Case Law Details
Crescent Chemicals Vs ITO (ITAT Mumbai)
Introduction: The recent order of the Income Tax Appellate Tribunal (ITAT) Mumbai in the case of Crescent Chemicals Vs ITO has significant implications for the disallowance percentages of various business expenses. The appeal arises from the order of the National Faceless Appeal Centre (NFAC) Delhi/CIT(A) concerning an ad hoc disallowance amounting to Rs. 1,66,180/- for Business Promotion, Sundry Expenses, Office Maintenance Charges, and Conveyance. The ITAT’s directive to limit disallowance percentages is a crucial development in the ongoing dispute.
Detailed Analysis: The assessee, engaged in the business of chemicals, plastics, and electrical appliances, filed the return of income for A.Y 2014-15. The case underwent scrutiny under CASS, leading to the AO’s ad hoc disallowance of various expenses. The AO cited cash transactions, lack of proper bills and vouchers, and discrepancies in self-made vouchers as grounds for disallowance. The CIT(A) upheld the AO’s decision, prompting the assessee to appeal before the ITAT.
During the hearing, the Ld. AR argued that the CIT(A) overlooked crucial facts and submissions, emphasizing that similar claims were accepted in earlier years. The Ld. AR presented ledger account copies and demonstrated the percentage of expenses in comparison to turnover. The contention was that the AO’s estimation was arbitrary, and the disallowances should be reconsidered based on genuine business expenses.
The ITAT, after considering the submissions, directed the AO to limit disallowance percentages. The order highlights that the expenses were genuinely incurred for business purposes, and the disallowances were excessive. The ITAT set aside the CIT(A) order and directed the AO to restrict disallowance percentages for aggregate expenditure categories. The decision is contextualized within the overall facts, turnover, and nature of the business activities.
Conclusion: In conclusion, the ITAT’s order in the Crescent Chemicals Vs ITO case brings relief to the assessee by reducing the ad hoc disallowance percentages. The decision emphasizes the need for a more specific examination of expenses rather than arbitrary estimations. Businesses should take note of this development, as it sets a precedent for considering the genuine nature of expenses in the absence of complete bills and vouchers. The ITAT’s directive serves the interests of justice and strikes a balance between tax compliance and recognizing legitimate business expenditures.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The appeal is filed by the assessee against the order of the National Faceless Appeal Centre (NFAC) Delhi/CIT(A) passed u/sec143(3) and U/sec250 of the Ac. The assessee has raised the following grounds of appeal:
1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), NFAC erred in confirming the Ad hoc disallowance amounting to Rs. 1,66,180/- from Business Promotion – Rs.75,000/-, Sundry expenses – Rs. 16,620/-, Office Maintenance Charges – Rs.59,490/- and Conveyance – Rs. 15,070/-.
2 On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals), NFAC erred in confirming the action of Assessing Officer i.e. making the disallowance on the ground to cover up any discrepancy against self-made vouchers and making the addition of Rs. 1,66,180/- to the income of the appellant without pinpointing any defects in the expenses incurred by the appellant company
3 The appellant craves leaves to add, to delete or amend any of the above grounds of appeal at the time of hearing.
2. The Brief facts of the case are that, the assessee firm is engaged in the business of dealing in chemicals, plastics and electrical appliances. The assessee has filed the return of income for the A.Y 2014-15 on 24.11.2014 disclosing a total income of Rs.3,37,931/- and the return of income was processed u/sec143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS and notice u/sec 143(2) and U/sec142(1) of the Act along with the questionnaire are issued. In compliance to the notice, the Ld.AR of the assessee appeared from time to time and submitted the details and the case was discussed. The Assessing Officer (AO) on perusal of the Audited Profit and Loss Account found that (i) the assessee has debited Business Promotion Expenses of Rs.27,76,841/- and most of the expenses are incurred in cash and some of expenses are supported with the self made vouchers and has made adhoc addition @10% of cash expenses, which works out to Rs. 75,000/-(ii) The AO found that the assessee has debited sundry expenses of Rs.1,66,216/- and since the expenses are incurred in cash and not supported with the proper bills and vouchers, the A.O. has estimated the disallowance @10% of total claim which works to Rs.16,620/-(iii) The A.O found that the assessee has claimed Office maintenance charges of Rs. 11,89,647/- and since the expenditure is incurred in cash and are supported with the self made vouchers, the A.O has estimated adhoc disallowance @10% of the total amount which works out to Rs.59,490/- and (iv) the assessee has debited conveyance expenses of Rs.1,50,722/- to the Profit & Loss account and since most of the expenses are incurred in cash and are supported with the self made vouchers, the A.O. has estimated the disallowance @10% of the claim which works out to Rs.15,070/-. Finally the A.O has assessed the total income of Rs.5,04,110/- and passed the order u/sec 143(3) of the Act dated 30.12.2016.
3. Aggrieved by the order, the assessee has filed an appeal before the CIT(A), whereas the CIT(A) considered the grounds of appeal, submissions of the assessee and findings of the A.O but has confirmed the action of the AO and dismissed the assessee appeal. Aggrieved by the CIT(A)order, the assessee has filed an appeal before the Honble Tribunal.
4. At the time of hearing, the Ld. AR submitted that the CIT(A) has erred in confirming the disallowance made by AO overlooking the facts and submissions made in the assesseement proceedings. The Ld. AR also emphasized that in the earlier years these claims have been accepted by the revenue and only for this year the AO has estimated the disallowance without referring to the specific item under the expenses claim and made adhoc additions. Further the disallowance of the expenses are routine day to day expenses and at higher side and the Ld.AR has substantiated the submissions with the factual paper book and judicial decisions and prayed for allowing the assessee appeal. Per Contra, the Ld. DR relied on the order of the CIT(A).
5. Heard the rival submissions and perused the material available on record. The Ld. AR submitted that the CIT(A) has erred in sustaining the addition of expenses estimated by the Assessing Officer, ignoring the material information and evidences filed in the proceedings. The AO has not considered any specific expenditure item to be disallowed and the assessee has incurred the expenditure for the purpose of business, and the AO on the presumptions and assumptions has estimated the disallowances on the claims debited to the profit &Loss account which is at higher side. The Ld. AR demonstrated the ledger account copy of the office maintenance charges, conveyance charges, sundry expenses and business promotion expenses placed at page 20 to 28 of the paper book. The Ld. AR made submissions on the percentage of expenses claimed in the earlier years and the subsequent years in comparison to turnover of the assessee business. Whereas the A.O has not disputed the genuineness of the expenditure claimed and the utilization of expenses is wholly and exclusively for the purpose of business but due to non production of complete bills and vouchers has estimated the disallowances. Hence considering the overall facts, turnover and nature of business activities of the assessee and to meet the ends of justice, set aside the order of the CIT(A) and direct the Assessing officer to restrict the disallowance of aggregate expenditure of conveyance charges, sundry expenses and business promotion expenses @ 3% (as against@10%) and office ITA No. 3089/Mum/2023 Crescent Chemicals. Mumbai. maintenance expenses @2% (as against @5%).Further, this reduced percentage is applicable only to this Assesseement year. Accordingly partly allow the grounds of appeal in favour of the assessee.
6. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 16.11.2023.
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