ITAT deletes ad-hoc disallowances made without specifying non available vouchers

Grand Mumtaz Resorts Vs ITO (ITAT Amritsar)

Introduction: The recent case of Grand Mumtaz Resorts vs. ITO, decided by ITAT Amritsar, revolves around the ad-hoc disallowance of expenses worth Rs.1,02,350. The dispute arose due to the Assessing Officer’s sweeping statement on insufficiently vouched expenses. The assessee contended that the lack of specificity in pointing out particular vouchers rendered the disallowance unjustifiable.

Detailed Analysis: During the assessment proceedings, the assessee was asked to produce vouchers to substantiate various expenses, including miscellaneous, petrol, staff welfare, etc. The Assessing Officer (AO) made a 5% ad-hoc disallowance, claiming incomplete voucher verification. The crucial point raised by the assessee was that the AO failed to specify the missing vouchers, leading to a sweeping disallowance.

The appellant argued that petty vouchers, like taxi receipts, miscellaneous expenses, and uniform cleaning, are usually unavailable in informal sectors but are legitimate business expenditures. Citing precedent cases such as Pearl Farben Chem (ITA No.1122/Mum/2010) and DCIT v. M/s EPCOT Securities (P) Ltd. (ITA No. 395/Mum/2009), the assessee challenged the ad-hoc disallowance.

The ITAT, acknowledging the absence of specific findings on missing vouchers, directed the Assessing Officer to delete the ad-hoc disallowance of Rs.1,02,350.

Conclusion: The ITAT’s decision to quash the ad-hoc disallowance underscores the importance of specific findings in voucher verification. Without pinpointing the missing vouchers, sweeping disallowances are deemed unjustifiable. This case sets a precedent for meticulous scrutiny in such assessments, ensuring fairness and precision in expense disallowances.

it is contended on behalf of the assessee that during the course of assessment proceedings, the assessee was required to produce vouchers to substantiate the expenses from the vouchers so produced. It was observed that the expenses were not completely vouched and were not fully verifiable. It was contended that the AO has made a sweeping statement without specifying the vouchers that were not available. The reliance was placed on the decision of the Tribunal in the case of Pearl Farben Chem (P) Ltd. (ITA No. 1122/Mum/2010) and DCIT v. M/s EPCOT Securities (P) Ltd. (ITA No. 395/Mum/2009). There is no dispute with regard to the fact that the disallowances made by the Assessing Officer are purely ad-hoc and has not specified the vouchers that were not available. Hence, in the absence of such findings, I am of the considered view that the Ld. CIT(A) was not justified in confirming the addition. Therefore, the Assessing Officer is directed to delete the addition of Rs.1,02,350/-.

FULL TEXT OF THE ORDER OF ITAT AMRITSAR

The appeal by the assessee is directed against the order dated 09.03.2018, passed by the Ld. Commissioner of Income Tax (Appeals)-2, Amritsar (Camp at Jammu), pertaining to the Assessment Year 2012-13.

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

“1. On circumstances and facts of the case, the worthy CIT (A) has erred in sustaining the addition to the extent of Rs. 1,02,350/- made by Ld. ITO on the ground of non-availability of vouchers etc. in support of expenses claimed in books of account. The worthy CIT(A) has erred in upholding the action of Ld. ITO as stated above without appreciating the fact that Ld. ITO has not specifically pointed to any particular voucher or documentary evidence not made available to him.

2. The worthy CIT(A) has also erred in referring to cases decided by Hon’ble ITAT Amritsar Bench in support of his judgment without quoting such cases in detail, the issues & nature of expenses involved in such cases. He has also erred to appreciate that most of the expenses targeted by Ld. ITO like freight & carriage, petrol & lubricant, staff welfare expenses, travelling expenses, vehicle running & maintenance expenses, uniform etc do not contain any personal element and cannot be subject to any disallowance on % basis. Further, TDS wherever applicable has been adequately deducted.

