Mere Magnitude of disallowance cannot be the basis for restricting disallowance

Devyani Food Industries Ltd. Vs ACIT (ITAT Delhi)

The learned CIT(A) noticed that the assessee has not filed detail of expenses before the Assessing Officer, still he restricted the disallowance for other expenses to 10% of the total expenses without any justification and only on the basis of the magnitude of the disallowance. The learned CIT(A) should have examined the books of accounts along with bills and vouchers to decide the issue of disallowance of other expenses and depreciation. The action of the learned CIT(A) of sustaining the disallowance on ad-hoc basis is not justified. In the facts and circumstances of the case, we feel it appropriate to restore the matter back to the file of the Assessing Officer for deciding afresh with the direction to the assessee to produce all the necessary documents in support of its claim including books of accounts and bills and voucher in relation to other expenses and additions to assets for justifying the claim of the depreciation. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. Accordingly, the grounds raised by both the parties are allowed for statistical purposes.

FULL TEXT OF THE ITAT JUDGEMENT

These cross appeals by the assessee and the Revenue are directed against order dated 08/06/2015 passed by the learned Commissioner of Income-tax (Appeals) -24, New Delhi [in short “the Ld. CIT(A)”] for assessment year 2012-13. Both the appeals being connected with the same assessee and common issues involved, same were heard together and disposed off by way of this consolidated order for sake of convenience.

2. The grounds of appeal raised by the assessee in ITA No. 4973/Del/20 15 are reproduced as under:

1. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred by applying law of estoppels and not accepting the facts that there are no discrepancies in the documents and the revised surrendered income is NIL.

2. That on the facts and in circumstances of the case and in law, the Commissioner of Income Tax (Appeals) has erred by not appreciating the complete facts that the additions made by the Ld. AO by disallowing ad-hoc % of other expenses was on the basis of suspicion, conjecture and surmise that the appellant has inflated expenses to suppress profit which is liable to omitted & deleted.

2.1  That on the facts and in circumstances of the case and in law, the Commissioner of Income Tax (Appeals) has erred in upholding the addition of 10% of the other expenses made by the Ld. AO.

3. That on the facts and in circumstances of the case and in law, the Commissioner of Income Tax (Appeals) has erred by confirming the disallowance of 1 /5th of depreciation on additions to fixed assets made during the year.

4. That the order passed by the Commissioner of Income Tax (Appeals) /AO is bad in law.

5. That each ground is independent of and without prejudice to the other grounds raised herein.

3. The grounds of the appeal raised by the Revenue are reproduced as under:

1. The order of Ld. CIT(A) is not correct in law and on facts.

2. On the facts and circumstances of the case, the CIT(A) has erred in law in restricting the addition to Rs.3,68,54,000/- out of total addition of Rs.18,42,70,000/- made by AO on account of disallowance of expenses.

3. On the facts and circumstances of the case, the CIT(A) has erred in law in restricting the addition to Rs.2,90,63,218/- out of total addition of Rs.13,30,46,472/- made by AO on account of disallowance of depreciation.

4. The appellant craves leave to add, amend any/ all the grounds of appeal before or during the course of hearing of the appeal.

