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Income Tax Appellate Tribunal, ‘D‘ BENCH
Before: SHRI AMIT SHUKLA & SHRI GAGAN GOYALShri Deepak Shivram
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against the order dated 12/09/2022 passed by NFAC, Delhi for the A.Y.2015-16 for the quantum of assessment passed u/s.143(2).
In the grounds of appeal, assessee has challenged the addition of Rs.40,09,710/- on account of adhoc disallowance
2 ITA No.2779/Mum/2022 Shri Deepak Shivram Shetty made on estimated basis @30% of the total expenses claimed at Rs.1,33,65,709/- debited under various heads.
The brief facts are that the assessee is in the business of selling mobile prepaid recharge coupon. The ld. AO noted that for A.Y. 2016-17 assessee has filed return of income declaring total income of Rs.13,60,380/-. During the course of assessment proceedings, the ld. AO noted that assessee is required to file various details vide notice dated 26/07/2017. Thereafter, he noted that assessee was asked to substantiate each and every expenses and highlighted various expenses to be explained and asked the assessee to substantiate with relevant supporting documents which has been elaborately mentioned at page 4, para 4 of the assessment order. He noted that last year, expenses debited were to the extent of 94.70% of the commission income and this year expenses are 171% of the commission income. The assessee’s case has been that selling of mobile prepaid recharge coupon is highly marketing oriented competitive business and there is very thin margin. It was further stated that in this nature of business 90% of purchase / expenses and sales are done in prepaid vouchers and cash transactions are very insignificant. All the receipts from Loop are in the form of RCV and all the invoices and expenses are also settled in RCV and no cash is involved. The ld. AO has noted the following figures from the financials of the assessee:-
3 ITA No.2779/Mum/2022 Shri Deepak Shivram Shetty Total Sales : Rs. 34,61,48,020/- Total Purchases : Rs. 34,61,48,020/- Indirect Income : Rs. 79,99,108/- Indirect Expenses : Rs. 1,36,41,078/- Net Loss : Rs. 56,41,970/-
The AO on verification of the profit and loss account found that assessee had shown commission income of Rs.79,99,108/- against which he has claimed various expenses aggregating to Rs.1,36,41,078/- mostly in cash. Some of the expenses are as under:-
Sr. No. Expenses Amount (Rs.) 1 Salary, Wages & Incentives 19,63,246/- 2 Sales Promotion expenses 36,33,200/- 3 Sub-dealer Promotion expenses 20,75,800/- 4 Business Promotion expenses 15,08,475/- 5 Demo expenses 5,20,572/- 6 Special Discount to dealers 17,45,000/- 7 Staff Welfare expenses 6,54,481/- 8 Diwali expenses 3,12,500/- 9 Foreign tour expenses 2,43,285/- 10 Office & Admn. expenses 3,76,400/- 11 Repairs & Maintenance 1,09,450/- 12 Travelling & Other Conveyance 2,23,300/- expenses 1,33,65,709/-
4 ITA No.2779/Mum/2022 Shri Deepak Shivram Shetty
The AO also carried out independent verification by sending notice u/s. 133(6) to the parties to verify the expenses which according to him, returned back unserved by the postal authorities and assessee has claimed most of the expenses on self-made vouchers which do not have any proper identity of the person. Even the amount paid to each party is not mentioned in the details submitted by the assessee. Accordingly, the ld. AO on these facts and circumstances held that most of the expenses are not verifiable or ascertainable, therefore, he disallowed 30% of the said expenses holding it to be not incurred wholly and exclusively for the purpose of business and worked out the disallowance of Rs.40,09,710/-. The Ld. First Appellate authority has confirmed the action of the ld. AO.
Before us, the ld. Counsel explained the modus operandi of the business and submitted that assessee pays commissions in the form of prepaid recharge vouchers and everything is governed by the Loop Mobile and is highly marketing oriented competitive business in which many level of marketing organizations are involved and percolated down to lowest level of marketing, i.e., retailers. At every level there is a very thin margin and it is the retailer who makes huge percentage of profit. He also drew our attention to the terms of trade to the mobile companies wherein it has been stated that in prepaid sales, basic commission margin is 5% of the gross purchase and out of 5% base commission 3-4% margin is passed as discount
5 ITA No.2779/Mum/2022 Shri Deepak Shivram Shetty to sub-dealer / retailer as the selling margin and another 3-4% additional RCV will be given to DMA for promoting the Loop mobile products. Thus, there was hardly any margin with the assessee. He also drew our attention that payments to the employees being given for the works done by the assessee were either payment of cheque or issuance of incentives in the form of prepaid vouchers. Thus, there was no cash element involved. Accordingly, the addition which has been made by the ld. AO on estimate basis is very arbitrative. He also explained the reasons for incurring loss in this year which was due to high competition and major expenses incurred on commission.
On the other hand, ld. DR strongly relied upon on the order of the ld. AO and submitted that assessee at any stage could not substantiate the expenditure debited and he has also carried out sufficient enquiry to come to the conclusion that expenses are not verifiable and therefore, he has no option to make estimated addition.
After hearing both the parties and on perusal of the relevant facts and material on record, it appears that assessee had a very thin margin in selling of mobile prepaid recharge coupon and had to pay commission at various levels as per the agreement with the mobile companies. Even the major part of gross receipts are received in the form of prepaid vouchers and also passing of the margin to the buyers is also mostly in the form of prepaid vouchers. Most of the selling and distribution expenses
6 ITA No.2779/Mum/2022 Shri Deepak Shivram Shetty are paid by this recharge coupon vouchers. Assessee being a direct selling agent of Loop Mobile, he was purchasing prepaid vouchers from Loop mobile and was selling to distributors and to retailers. It has been stated that due to close of Loop Mobile, assessee could not sell the prepaid vouchers lying with them and therefore, it has incurred huge losses on account of stock lying with them. Thus, there appears to be some reasonable ground for incurring the loss. However, if the expenditure has been debited in the profit and loss account, the onus is entirely on the assessee to substantiate that each and every expenditure debited has been incurred wholly and exclusively for the purpose of business. From the details of expenses as noted by the ld. AO incorporated supra in the foregoing paragraphs, it seems that most of these expenses are over lapping and these expenses are not open for complete verification which the ld. AO has made his endeavors while making the disallowance. Thus, it cannot be categorically held that all the expenses incurred by the assessee specifically the sales promotion expenses, business promotion expenses, special discounts to dealers and sub- dealers promotion expenses can be subjected to verification. Under these facts and circumstances and looking to the overall nature of the assessee’s business, we find that disallowance @ 30% is too high and excessive and accordingly, as a reasonable estimate, we hold that 10% of the expenditure would be reasonable for the purpose of disallowance. Accordingly, the disallowance will be reduce to 10% from 30% which will meet
7 ITA No.2779/Mum/2022 Shri Deepak Shivram Shetty the ends of justice. Accordingly, the appeal of the assessee is partly allowed.
In the result, appeal of the assessee is partly allowed. Order pronounced on 20th April, 2023
Sd/- Sd/- (GAGAN GOYAL) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 20/04/2023 KARUNA, sr.ps
Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//
BY ORDER,
(Asstt. Registrar) ITAT, Mumbai