Full picture of how travelling expenses and conveyance expenses were being incurred by assessee was brought to the notice of AO in writing but AO, instead of appreciating facts and circumstances of the case, just made simple observation that assessee’s reply was very general in nature. There was no finding that impugned expenses were not incurred for the purposes of business. It was a clear case of ad hoc disallowance which could not be sustained.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal filed by the assessee against the order of ld. CIT(A)-3, Jaipur dated 13.11.2017 for Assessment Year 2012-13 where in the following grounds of appeal have been taken:
“1. On the facts and in the circumstances of the case and law, the Commissioner of Income Tax(Appeals)-3, erred in confirming 10% disallowance from traveling expenses and conveyance expenses (1.e. 10% of 751121/- and 10% of 104856/-) and there by confirming addition of Rs. 85598/- to the total income of the assessee.
2. On the facts and in the circumstances of the case and law, the Commissioner of Income Tax(Appeals)-3, erred in confirming 10% allowance from Machinery Repair expenses (1.e. 10% of 12,92,284/- and thereby confirming addition of Rs. 1,29,228/- to the total income of the assessee.
3. That on the facts and in the circumstances of the case and law the Commissioner of Income Tax(Appeals)-3, erred in assessing the total income at Rs. 75,67,036/- as against returned total income of Rs. 73,52,210/- declared by the assessee.”
2. Regarding Ground No. 1, briefly stated, the facts of case are that the assessee has debited Rs. 7,51,121/- and Rs. 1,04,856/- to the profit and loss on account of travelling expenses and conveyance expenses. As per the Assessing officer, on exam1nat1on, it was found that these expenses were supported by internal made vouchers. On being asked, the assessee submitted that he has formulated a pol1cy for travell1ng expenses done by the employees, whereby sales personal are reimbursed fixed amount towards their food, stay charges etc. at various places. The assessee’s reply was however, found very generic in nature and was not accepted by the AO. He, thereafter, disallowed 20% of travelling expenses (1.e. 20% of 7,51,121) and 20% of conveyance expenses (20% out of 1,04,856/) and added the same in determiner total income in hands of the assessee.
3. Being aggrieved, the assessee carried the matter 1n appeal before the ld. CIT(A) who has reduced the disallowance to 10% and his findings are as under:
“4.3 I have carefully considered the material before me. I find that the Assessing Officer made the disallowances making observation that travelling and conveyance expenses were supported by internal made vouchers. The A/R ofthe appellant submitted that the Assessing Officer did not point out any specific defects. Further, the AR compares the N P rate with last year. The NP rate in this year is 3.83% as compare to the last year NP rate 3.68% which is higher. He also relied upon the Id. CIT(A) order for A. Y. 2009-10. I perused the record I find that the A/R of the appellant do not made any submission that the travelling expenses and conveyance expenses are supported self made voucher.
Therefore it is established that these expenses are not fully vouched. The Assessing Officer disallowed 20% of travelling expenses and conveyance expenses which is excessive and unreasonable. Therefore, considered the facts of the case, nature of these expenses I restrict the disallowance p10%. Thus the disallowance comes of Rs. 85,598/-. Accordingly, I confirm the addition of Rs. 85,598/- and balance amount of Rs. 85,598/- is deleted. This ground is partly allowed.”
4. During the course of hearing, the Id. AR submitted that due to the sales person travell1ng from one village to another village and to convince the farmers as well as dealers about the cattle feed produced by the firm, they remain in the field travelling for 15-30 days altogether. The assessee has incurred a sum of Rs. 7,51,121/- on the travelling and Rs. 1,04,856/- on the conveyance of these sales personnel during the year 2011-12. Due to their efforts, the firm has managed to increase the turnover which has increased from Rs. 20,35,06,246.40 1n F. Y. 2010-11 to Rs. 29,23,13,649.23 in the F.Y. 2011-12. This shows that around 44% sales have increased due to the efforts of sales personnel. Further, conveyance expenses are paid to the employees for their local conveyance charges for executing the work of our organizat1on, wh1ch is credited to them at the end of the month along with salary schedule.