4. Briefly stated facts of the case are that the assessee company was engaged in the business of manufacturing and trading of ice cream under the brand name “Cream bell” and also engaged in providing management activities. In the case of the assessee, a search and seizure operation under section 132 of the Income-tax Act, 1961 (in short ‘the Act’) was carried out on 27/03/2012 and incriminating material was seized. Consequent to the search proceedings, the assessee surrendered amount of ₹ 5 crore against discrepancy in the seized/impounded material. A notice under section 142 (1) of the Act was issued asking the assessee to file the return of income. In response, the assessee filed return of income on 17.06.2013, declaring loss of Rs.11,69,00,806/- under normal provisions of the Act and book profit of ₹ 6,08,39,186/- under section 115JB of the Act. The assessee paid taxes of ₹ 1,12,55,249/- on the book profit. Subsequently, statutory notice under section 143(2) of the Act was issued for commencing scrutiny proceeding. During the assessment proceeding, the Assessing Officer on 14.02.2014 noticed that the assessee retracted the surrender made of Rs .5 crore as a result of search proceeding. In view of the retraction of the surrender, the Assessing Officer asked the assessee to reconcile the incriminating material seized during the course of search with the books of accounts, bills and vouchers and other confirmations, but even after repeated reminders and opportunity provided to the assessee, no compliance was made by the assessee. The Assessing Officer has mentioned detail of the opportunities provided and non-compliance by the assessee in Para-7 (seven) of the assessment order. The learned Assessing Officer has specifically mentioned that in question No.43 of the questionnaire dated 23.10.2013, the assessee was asked to submit details of expenses claimed in profit and loss account with documentary evidences. In view of non­compliance on the part of the assessee, the Assessing Officer disallowed 50% of the expenses claimed of ₹ 36, 85, 40,000/-by the assessee under the head “other expenses” and worked out the disallowance at ₹ 18,42,70,000/-. Similarly, the Assessing Officer disallowed 50% of the depreciation claimed of ₹ 26,60,92,945/- by the assessee and worked out the disallowance at ₹ 13,30,46,472/. In the assessment order passed on 28.03.2014, both the disallowances were made by the Assessing Officer.

4.1 On further appeal before the learned CIT(A), the assessee challenged the disallowances and submitted that all the books of accounts, bills and vouchers etc. were produced before the learned Assessing Officer, however, he did not consider those. The assessee submitted that his books of accounts have been duly audited both under the company law and under section 44AB of the Income-tax Act and no discrepancy has been pointed out by any of the Auditor. He also submitted that no final show cause notice was issued before making those ad-hoc disallowances. According to the assessee, the Assessing Officer was not justified in making disallowance on ad-hoc manner and without a good rational.

4.2 After considering the submission of the assessee and the assessment order, the learned CIT(A) restricted the disallowance under the head ‘expenses’ to 10% of the total expenses and restricted the depreciation to 1/5^th of the total depreciation on the addition of fixed assets added during the year under consideration.

4.3 Aggrieved with the finding of the CIT(A), learned both the assessee and Revenue are in appeal before the Tribunal, raising the grounds as reproduce above.

5. The learned counsel of the assessee filed a paper book containing pages 1 to 87 and submitted that ad-hoc addition made by the Assessing Officer needs to be deleted.

6. On the contrary, the learned DR submitted that before the Assessing Officer no bills and vouchers of the other expenses were submitted and, therefore, the Ld. CIT(A) was required to examine the documents of the assessee in detail in accordance with the provisions of the Act and then decide the disallowance rather than restricting the disallowance on ad-hoc basis. The learned DR accordingly submitted that the matter may be restored back to the file of the Assessing Officer for deciding afresh. The learned counsel of the assessee has also not objected to this proposition of the learned DR.

7. We have heard the rival submissions and perused the relevant material on record. We find that the Assessing Officer made ad-hoc disallowance on the reasoning that books of accounts and bills and voucher in respect of the other expenses as well as addition to the assets were not produced before him. The Ld. CIT(A) adjudicated the issue of disallowance of other expenses observing as under:

“4.1.14 I have considered the submission of the AR and the assessment order. The AO has made an ad-hoc addition of a huge amount by disallowing 50% of the expenses debited under the sub­head “other expenses” amounting to Rs.36,85,40,000/-. From the assessment order, it can be gathered that the AO was unhappy with the pace of submission of details filed by the assessee. He has made the list of adjournments taken and the dates on which part details have been filed. He has also observed that the search was conducted almost two years before the issue of relevant questionnaire and that the appellant should have been ready to furnish the details as and when called for. The observations made in para 7 show that the A.O. had not expected the delay in submission of the details. This has played in his mind while arriving at the decision of disallowing 50% of the entire expenditure debited under the head “other expenses”.

