Raj Kumari Vs ITO (ITAT Jaipur)
Lower Net Profit Cannot Justify Ad Hoc Disallowance of Breakage Expenses: ITAT Jaipur
The Income Tax Appellate Tribunal (ITAT), Jaipur, in Raj Kumari vs. ITO, deleted an ad hoc disallowance of breakage expenses, holding that a lower net profit compared with other businesses could not, by itself, justify such disallowance when the assessee’s audited books of account had been accepted.
The Tribunal observed that profitability depends on several factors, including the businessman’s expertise, trained staff and marketing strategies. Businesses operating in the same line need not earn identical profits. It also condoned a 105-day delay in filing the appeal after accepting the assessee’s explanation concerning the death of her father-in-law, who handled her income tax matters.
Background of the Dispute
The assessee, a licensee running a wine shop, filed her return for assessment year 2017-18 declaring total income of ₹3,87,230. The return was selected for scrutiny, and notices under Sections 143(2) and 142(1) of the Income Tax Act, 1961, were issued.
The assessment proceedings recorded initial non-compliance. Subsequently, on 15 December 2019, the assessee furnished certain particulars, including month-wise salary, purchases and capital account details.
The Assessing Officer completed the assessment under Section 143(3) at a total income of ₹27,03,020.
The assessee challenged the assessment before the Commissioner of Income Tax (Appeals)-6, Chennai, who partly allowed her appeal through an order dated 30 December 2024. Aggrieved by the sustained disallowance of breakage expenses, she approached the Tribunal.
Tribunal Condones 105-Day Delay
The appeal before the Tribunal was delayed by 105 days. Through an affidavit, the assessee explained that she was a household lady without her own mobile number or email address and lacked knowledge of computers and the internet.
Her income tax matters were handled by her father-in-law, Shri Brijendra Singh, who died on 15 April 2024. His death certificate was placed on record.
The assessee stated that, following his death, she was unaware of the requirement to file the appeal. Upon receiving a notice concerning penalty proceedings dated 30 May 2025, she took steps and filed the appeal on 13 June 2025.
The Tribunal accepted these circumstances as constituting sufficient cause, condoned the delay and proceeded to examine the appeal on merits.
Audited Books Had Been Accepted
During the relevant year, the assessee reported turnover of ₹4,03,28,175 and a net profit rate of 0.96%.
The Tribunal recorded that her books of account were audited and had been accepted by the Assessing Officer during assessment. It also recorded that the Assessing Officer had made an ad hoc disallowance at 20% of the breakage expenses claimed.
The assessee argued that the Assessing Officer had examined the details furnished, including those relating to breakage expenses. The accounts had been audited under Section 44AB, with audit reports in Forms 3CB and 3CD.
Accordingly, she contended that the ad hoc disallowance, subsequently sustained by the CIT(A), was unjustified in the circumstances.
Comparison With Other Traders Was Insufficient
The Assessing Officer had compared the assessee’s results with those of other businessmen operating in the same line of business, who reported higher net profits.
The Tribunal rejected the proposition that such a comparison, by itself, warranted disallowance.
It explained that even persons carrying on the same business cannot necessarily achieve the same level of profitability. Commercial results depend on factors such as individual expertise, the availability of trained staff, and better marketing strategies.
Consequently, a difference in net profit could not independently support an ad hoc disallowance, particularly where the Department had accepted the assessee’s duly audited accounts.
The Tribunal’s reasoning focused on the factual position before it: the expenses appeared in the audited financial statements, the books had been accepted, and the disallowance was made on an ad hoc basis.
Breakage Expenses Disallowance Deleted
The Tribunal held that the breakage expenses, duly detailed in the assessee’s audited financial statements, could not be disallowed on an ad hoc basis in these circumstances.
It therefore directed deletion of the disputed disallowance and allowed the assessee’s appeal.
The decision distinguishes a business’s comparatively low profitability from a valid factual basis for disallowing a particular expense. The Tribunal did not treat higher profits earned by other traders as sufficient evidence against the assessee’s claim.
Key Takeaway
The ruling establishes that lower net profit alone does not justify an ad hoc disallowance of expenses where the audited books have been accepted and the relevant expenses are detailed in the audited financials.
It also illustrates the Tribunal’s acceptance of a documented personal circumstance as sufficient cause for condoning delay, enabling the dispute to be decided on its merits.