3. On circumstances and facts of the case, the worthy CIT (A) was not justified in upholding Ld. ITO’s view that replacement of existing worn out wooden flooring by fresh wooden flooring was a capital expenditure keeping in view the nature of business, cold weather and other condition in which the assessee carries on business. As such the addition of Rs. 4,76,068/- (Rs. 5,05,523/- less depreciation of Rs. 29,455/-) made by Ld. ITO deserved to be deleted in toto.

4. On circumstances and facts of the case, the worthy CIT (A) has erred in not appreciating the fact that the additions made by Ld. ITO were made in a routine & perfunctory manner without application of mind & deserved to be deleted in toto.

5. The appellant craves leave to add, alter, modify or modify the grounds of appeal.”

3. The facts giving rise to the present appeal are that the assessee is a partnership firm and has filed its return of income through electronic mode declaring an income of Rs.13,98,726/- on 30.09.2012. The case of the assessee was picked up for scrutiny assessment and the assessment was framed vide order dated 26.03.2015 whereby the Assessing Officer made on ad-hoc disallowance out of various expenses of Rs. 1,02,350/-. Further, it was observed by the Assessing Officer that the assessee claimed an amount of Rs.20,91,883/- under the head of ‘Building Repairs and Renovations’ while verifying the details. The AO was of the view that the expenditure incurred on wooden flooring was of enduring nature hence it was capital expenditure. He, therefore, disallowed the sum of Rs. 4,76,068/- allowed depreciation of Rs. 29,455/-. Further, the Assessing Officer also noticed that the additions were made into the plant and machinery at Rs. 29,91,833/-. He noticed that the assessee claimed excessive depreciation of amount of Rs.67,500/- and same was added into the income of the assessee. Lastly the Assessing Officer made addition of Rs. 8,714/- being the difference between the purchase price. Thus, the Assessing Officer assessed income of Rs.20,53,403/-against the returned income of Rs. 13,98,726/-.

4. Aggrieved, against this the assessee preferred an appeal before the Ld. CIT(A) who after considering the submissions partly allowed the appeal thereby the Ld. CIT(A) confirmed the disallowance of expenditure of Rs.1,02,350/-, disallowance of Rs. 4,76,068/- and deleted the addition of Rs. 8,714/-, thus, the Ld. CIT(A) partly allowed the appeal of the assessee.

5. Now, the assessee is in appeal before this Tribunal. At the time of hearing no one attended the proceedings on behalf of the assessee, however written submissions have been filed on behalf of the assessee.

6. For the sake of clarity, the submissions filed by the assessee are reproduced as under:

“This is an appeal against the order of the worthy CIT(A),Jammu dated 09-03-2018for Asstt. Year 2012-13

THE FACTS OF THE CASE:

The appellant assessee is a partnership firm running a hotel at world famous tourist spot, Gulmarg. For Asstt. Year 2012-13, the Ld. ITO completed the assessment under section 143(3) of IT Act.Following additions made to his returned income of Rs.13,98,726/-& upheld by worthy CIT(A)

a) Addition of 1,02,350/- towards disallowance of 5% of expenses under various heads like misc. expenses, petrol & lubricants, staff welfare etc. etc. for want of sufficient vouchers etc.

b) Expenditure of Rs. 4,76,068/- (Original expenditure Rs. 5,05,523/-Minus imaginary depreciation of Rs. 29,455/- allowed by Ld. ITO) incurred on repairs & maintenance of hotel treated as capital expenditure

NOW THE ARGUMENTS

GROUND NOS. 1 & 2

Your Honour- As is a common knowledge, various expenses have to be incurred to run the business of hotel. During the year the assessee incurred following expenditures.

Disallowing 5% of the above expenses, the Ld. ITO notes in his Asstt. Order at page 3, para 4.1

“During the course of assessment proceedings, the assessee was required to produce supporting vouchers to substantiate these expenses. From the vouchers produced, it is

observed that these expenses are not completely vouched and are not fully verifiable——
”

From the above it is pertinent to note that vouchers & supporting documents were actually produced before the Ld. ITO but in his opinion were not complete.