4.1.15 The A.O. has noted that the assessee did not furnish any details whatsoever in reply to Q.No.43 of the questionnaire dated 23.10.13. His remark at para 3 of the assessment order is reproduced below for ready reference:

“The assessee has also not furnished any details whatsoever in reply to Q. No.43 of the questionnaire dated 23.10.13 regarding the details or expenses claimed in P&L account with documentary evidence. The above details were not furnished in spite of repeated reminders as noted in the order sheet. The assessee had failed to furnish the complete details on the said dates.”

4.1.16 Thereafter, the A.O. has noted that the assessee has claimed expenses of Rs.36,85,40,000/- in P&L account under the head of “other expenses” but no details were filed by the assessee in this regard till date. According to the A.O., this conduct of the assessee was a clear indication of inflation of expenses to suppress the profit. He has also held that the assessee did not furnish any details of the expenditure and hence the expenses claimed by the assessee under the head “other expenses” could not be accepted and that ad-hoc disallowance of 50% was required to be made as bogus expenditure. The relevant part of para 3 of the assessment order is reproduced below for ready reference:

In this regard, the assessee has claimed expenses of Rs.36,85,40,000/- in the profit & loss account under the head “Other Expenses” but no details filed by the assessee in this regard till date. This is clearly indicative of assessee’s conduct showing that expenses are being inflated to suppress the profit. The assessee had not furnished any details of expenditures. In this background the expenses claimed by the assessee on account of other expenses cannot be accepted and accordingly an ad-hoc disallowance of 50% is being made on account of bogus expenses which comes to RS. 18,42,70,000/- and will be added to the income of the assessee.

4.1.17 In the background of the observation of the A.O, it is necessary to examine Q.No.43 of the questionnaire dt. 23.10.13. The relevant Q.no.43 is reproduced below for ready reference:

43) Details of major expenses debited to P&L Account and justification via-a-vis revenue of the company, such as freight, forwarding and distribution expenses, Misc. Expenses, processing, commissioner, brokerage, and other expenses rent and repairs and replacement, advertising, publicity and sales promotion. (Please produce the documentary evidences for verification during the course of hearing.) Also give complete names and add of all the debtors, creditors, persons from whom any loan and advance is taken or given, also give names and add of all the parties Head wise whose A/c has been debited / credit in the P/L A/c and the payment made them is more than Rs. 50,000/- in different heads.

4.1.18 From the above, it is noted that the question No. 43 is a significant question. The A.O. has required the assessee to submit details of major expenses debited to P&L account. He has also required the assessee to give a justification of those expenses vis-a-vis revenue of the company. He has referred to some of the major expenses debited to P&L account namely freight, forwarding and distribution expenses, misc. expenses, processing, commission, brokerage and other , expenses, rent and repairs and replacement, advertising and publicity as well as sales promotion. The A.O. also has required the assessee to produce the documentary evidence for verification during the course of hearing. The turnover of the company for the relevant year was Rs. 167.93 crores. The total expenditure debited to P&L account was 161.85 crores.

4.1.19 The AR has submitted in the written submissions that the AO denied to take assessment proceedings as the same were bulky. This averment of the AR has no substance as firstly the details required by Q.No.43 had not been submitted at all ( the question of bills and vouchers would come thereafter) and secondly appellant has not denied that question number 43 was not answered, in any of the replies before the AO. Further the conduct of the appellant group as a whole (as noted from the assessment orders of other members of the group) has been one of reluctance to get its affairs scrutinized properly. There has been general delay and reluctance in timely compliance to the AO’s requirements. The assessment records also do not support the averment of the AR. Thus it is an undisputed fact that the appellant chose not to reply to Q.N.43 of the questionnaire and thus avoided proper scrutiny of its claim.

