No levy of penalty on estimated addition on ad hoc disallowance of expenses: ITAT Delhi

C&C Construction Ltd Vs CIT (Appeals) (ITAT Delhi)

ITAT Delhi held that the law is very well settled that there cannot be any levy of penalty on an estimated addition on ad hoc disallowances of expenses. Accordingly, penalty proceedings initiated under section 271(1)(c) of the Income Tax Act quashed.

Facts- The issue to be decided in this appeal is as to whether CIT(A) was justified in upholding the ad hoc disallowance of 10% out of repairs and maintenance expenses of plant and machinery, travelling and conveyance expenses, telephone expenses, repairs and maintenance of vehicles and security service charges, in the facts and circumstances of the instant case. The interconnected issue involved therein is whether CIT(A) was justified in enhancing the income of ₹4,96,84,717/- on account of reimbursement of expenses received from Oman Branch.

Conclusion- With regard to ad hoc disallowances of expenditure, it is a fact that assessee had agreed for 10% disallowance of expenses in the assessment proceedings due to paucity of time for furnishing all details before AO. Admittedly, AO had sought for other details only on 26.12.2017. The assessment finally stood completed on 28.12.2017. It is a fact that the assessee work sites are located at 20 locations and spread over all over the country and also in abroad. Hence, it would be practically impossible to collect all the details and submitted the same before AO within 2 days and assessee further collected the details and submitted the same to the extent of 80% of the expenditure before CIT(A) in the form of additional evidences. CIT(A) had not given any finding with regard to those additional evidence and merely sustained the disallowances on the ground that assessee had agreed for the same in the assessment proceedings forgetting the circumstances under which the assessee had agreed for the same. Considering the principle that there is no estoppels against the statute and income is to be determined based on the provisions of the Act and not by concession given by the parties, we deem it fit and appropriate to restore this issue to the file of AO for de novo adjudication in accordance with law.

Held that the law is very well settled that there cannot be any levy of penalty on an estimated addition on ad hoc disallowances of expenses.

FULL TEXT OF THE ORDER OF ITAT DELHI

These appeals in ITA Nos. 440/Del/2023 and 255/Del/2019 for AY 2015-16, arise out of the order of the Commissioner of Income Tax (Appeals)-XXVI, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 15.01.2019 for AY 271(1)(c) and 15.11.2018 u/s 250(6) against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.12.2017 by the Assessing Officer, ACIT, Central Circle-16, New Delhi (hereinafter referred to as ‘ld. AO’).

2. The first issue to be decided in this appeal is as to whether the ld CIT(A) was justified in upholding the ad hoc disallowance of 10% out of repairs and maintenance expenses of plant and machinery, travelling and conveyance expenses, telephone expenses, repairs and maintenance of vehicles and security service charges, in the facts and circumstances of the instant case. The interconnected issue involved therein is whether the ld CIT(A) was justified in enhancing the income of ₹4,96,84,717/- on account of reimbursement of expenses received from Oman Branch in the facts and circumstances of the instant case.

3. We have heard the rival submissions and perused the material available on record. The return of income for assessment year 2015-16 was filed by the assessee on 30.09.2015 declaring loss of ₹97,97,40,436/-, which was later on revised on 31.03.2017 declaring loss of ₹152,81,19,451/-. The assessee is engaged in the business of development of infrastructure and construction of roads, highways, bridges etc, having project sites in different parts of the countries and in abroad also such as Afghanistan and Oman. The ld AO observed that the assessee had debited following expenditure in profit and loss account:-