It was pleaded before the worthy CIT(A) that since vouchers & supporting documents were actually produced and if the opinion of Ld. ITO these were not complete, then he should have pointed out the absence of particular voucher/s & resorted to addition of that amount amount only. Instead the Ld. ITO has resorted to a sweeping 5% disallowance without any justification whatsoever.

Without taking into account this argument, the worthy CIT(A), while upholding this addition notes in his order at page 3 under heading ‘Decision”

“Assessee had claimed various expenses in the P&L Account as mentioned in the para 4 of the Assessment order. The assessee was asked to produce supporting vouchers to substantiate these expenses. The AO found that these expenses were totally unvouched as such not verifiable at all……………. ”

Your honor the contradiction in worthy CIT(A)’s order is easily discernible. While the 1d. AO says that some or few vouchers were not available, the worthy CIT(A) says that all vouchers were not available. It clearly establishes that worthy CIT(A) has not gone fully through the order of 1d. AO and given his decision without proper appraisal of facts & material on record.

Now your honor, which are those petty vouchers which are not available with the assessee. Taxi-auto receipts, Few Misc. expenses like brooms or kerosene used for cleaning etc., uniform cleaning expenses etc. Your honor all these expenses are very petty in nature & usually incurred in informal sector where vouchers are not available. But nevertheless these expenses are incurred wholly & solely for business purposes. Hence the addition made by 1d. ITO & sustained by worthy CIT(A) needs to be quashed.

In support of my argument, reliance is placed on:

a) Pearl Farben Chem(P) Ltd(ITA No.1122/Mum/2010)

b) DCIT vM/s EPCOT Securities (P) Ltd.(ITA No.395/Mum/2009)”

7. On the contrary, the Ld. Sr. Departmental Representative opposed the submission and submitted that the orders of the authorities below are well reasoned and based upon the correct appreciation of the fact

8. I have heard the Ld. DR and perused the material available on record. Apropos to ground nos. 1 & 2, it is contended on behalf of the assessee that during the course of assessment proceedings, the assessee was required to produce vouchers to substantiate the expenses from the vouchers so produced. It was observed that the expenses were not completely vouched and were not fully verifiable. It was contended that the AO has made a sweeping statement without specifying the vouchers that were not available. The reliance was placed on the decision of the Tribunal in the case of Pearl Farben Chem (P) Ltd. (ITA No. 1122/Mum/2010) and DCIT v. M/s EPCOT Securities (P) Ltd. (ITA No. 395/Mum/2009). There is no dispute with regard to the fact that the disallowances made by the Assessing Officer are purely ad-hoc and has not specified the vouchers that were not available. Hence, in the absence of such findings, I am of the considered view that the Ld. CIT(A) was not justified in confirming the addition. Therefore, the Assessing Officer is directed to delete the addition of Rs.1,02,350/-.

9. Ground no. 3 is against sustaining the addition of Rs. 4,76,068/- in this regard the assessee has stated the expenditure was on account of renovation and replacing of existing worn-out & damaged wooden flooring with new wooden flooring by treating it as capital expenditure instead of Revenue expenditure. The assessee for this opposition that the expenditure is of revenue nature placed reliance on the following case laws:

“1. Addl. CIT v. India United Mills Ltd. 141 ITR 399 (Bom)

2. CIT v. Rex Talkies 148 ITR 560 (Kar)

3. Landmark Automobiles Pvt. Ltd. v. ITD (ITA No. 333/Ahd/2011)”

The contention of the Ld. DR is that the assessee could not prove that he has not enjoyed enduring benefit of such expenditure. I find force into this contention of the Ld. Sr. DR that there is no material suggesting that expenditure did not give enduring benefit to the assessee in the absence of material that such expenditure was of a regular feature and was claimed in earlier years as well and did not give enduring benefit to the assessee. I do not see any reason to interfere in the finding of the Assessing Officer. This ground of assessee’s appeal is rejected.

10. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 16.06.2022