4.1.20 The assessee has failed to provide the details for the expenses debited and justification etc. on the basis of which AO could have proceeded to third party enquiries or any other similar investigation/examination deemed fit by him or would have accepted the claim without any further enquiry. Non-furnishing of the required details has affected the assessment proceedings. I, therefore consider that there is merit in the A.O. drawing adverse inference. This is especially so due to the fact that the appellant has retracted from the surrender of undisclosed income (of Rs.5 crore) made by it during the search and seizure action – that too after a very long gap of almost two years (as per assessment order the appellant retracted from the surrender by its letter dated 14/2/2014). The appellant had surrendered Rs.5 crore towards ‘discrepancy in seized/ impounded Annexures and others’. But the same has been completely retracted after a gap of almost two years. It is noted here that the scheme of the act does recognize the act of surrender of any undisclosed income at the time of search. Such surrender is one of the significant events of in any search and post search proceedings and it greatly influenced the post search investigation. By surrendering the undisclosed income the appellant stops the investigating wing from continuing with investigation on that issue on the principle that a fact accepted by the other party need not be proved. Here the surrender was on account of discrepancy in the seized and impounded documents. After a gap of two years, it is very easy to say that there are no discrepancies in the documents. The party has got ample time to set right the weaknesses, if any, in his affairs and also to take care of any deficiencies that could be linked to the contents of the seized papers including third party affairs. Thus any retraction from surrendered income, that too after a considerable time period, only points towards lack of bona fide on the party of the appellant. This is also against the rule of estoppel. A person who by his statement has induced another to believe his words and act in a particular manner, cannot go back and say that what he stated was incorrect. He is estopped from doing so.

4.1.21 I, however, note that there is no merit in disallowance of such high a magnitude on ad-hoc basis for non-furnishing of details and without connecting it to any defect in the appellant’s affairs and bringing on record any deficiencies in the accounts. The appellant had surrendered unaccounted income during the search and retracted from it after a very long gap. Non furnishing of the relevant details like party names and addresses of parties who are suppliers of goods and services which have been debited to P&L account has hampered the assessment of true income of the assesse. The appellant seems to have succeeded in preventing any possible further damage to him through delaying tactics and by failure in furnishing the details. But that cannot be a ground for making excessive disallowance. The present ad-hoc disallowance made by the AO is excess of surrendered amount by Rs.13.4 crores (18.34 – 5). There is no case to support such disallowance over and above what was surrendered and retracted. But even disallowance of Rs.5 crore from out of ‘Other Expenses’ alone in the given circumstances on appears excessive considering. I therefore hold that the addition to the total income be restricted to 10 % of the ‘other expenses’ and not 50% as done by the AO. There is sufficient adverse evidence to that effect in the form of acceptance by the appellant itself of deficiencies in the accounts (surrender of undisclosed income during search), a very long gap in retraction of surrender of undisclosed income without any valid and bonafide cause and its failure & reluctance to get itself scrutinized during assessment proceedings. Hence, ordered accordingly. Grounds are partly allowed.”

8. Similarly, regarding disallowance of depreciation, the learned CIT(A) observed as under :

“4.2.7 I have considered the submissions of the AR and the assessment order. The assessing officer had called upon the appellant to provide the details of fixed assets along with supporting evidences. Below the said question he has also inserted a table in which he has also asked certain more details. The relevant question no. 37 of AO’s Questionnaire dated 23.10.2013 is reproduced below for ready reference:-

37) Details of fixed assets as per schedule of companies Act. Details of additions to fixed assets along with the supporting evidences.

4.2.8 I have perused the relevant assessment folder. There is no reply given by the assessee on the said question no. 37. Written submission and Paper Book also does not show that the appellant furnished the details and replied to the said Q.No.37. It has been submitted by the AR that the assessing officer had denied to take cognizance of the supporting evidences due to them being bulky. This averment is not found to be factually correct. This averment of the AR has no substance as the details required by Q. No 37 had not been submitted at all and secondly appellant has not denied that question no. 37 was not answered, in any way of the replies before the AO. Further, the conduct of the appellant group (as noted from the assessment orders of other members of the group) as a whole has been one of reluctance to get its affairs scrutinized properly. There has been general delay and reluctance in timely compliance to the AO’s requirements. The assessment records also do not support the averment of the AR.