5. It was further submitted that as the sales person has to travel from small village to towns where they are not able to get bills, in all cases, for their expenditure, hence the assessee has formulated a policy whereby the sales personnel are being reimbursed by fixed amount towards their boarding and lodging charges as well as travelling charges and the payment are being made accord1ng to the policy framed by the firm. Because it is not possible for the firm to keep track of small payments like auto charges, food charges, breakfast charges, stay charges, commuting charges of the sales personnel. The assessee is in cattle feed industry from the last so many years and on the basis of exper1ence gained in the cattle feed 1ndustry, the assessee has formulated payment plan, which is competitive with best industry practices, whereby the employee are paid fixed amount towards their boarding and lodging expenses and travelling expenses. The assessee is maintaining full details of the employee’s visits and payment made to them towards these expenses, as the amount of such expenses has been fixed by the firm, most of vouchers in this category are authenticated by the proprietor to justify the payment made on this account. Hence, any disallowance out of travelling expenses and conveyance expenses, w1ll be injustice. Further, conveyance expenses are paid to employees along with salary.
6. It was submitted that from the above, it is clear that full p1cture of how travelling expenses and conveyance expenses are being incurred by the assessee firm was brought to the notice of the Ld. A.O. in writing, but the Ld. AO instead of appreciating the facts and circumstances of the case, just made simple observation that the assessee’s reply is very general in nature and is not acceptable. The Ld. AO has himself made the addition for the sake of making addition and has failed to point out any specific defect, shortcoming or anything negative with regard to expenses incurred by the assessee on account of travelling and conveyance expenses, which are incurred by the employees of the firm for the work of firm exclusively, and there 1s nothing on record, which indicate that these expenses are not incurred for business or such expenses were not incurred at all. Such nature of ad hoc addition was also made of 1n the case of assessee for A Y 2009- 10 at Rs. 71,632/-, which was deleted by the Id. CIT(A).
7. In support, reliance was placed on following decisions:-
• M/s Vijay Infrastructure Limited vs. ACIT (ITAT Lucknow) in ITA 254 of 2015 and Cross Appeal Nos. 12 & 13 of 2015 vide order dated 30. 10.2015.
• Balbir Singh vs ACIT (ITAT Jaipur) in ITA No. 121 of 2013 vide order dated 21.10.2015.
• Tripat Kaur Vs. ACIT Circle 22(1) New Delhi in ITA No. 3244/Del/2012 vide order dated 07.09.2012.
8. The Id DR is heard who has vehemently argued the matter and submitted that the Id CIT(A) is more than reasonable in restricting the disallowance to 10% of total travel and conveyance expenses and no further relief may be provided to the assessee.
9. We have heard the rival content1ons and perused the material available on record. It is a case where the AO has disallowed 20% of travelling and conveyance expenses incurred by the assessee and which has been sustained to the extent of 10% by the Id CIT(A). There is no finding recorded regarding any specific defect in claim of the expenses or the expenses have not been incurred for the purposes of the business. It is a clear case of adhoc d1sallowance of expenses which cannot be sustained in the eyes of law. In the result, addition so sustained by the Id CIT(A) is hereby deleted.
10. Regarding Ground No. 2, briefly stated, the facts of case are that during the year under consideration, It was observed by the AO that the assessee has incurred Rs. 12,92,284/- towards machinery repair expenses where as in the last preceding year, there was no such expenditure in this head of expenses. Further, during the course of assessment proceedings, it was noticed that many payments were made in cash on the basis of un-proper bills and supporting, and majority of payments were made in cash, for which the assessee could not explain the justification and reasons. Hence, a disallowance of 10% of above expenditure of Rs. 12,92,284/- is made which comes to Rs. 1,29,228/-, which was added to total income of the assessee.
11. Being aggrieved, the assessee carried the matter in appeal before the Id. CIT(A) and his findings are reproduced as under:
“I have carefully considered the material before me. I find that the assessing officer made the disallowance of Rs. 1,29,228/- in absence of proper vouchers. The Id. A/R submitted general submissions. He did not comment on the issue that expenses are not fully vouched. I perused the record and find that in the last year there is no machinery expenses and the finding of the assessing officer that the expenses are not fully vouched. The Id. A/R of the appellant failed to file any evidences that machinery expenses are fully vouched. Therefore, I am of the view that assessing officer rightly disallowed Rs. 1,25,228/-out of machinery expenses. This ground is not allowed.”