Five Alternative SEO Titles
Lower Net Profit Cannot Justify Ad Hoc Expense Disallowance: ITAT Jaipur
ITAT Deletes Breakage Expense Disallowance Where Audited Books Accepted
105-Day Appeal Delay Condoned After Death of Taxpayer’s Representative
ITAT Jaipur: Profit Comparison Alone Cannot Support Expense Disallowance
Raj Kumari Case: Ad Hoc Breakage Disallowance Deleted by ITAT
FULL TEXT OF THE ORDER OF ITAT JAIPUR
The Appellant, Raj Kumari (hereinafter referred to as the ‘assessee’) by filing the present appeal, sought to set aside the impugned order dated 30.12.2024 passed by the Commissioner of Income Tax (Appeals)-6, Chennai [hereinafter referred to as the ‘CIT(A)’] qua assessment year 2017-18 on the ground that:- “1. The Ld. Appellate authority erred in sustaining the disallowance of breakage of Rs. 14,52,382/-“
2. Briefly stated, facts necessary for consideration and adjudication of the issues at hand are: Assessee’s return of income for A.Y. 2017-18 declaring total income at Rs. 3,87,230/- was subjected to scrutiny. Necessary notices u/s 143(2) and u/s 142(1) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), were issued, but no reply has been filed. However on 15.12.2019 the assessee furnished certain details viz month wise` salary, monthwise purchase and capital accounts details etc. Declining the contention raised by the assessee, the AO proceeded to make disallowance/addition of Rs. 14,52,382/- by allowing 20% breakage expenses claimed by the assessee, made disallowance/addition of Rs. 1,43,410/-. The AO accordingly, proceeded to frame the assessment u/s 143(3) of the Act at the total income of Rs. 27,03,020/-.
3. Assessee carried the matter before the Ld. CIT(A) by way of filing appeal, who has partly allowed the appeal. Being aggrieved with the impugned order passed by the Ld. CIT(A), assessee has come up before the Tribunal by way of filing the present appeal.
4. At the very outset, it is brought to the notice of the Bench that the present appeal is time barred with a delay of 105 days. The assessee by moving an affidavit sought to condone the delay of 105 days on the grounds inter-alia that the assessee being a household lady was not having her own mobile number and email ID, nor is having any knowledge of computer and internet; that all the income tax cases of the assessee are being looked after by her father-in-law Shri Brijendra Singh, who had expired on 15.04.2024 (his death certificate on record); that due to death of her father-in-law, she had no knowledge to file the appeal; that when the assessee has got notice regarding penalty proceedings dated 30.05.2025, she immediately filed the present appeal on 13.06.2025.
5. Keeping in view the facts that the entire income tax proceedings of the assessee were being looked after by her father-in- law, who has unfortunately expired on 15.04.2024, thus the appeal could not be filed and when the assessee has got the notice of the impugned order passed by the Ld. CIT(A) on 30.05.2025 from the AO initiating penalty proceedings, she filed the present appeal, we find it a “sufficient cause” to condone the delay, hence the delay of 105 days in filing the appeal is hereby condoned and the appeal is being heard on merits.
6. We have heard Ld. ARs for the assessee and Ld. DR for the Revenue and perused the record available on file.
7. Undisputedly, the assessee being a licensee running a wine shop and has claimed her turnover of Rs. 4,03,28,175/- during the year under consideration and shown net profit @ 0.96%. It is also not in dispute that the books of accounts maintained by the assessee were audited and accepted by the AO while making assessment. It is also not in dispute that the Assessing Officer has made adhoc disallowance @ 20% of the breakage expenses claimed by the assessee.
8. Ld. AR for the assessee challenging the impugned disallowance made by the AO and confirmed by the Ld. CIT(A) contended that when the entire details furnished by the assessee including breakage expenses have been examined by the AO and complete the books of accounts dully audited by Auditor u/s 44AB of the Act as per audited report Form 3CB and Form 3CD were accepted adhoc disallowance made by the AO and sustained by the Ld. CIT(A) is not sustainable.
9. No doubt the AO compared the assessee’s case with other businessman, in the same line, who has shown more net profit than assessee. But we are of the considered view that even in the same business one cannot get the same profit because it depends on many factors viz individual expertise of the businessman, trained staff and better marketing strategies. So merely on the basis of difference in the net profit adhoc disallowance cannot be made, particularly when duly audited of books of accounts have been accepted.
10. In view of the matter, we are of the considered view that breakage expenses claimed by the assessee, which are duly detailed in the audited financials cannot be disallowed on adhoc basis, hence ordered to be deleted.
11. Resultantly, the appeal filed by the assessee is allowed.