4.2.9 It is noted here that in the question the AO asked for details of fixed assets as per schedule of Companies Act and details of additions to fixed assets along with supporting evidences. In the table provided in the question the details such as date of purchase or installation, party from whom purchase has been made, the block of depreciation to which the asset relates to and utility of the asset vis-a-vis business activity of the company have been called for.

4.2.10 The above are vital details for AO to decide if the asset has been really acquired and put to use. This is especially relevant in view of the fact that the appellant group was found indulging in booking bogus expenditure. (For example in the case of group companies namely, Varun Beverages Ltd and Park View City Limited, bogus land development and construction expenditure was booked in the name of Rockhard Infrastructure Pvt. Ltd – which was surrendered during search). The names of the party who had supplied the asset and its utility etc. would have allowed the AO to decide the course of scrutiny and investigation. These have not been provided. The details in Form 3CD report are insufficient to cover the requirements sought by the AO. From the assessment proceedings and written submissions it is an undisputable fact that the appellant did not furnish details as required by Q.No.37. Without the details, AO could not have proceeded with proper assessment and hence there is merit in his action of drawing adverse inference.

4.2.11 In the above background it is now left to adjudicate whether the AO should disallow 50% of the depreciation claimed in the given circumstances. It is noted here that the AR has stressed on the fact that the GP and NP ratios do not call for any adverse inference and that the Form 3CD already contained the details. I do not agree that just because GP and NP ratios are better, assesse can get exemption from substantiating his claim of depreciation. Further, the details in Form 3CD report are insufficient to cover the requirements sought by the AO. They do not give details of parties from whom the same was acquired and the utility of the asset (required for the AO to assess in his own mind the reliability of the claim and to decide the line of investigation if required). They do not give the actual date of purchase of asset, they provide the date of ‘put to use’. AO wanted the date of purchase. The facts show that the appellant has not given any reply to question no. 37 of the said questionnaire. In the background of search findings relating to bogus booking of expenditure by the appellant group and retraction of surrender, this non-substantiation of depreciation claim and non-furnishing of vital details assume greater significance. The AO had sought details which were vital to determine the allowability of depreciation. The details like names and addresses of parties, date of purchase, the utility of the asset etc. and supporting bill & vouchers would have helped him make proper assessment after deciding whether should doubt any of the purchases and take up third party enquiries. This is especially relevant in view of the fact that the appellant group was found indulging in booking bogus expenditure, (for example in the case of group companies namely, RJ Corp Ltd and Park View City Limited bogus land development and construction expenditure was booked in the name of Rockhard Infrastructure Pvt. Ltd – which was surrendered during search).

4.2.12 However, I am not in agreement with the AO’s action of disallowing the entire 50% depreciation on this count. In a situation where the assessee has not furnished necessary replies and substantiated the depreciation claim and the AO wanted to make a huge disallowance based on that, I am of the view that, the AO should have issued a final show-cause letter to the assessee before doing so fin spite of the fact that he has been repeatedly calling upon the assesse to funish the details as is evident from the order sheet notings’). The AO has completed the assessment without issuing any show casuse notice. This is not even the case of best judgment assessment u/s 144. Even u/s 144, such a course could not have been adopted. Even under best judgment assessment, AO is required to issue a show cause notice.

4.2.13 Further, as pointed out by the AR, there was an opening w.d.v. of Rs.78,24,06,608/- on which depreciation is automatically allowable because the same has been allowed in the previous year. The depreciation on the WDV works out to Rs.12,07,76,856/- as under:

4.2.14 The disallowance therefore has to be related only to the assets claimed to have been added during the year. The appellant has failed to substantiate the additions to the Fixed Assets amounting to Rs.85,19,57,313/-. The depreciation relating to the same works out to Rs.14,53,16,088/- (Rs.26,60,92,945 – Rs.12,07,76,856/-). So AO could only have disallowed the said amount at whatever percent he found fit.

