowance. Such expenditure, as admitted by the A.R. during the assessment proceedings, are not allowable u/s.37 o f the Act as they are not incurred wholly and exclusively for the purpose of business. Therefore, I find that the ld. A.O. was justified in making ad hoc disallowance of Rs.3,75,036/-. Hence, addition made by the Ld. A.O. is confirmed. Accordingly, these grounds of appeal are dismissed.”

(B.1) The present appeal before us has been filed by the assessee against the aforesaid impugned appellate order of learned CIT(A). In the course of appellate proceedings in Income Tax Appellate Tribunal (“ITAT” for short), a paper book containing the following particulars was filed from the assessee’s side:

(B.2) In addition, a brief synopsis was also filed from the assessee’s side, the relevant portion of which is reproduced below:

“Comparative chart of Sales, net profit and expenses claimed of four years”

– Appeal for AY 2015-16 allowed by CIT(A) deleting all the additions. Order attached.

– Further in continuation of the decision as mentioned in the written submissions attached to the paper book reliance is made on the following decisions:

i. Shri Shashi Kant Loyakla vs. ACIT Circle 35(1) Delhi ITA No. 5953/Del/2019 AY 2016-17 order dated 13.02.2023

ii. Cheminova India Ltd. vs. ACIT 10(1) Mumbai ITA No. 5282/Mum/2014 AY 2007-08 order dated 03.08.2016

iii. TPF Getinsa Euroestudios S.L. vs. ACIT International Taxation ITA No.2400/Del/2022 AY 2018-19 Order dated 19.04.2023

iv. Kailas Chand Agarwal vs. DCIT, ITA No. 275/RPR/2016 for AY 2010-11, Order dated 01.04.2022.

v. Sayaji Iron & Engg. Co. vs. CIT- 253 ITR 749 (Guj.)

(C) At the time of hearing before us, learned Counsel for the assessee placed reliance on the submissions filed by the assessee before learned CIT(A), copy whereof was filed from the assessee’s side as part of the aforesaid paper book. The learned Counsel for the assessee also placed reliance on the aforesaid synopsis filed from the assessee’s side, relevant portion of which has already been reproduced in paragraph no.(B.2) of this order. In his oral submissions, he further contended that the aforesaid addition has been made on ad hoc basis without pointing out any specific item of disallowance or discrepancy; that no defect or discrepancy has been pointed out by the Assessing Officer; that the accounts have been tax audited; that the payments are vouched; and that the aforesaid addition on account of disallowance out of various expenses made on ad hoc basis should be deleted. In addition to the case laws cited in the aforesaid synopsis, the learned Counsel for the assessee also placed reliance on the following case laws:

(1) J. Enterprises vs. CIT on 14^th September, 2001 [2002] 254 ITR 216 (SC)

(2) Vijay Infrastructure Limited vs. ACIT [ITAT Lucknow) in I.T.A. No.254 of 2015 dated 30/10/2015

(3) Atul Construction Company vs. Income Tax Officer (ITAT Agra) in I.T.A. No.361 of 2013 dated 31/01/2014

(4) Kanha Vanaspati Ltd. vs. Jt. C.L.T. Special Range-II, Lucknow 2006(7) MTC 339 (Trib. Lko)

(5) Mahendra Kumar Agarwal vs. Income Tax Officer 2007(9) MTC 97 (Trib. Allahabad)

(6) Honda Siel Cars India Ltd. vs. ACIT 2009 (13) MTC 427 (Trib. Delhi)

(7) ACIT Circle-2(2), Lucknow vs. M/s Chandra Confectionery (P.) Ltd. 2003 (2) MTC 1022 (ITAT Lko)

(8) UP Cooperative Federation vs. Department of Income Tax (ITAT Lucknow) in I.T.A. No.33/Lkw/2011 dated 22/03/2011

(9) Judgment of Income Tax Appellate Tribunal Lucknow dated 13/07/2011 in case of Rajmaatidevi, Basti

(10) Judgment of CIT(A)-III in the case of Shri Rawal Das Ratnani (Prop. M/s Om Food Products) Gorakhpur dated 16/12/2013 in Appeal No.196/ITO-2(1)Gkp/CIT(A)-III/LKP/11-12

(12) Judgment of CIT(A)-II in the case of M/s Jet Knitwear Pvt. Ltd. Order dated 03/01/2018 in Appeal No.CIT(A)-1/KNP/10166/2017-18/311

(13) ACIT vs. Modi Rubber Limited, I.T.A. No.1952/Del/2014, Order dated 15/05/2018

(C.1) Learned Sr. DR for Revenue relied on the orders of the Assessing Officer and the learned CIT(A) and supported the same.

(D) We have heard both sides. We have perused materials on record. We find from the perusal of the assessment order [relevant portion of which has already been reproduced in paragraph no. (A.1) of this order] that the AR of the assessee had stated that some expenses had to be incurred in cash on the basis of self-made vouchers. Self-made vouchers towards expenses incurred in cash are self-serving materials and are not amenable to independent verification in the absence of supporting independent evidence. Learned AR of the assessee had also stated during assessment proceedings that possibility of leakage in the claim cannot be ruled out. It is well settled that the assessee is required to adduce necessary evidence not only to the effect that the expenses claimed were business expenses, but also that the expenses were indeed incurred in the first place. In view of the foregoing, and specifically having regard to what was stated by learned Counsel for the assessee during assessment proceedings, the case laws on which reliance has been placed by the assessee side fail to advance the assessee’s case due to distinguishing fact; averment made by learned Authorised Representative for the assessee during assessment proceedings. Therefore, we are of the view that some disallowance out of assessee’s claim of expenses was justified. What remains to be seen is whether the quantum of disallowance made by the Assessing Officer was excessive or unreasonably high having regard to facts and circumstances of the present case. We find that the Assessing Officer and the learned CIT(A) have not pointed out any specific item of expenditure which are to be disallowed. No particular item of expenditure has been even doubted by them. The disallowance has been made by the Assessing Officer and confirmed by learned CIT(A) on the basis of generalized observation that there was possibility of leakage in the form of expenditure of personal nature. In the aforesaid facts and circumstances, we are of the view that the disallowance of a total amount of Rs.3,75,036/- is excessive and unreasonably high. In our view, a disallowance of Rs.10,000/- would be just and fair in the facts and circumstances of this specific case. Accordingly, out of total disallowance of Rs.3,75,036/-; an amount of Rs.10,000/- is sustained; and the Assessing Officer is directed to delete the remaining disallowance of Rs.3,65,036/-.

(E) In the result, the appeal is partly allowed for statistical purposes. (Order pronounced in the open court on 19/07/2023)