12. During the course of hearing, the Id. AR submitted that the assessee herew1th providing the summary of machinery repair expenses which contains full details of bill no., amount of bill and name of the party. All these detail were available in the books of accounts made available to the AO and in ledger account, where name is appearing means that these vendors are regular vendors of the company and payment to them are made mostly by cheques as they are regular supplier to the assessee.
Total of Machinery Expenses Rs. 12,92,228/-
Payment by way of cheque/Journal
entries to regular vendors Rs. 10,97,774/-
(% of total machinery expenses =
Payment by way of cash for machinery
Expenses Rs. 1,94,510/-
(% of total machinery expenses incurred in cash comes to 15.06%, value wise bills are available in 99% of cases where the cash payments were made)
13. It was submitted that even in the case of payments made in cash for machinery repair expense, it is bring to your kind notice that even payment made for these expenses are done mostly against the bill raised by the vendors from which dealings has been made in cash. Copy of Machinery repairs expenses concerning cash payment 1s attached herewith at paper book Sr. no. 14 to25 which clearly shows in most of the cases, bill no, amount of the bill and the name of the party with whom such payment has been made. It means that even where the cash payment has been made by the assessee, such expenses are fully vouched. And as such whole of the expenses are against bills. So the conclusion reached by Ld. AO is far from the truth. Further, during the course of assessment proceedings, no query relating to justification of machinery expenses was enquired from the assessee. It was last minute thought of the Ld. AO, which made addition only for the sake of making addition. We are attaching herewith attaching the copy of note sheet at Sr. No. 54 to 55, obtained during the course of assessment proceedings 1n which certain queries were made and the copy of reply against such queries are attached at Sr. No. 45 to 53 of the paper book. Further, there were also machinery repair expenses in previous also, as the assessee is engaged in the business of manufacturing of cattle feed, so it is not possible that there were no machinery expenses in earlier years. In earlier years, machinery repair expenses were transferred to repairs and maintenance expenses, but after it was brought to the notice of assessee by the auditors of the concern, from the year under consideration, it was shown under the head of machinery repair expenses to present true and correct view.
14. It was further submitted that it is settled law that it is not open to the Assessing Officer to make addition on estimation basis without verifying that said expenses are genuine or not, as the Income Tax Law does not permit such adhoc additions. Mere fact that payments were made 1n cash on self made vouchers, not a conclusive evidence to disallow the expenses. In the given case, the Assessing Officer had not brought on record any adverse evidence that expenses are not genuine, and ignored the material available on record. He simply disallowed the expenses on estimate basis even without enquiring from the assessee, which is not allowed. He has to bring specific defects and at the best it can be a starting point for enquiry but if the vouchers were defective, the Assessing Officer should have pointed out the defects while framing the assessment and should have asked the assessee for a reasonable explanation, which is missing in current case, hence no addition can be made legally.
15. In support, reliance was placed on following decisions:
• Maheshwari Flour Mills vs. JCIT in ITA No. 39/LKW/2016 vide order dated 11.01.2018.
• M/s Vijay Infrastructure Limited Vs. ACIT (ITAT Lucknow) in ITA No. 254 of 2015 and Cross Appeal Nos. 12 &13 of 2015 order dated 30.10.2015.
• Tripat Kaur Vs. ACIT C1rcle 22(1) New Delhi in ITA No. 3244/Del/2012 order dated 07.09.2012.
16. The Id DR is heard who has relied on the findings of the lower authorities.
17. We have heard the rival contentions and perused the material available on record. It is a case where the AO has disallowed 10% of machinery expenses incurred by the assessee. There is no finding recorded regarding any specific defect in claim of the expenses or the expenses have not been incurred for the purposes of the business. It is a clear case of adhoc disallowance of expenses which cannot be sustained in the eyes of law. In the result, addition so made by the AO is hereby deleted.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 25/06/2018.