4. Vide order sheet entry dated 26.12.2017, the ld AO asked the assessee to submit bills and vouchers of these expenses. Due to paucity of time, the ld AR of the assessee representing before ld AO submitted that the said bills could not be provided and agreed for 10% of total expenditure to be disallowed. Accordingly, ld AO proceeded to disallow 10% of the aforesaid expenditure in the sum of ₹1,13,03,926/- in the assessment framed on 28.12.2017 u/s 143(3) of the Act. However, the assessee vide letter dated 15.12.2017 had submitted copies of the ledger accounts of major expenses by stating that all the accounts have not been submitted considering the volume involved therein. The assessee before the ld CIT(A) submitted that on security service charges, the assessee had even deducted tax at source and a sum of ₹2,15,47,678/- had been already allowed u/s 40(a)(ia) of the Act by the assessee for non-deposit of TDS before due date of filing of return. It was further submitted that the travelling and conveyance expenses of ₹5.55 crores include a sum of ₹4.96 crores being head office expenses incurred at Oman Branch by the assessee. These expenses were included in the travelling and conveyance related to Oman Branch, however, in head office books, different heads of expenses were credited to that extent and as such, there is no deduction claimed by the assessee with regard to expenses of ₹4.96 crores under the head Travelling Expenses. It was specifically clarified that there was neither any expenditure nor any income to the extent of ₹4.96crores as it only represents the expenditure booked in Branch books and income booked in head office books and on consolidation, both gets knocked off. It was pleaded before the ld CIT(A) that the ld AO granted only two days time to produce the details of aforesaid 5 expenses and since the work sites of the assessee are scattered all over the country and in abroad, it could not be produced. It was next to impossible for the assessee to collect all the supporting documents from various places. Accordingly, the assessee was left with no option but to agree for adhoc disallowance of 10% of above said expenses. The assessee submitted site-wise details of aforesaid expenditure before the ld CIT(A). It was also clarified that around 20 work sites are present and expenses have been merged and given in the aforesaid details of expenditure. The assessee also furnished certificate from the Statutory Auditors stating that a sum of Rs. ₹2,15,47,678/- on account of security services expenses was disallowed u/s 40(a)(ia) of the Act on account of non deposit of TDS before due date of return of income. The said certificate also contain the fact that a sum of ₹4,96,84,717/-, which is included in the travelling and conveyance expenses of Rs. 5.5 crores and that this sum of ₹4.96 crores is head office expenditure debited by Oman Branch of the assessee company and in Head office books, the same had been credited in different expenditure against which reimbursement was taken from Oman Branch. Hence, it was specifically clarified that this sum of ₹4,96,84,717/- was neither claimed as expenditure nor shown as income as it got knocked off in the consolidated accounts of head office and Oman branch. The said certificate also contain that all the expenses reflected in the books of accounts were incurred only for the purpose of business of the assessee company and are supported with documentary evidences thereon.

5. The ld CIT(A) agreed with the contention that the assessee only with regard to disallowance made u/s 40(a)(ia) of the Act in the sum of Rs. ₹2,15,47,678/- and granted partial relief to that extent and directed the ld AO to work out the disallowance of 10% of total expenditure excluding this figure of Rs. 2,15,47,678/-. This direction was given by the ld CIT(A) on the ground that assessee had indeed agreed for the disallowance at the time of assessment proceedings.

6. The ld CIT(A) made enhancement of income of ₹4,96,84,717/-towards reimbursement received from Oman Branch, ignoring the fact that the said sum has already been credited as credit to various expenditure account in the books of head office.

7. At the outset, we find a sum of ₹4,96,84,717/- has no effect on the computation of taxable income at all. Expenditure is debited in the branch books and income to the very same extent has been credited in head office books. On consolidation of branch financials with head office financials, the same gets knocked out. This was duly explained by the assessee before the ld CIT(A) and also by way of a certificate from Chartered Accountant. The said certificate is enclosed at pages 134 to 135 of the paper book. Hence, the addition made by the ld CIT(A) by way of enhancement in the sum of ₹4,96,84,717/- is absolutely without any basis and not understanding the basic financials of the assessee company. Ground No. 2 raised by the assessee is hereby allowed.

8. With regard to ad hoc disallowances of expenditure, it is a fact that assessee had agreed for 10% disallowance of expenses in the assessment proceedings due to paucity of time for furnishing all details before the ld AO. Admittedly, the ld AO had sought for other details only on 26.12.2017. The assessment finally stood completed ion 28.12.2017. It is a fact that the assessee work sites are located at 20 locations and spread over all over the country and also in abroad. Hence, it would be practically impossible to collect all the details and submitted the same before the ld AO within 2 days and assessee further collected the details and submitted the same to the extent of 80% of the expenditure before the ld CIT(A) in the form of additional evidences. The ld CIT(A) had not given any finding with regard to those additional evidence and merely sustained the disallowances on the ground that assessee had agreed for the same in the assessment proceedings forgetting the circumstances under which the assessee had agreed for the same. Considering the principle that there is no estoppels against the statute and income is to be determined based on the provisions of the Act and not by concession given by the parties, we deem it fit and appropriate to restore this issue to the file of the ld AO for de novo adjudication in accordance with law. The assessee is at liberty to furnish further evidences, if any, in support of its contentions. Accordingly, ground No. 1 is allowed for statistical purposes.

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

10. The appeal in ITA No. 440/Del/2023 is against the penalty proceedings u/s 271(1)(c) of the Act on the aforesaid quantum order. In view of the decision rendered above on the quantum appeal, the levy of penalty would have no legs to stand.

11. What now remains is only concealment penalty on ad hoc disallowance of expenses. The law is very well settled that there cannot be any levy of penalty on an estimated addition on ad hoc disallowances of expenses. Reliance in this regard is placed on the following decisions:-

a. CIT vs. Harprashad & Company (Delhi) 328-ITR53 (Del)

b. Samunder Bhan Sadh v. CIT [1991] 188 ITR 638 (P&H)

12. Accordingly, the grounds raised by the assessee in ITA No. 440/Del/2023 are allowed.

13. In the result, the appeal of the assessee in ITA No. 255/Del/2019 is allowed for statistical purposes and appeal of the assessee in ITA No. 440/Del/2023 is allowed.

Order pronounced in the open court on 25/09/2024.