4.2.15 It is noted here that even though appellant has failed to substantiate (whose onus it was to do so) the depreciation claim to the extent of Rs.14.53 crores, the AO’s action of disallowing 50% of the same does not appear reasonable. The same appears to be excessive. It cannot be said that the appellant ran its business without the help of such huge value of assets (more than Rs.85 crore). It is clarified here that the onus to substantiate its claim of depreciation was on the appellant and AO had nothing to do with that. The onus could be discharged only when it leads evidences and furnishes the necessary details such as details of the parties from whom the assets have been acquired etc. Appellant has failed in the preliminary stage itself.

4.2.16 It is once again noted that the appellant has retracted from the surrender of undisclosed income (of Rs.5 crore) made by it during the search and seizure action – that too after a very long gap of almost two years (as per assessment order the appellant retracted from the surrender by its letter dated 14/2/2014). The appellant had surrendered Rs.5 crore towards ‘discrepancy in seized/ impounded Annexures and others’. But the same has been completely retracted after a gap of almost two years. It is noted here that the scheme of the act does recognize the act of surrender of any undisclosed income at the time of search. Such surrender is one of the significant events of in any search and post search proceedings and it greatly influences the post search investigation. By surrendering the undisclosed income the appellant stops the investigating officer from continuing with investigation on that issue on the principle that a fact accepted by the other party need not be proved. Here the- surrender was on account of discrepancy in the seized and impounded documents. After a gap of two years, it is very easy to say that there are no discrepancies in the documents. The party has got ample time to set right the weaknesses, if any, in his affairs and also to take care of any deficiencies that could be linked to the contents of the seized papers including party affairs. Thus any retraction from surrendered income, that too after a considerable time period, only points towards lack of bonafide on the party of the appellant. This is also against the rule of estoppel. A person who by his statement has induced another to believe his words and act in a particular manner, cannot go back and say that what he stated was incorrect. He is estopped from doing so.

4.2.17 However, the search action in the appellant’s case or its group has not thrown up undisclosed income of such a magnitude so as to warrant disallowance of 50% of the depreciation. The investigating authority had been able to unearth transactions with only one party (Rockhard Infrastructure Pvt. Ltd.) which was bogus. No doubt there could be suspicion that there were many more such transactions. But suspicion cannot be a substitute for hard evidences. Appellant group might have been successful in preventing further probe. Even then the same does not call for disallowance of such high magnitude. No show-cause notice has been issued by the AO, before making such a huge addition. Considering all the facts and circumstances of the case and also after taking into account the addition confirmed at Ground No.l&2 above (which is on account of non-furnishing of details and non-substantiating the expenses), I am of the view that disallowance of l/5th of depreciation on additions to fixed assets made during the year would meet the ends of justice. Ordered accordingly. The ground is partly allowed.”

9. The learned CIT(A) noticed that the assessee has not filed detail of expenses before the Assessing Officer, still he restricted the disallowance for other expenses to 10% of the total expenses without any justification and only on the basis of the magnitude of the disallowance. The learned CIT(A) should have examined the books of accounts along with bills and vouchers to decide the issue of disallowance of other expenses and depreciation. The action of the learned CIT(A) of sustaining the disallowance on ad-hoc basis is not justified. In the facts and circumstances of the case, we feel it appropriate to restore the matter back to the file of the Assessing Officer for deciding afresh with the direction to the assessee to produce all the necessary documents in support of its claim including books of accounts and bills and voucher in relation to other expenses and additions to assets for justifying the claim of the depreciation. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. Accordingly, the grounds raised by both the parties are allowed for statistical purposes.

10. In the result, both cross appeals of the assessee and of the Revenue are allowed for statistical purposes.

Order is pronounced in the open court on 15^th October, 2019.