Zheng Yuan Mobiles Pvt. Ltd. Vs DCIT (ITAT Delhi)
The case of Zheng Yuan Mobiles Pvt. Ltd. vs DCIT at ITAT Delhi revolves around the disallowance of expenses by the Assessing Officer (AO) based on improper vouchers and bills. The appellant, a private limited company engaged in the distribution of OPPO Mobiles India Pvt. Ltd., contested this disallowance, leading to a series of judicial assessments.
Detailed Analysis: During the assessment proceedings, the AO raised concerns regarding the genuineness of the company’s expenses, citing insufficient documentation, internal vouchers, and cash transactions below the threshold limit. The AO proceeded to disallow 30% of the claimed expenses, considering them excessive, unreasonable, and partly personal in nature.
The Commissioner of Income Tax (Appeals) upheld the AO’s decision, emphasizing the lack of proper documentation and the failure to establish the expenses’ business purpose. Despite the appellant’s submission of ledgers and vouchers, the appellate authority deemed the expenses not wholly and exclusively incurred for business purposes, thereby justifying the disallowance.
Upon further appeal, the Income Tax Appellate Tribunal (ITAT) scrutinized the case. It noted the absence of specific deficiencies in the company’s books of accounts and highlighted the substantial revenue generated by the appellant. The ITAT emphasized the nature of the appellant’s business, operating in a competitive market, and reasoned that minor discrepancies in documentation shouldn’t warrant ad hoc disallowance of expenses.
The tribunal overturned the previous decisions, concluding that the disallowance lacked justification and was made on an estimate basis without concrete evidence of malpractice or non-business nature of the expenses.
Conclusion: The ITAT’s ruling in favor of Zheng Yuan Mobiles Pvt. Ltd. underscores the importance of considering the context and nature of business operations while assessing expenses. The case serves as a reminder that mere technical deficiencies in documentation should not lead to arbitrary disallowance, especially when the business’s legitimacy and revenue generation are evident.
FULL TEXT OF THE ORDER OF ITAT DELHI
The assessee has come in appeal against the order dated 28.02.2023, for the assessment year 2017-18, passed by the Commissioner of Income Tax (Appeals)- 30, New Delhi (hereinafter referred as “learned First Appellate Authority” or in short “FAA”), in appeal no. 10527/2019-20, arising out of assessment order dated 19.07.2019 u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred as the “Act”), passed by the ACIT, Circle Exemption 1(1), Delhi, hereinafter referred to as the “AO”).
2. The assessee is a private limited company, registered under the Companies Act, 2013 and engaged in the business of distributorship of OPPO Mobiles India Private Ltd. The assessee’ s return of income at loss was selected for scrutiny to examine the following issues:
1. Low income in comparison to high loans/advances/Investment in shares, appearing in Balance Sheet.
2. High Revenue from operations (including other income) and no scrutiny in preceding 5 assessment years.
3. Large refund claimed out of advance tax.
4. Large value claim of refund.
3. During assessment proceedings, learned AO was not satisfied with the genuineness of the expenditure on account of business establishment expenses, conveyance expenses, Guest House expenses, maintenance expenses, mobile & internet expenses, other expenses, travelling expenses, show room expenses and staff welfare expenses of Rs. 3,39,62,041/- and observed in para 4.3 as follows:
“4.3 Disallowance on account of non-maintenance of proper Bills and Vouchers On perusal of Profit and Loss Account for FY 2015-16, it appears that the assessee has debited expenses in Profit & Loss Account under different heads.
During the course of assessment proceeding, the assessee was asked to furnished ledgers alongwith supportive bills & vouchers of expenses such as Business Establishment Expenses, Conveyance Expenses, Guest House Expenses, Maintenance Expenses, Mobile & Internet Expense, other expenses, Travelling Expenses, Show Room Expenses, Staff Fund Expenses claimed in Profit & Loss Account and was asked to furnish reasons for such claim.
However, the assessee had not furnished ledgers & all supporting bills & vouchers of expense incurred towards the expenses claimed in Profit & Loss Account.
On verification of ledgers with bills and vouchers related to the above claimed expenses, following things were observed:
1. There was a non-maintenance of proper bills & vouchers,
2. Most of the vouchers are internally vouched.
3. Even, the produced vouchers were not fully supported with correct bills and hence some the claim didn’t match with evidence.
4. It is settled law that assessee has to maintain proper bills and vouchers of the expenses in order to make it amenable to verification.
5. Further, it is found that assessee has made payment to meet the above expenses mostly in cash below the threshold limit of Rs. 20,000/-
6. So, genuineness of above expenses for business purpose remained unverified in absence of supporting evidences. In this situation, the inflation of expenses can’t be ruled out.
7. Few expenses such as Guest House Expenses, Mobile and Internet Expenses claimed by the assessee, which is something personal in nature,
8. Mostly bills and vouchers were devoid of receiver signature,
9. Proper name and address of receivers were missing in most of the vouchers,
10. Few expenses such as sweet and birthday cake for staff, gift to staff festival and water to staff are total personal in nature and not laid out for the purpose of business and profession.
Considering the above facts, it appears that the expenditure incurred by the assessee during the course of business operation is excessive and unreasonable and is liable to be disallowed. In this regard, following case laws are hereby relied upon as under:
1. Lakshminarayan Madan Lal Vs. CIT(SC) 86 ITR 439
2. Swadesh Cotton Mills Co. Ltd Vs. CIT(SC) 63 ITR 57
3. Lakshmiratan Cotton Mills Co. Ltd Vs CIT(SC) 73 ITR 634
The submission of the assessee was given thoughtful consideration and keeping in view the above facts, the expenses incurred on the following heads are hereby disallowed @30% of total expenses:
