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Income Tax Appellate Tribunal, BANGALORE BENCHES “C”, BANGALORE
Before: Shri George George K, JM & Ms.Padmavathy S, AM
O R D E R
Per George George K, JM :
This appeal at the instance of the assessee is directed against CIT(A)’s order dated 28.07.2022. The relevant assessment year is 2017-2018
The grounds raised read as follows:-
“1. The learned Assessing officer had erred in passing the order in the manner passed by him and the learned Commissioner of Income-Tax (Appeals) has erred in partially confirming the same. The order passed by CIT(A) to the extent confirming the assessment order being bad in law, against the principles of natural justice and required to be quashed in toto.
2. In any case and without prejudice, the learned Assessing officer had erred in disallowing a sum of Rs. 42,64,001/- being 10% of the purchases for want of documents and the learned CIT(A) has erred in confirming the disallowance to the extent of Rs. 10,66,000/- being 2.5% of the purchases. On the facts and circumstances of the case and the law . Sri.Nirmal Kumar Mogra. applicable, the disallowance as confirmed being adhoc and without basis is to be deleted in entirety.
3. The authorities below have erred in not appreciating the fact that the entire purchases are duly vouched and invoiced and there being no unaccounted or unsubstantiated purchases, the disallowance as sustained is erroneous and is to be deleted in entirety.
4. The learned CIT(A), NFAC, Delhi has erred in confirming the disallowance of purchases to the extent of 2.5% albeit stating that the books of account have not been rejected and the Assessing officer had not treated the purchases as non genuine or not related to business. The action of CIT(A) in confirming the disallowance of purchases to the extent of 2.5% being contrary to his own findings are to be negated and the disallowance as confirmed is to be deleted.
The appellant denies the liability to pay interest u/s 234B and 234C of the Act. The interest having been levied erroneously is to be deleted.
6. In view of the above and on the grounds to be adduced at the time of hearing, it is requested that the disallowance of purchases to the extent confirmed by CIT(A), NFAC Delhi be deleted and interest levied be also deleted.”
The brief facts of the case are as follows: The assessee an individual is engaged in the business of jewellery in the name and style of M/s.Nirmal Jewellers. For the assessment year 2017-2018, the return of income was filed on 11.09.2018 disclosing total income of Rs.21,80,470. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued on 29.09.2018. The assessment was completed u/s 143(3) of the I.T.Act vide order dated 20.11.2019. In the said order, the Assessing Officer had made adhoc disallowance of 10% of the total purchases made by the assessee. The A.O. observed that the assessee had shown total purchases of Rs.4,26,40,113 and he was asked to . Sri.Nirmal Kumar Mogra. furnish the documents with regard to these purchases. However, the assessee did not furnish the documentary evidences inspite of the opportunities given. The A.O. held that the onus of furnishing the document was not discharged by the assessee. The A.O. by placing reliance on the judgment of the Hon’ble Allahabad High Court in the case of M/s.Rimjhim Ispat Limited v. CIT in of 2015, made an adhoc disallowance of 10% of the total purchases amounting to Rs.42,64,001. Accordingly, the assessment was completed fixing total income at Rs.64,44,470 as against the returned income of Rs.21,80,270.
Aggrieved by the assessment order, the assessee preferred appeal to the first appellate authority. The CIT(A) partly allowed the appeal of the assessee. The CIT(A) confirmed the disallowance to the extent of Rs.10,66,000 being 2.5% of the purchases. The relevant finding of the CIT(A) reads as follows:-
“7.5 In view of the above facts and discussion and the judgments outlined above the ad-hoc disallowances made by the AO is held to be made on presumption only. The AO has made this disallowance based on general observation without pointing out any specific defect books of accounts or purchase registers filed on 20.11.2019. The AO has made ad-hoc disallowance of Rs. 42,64,001/- for the sole reason that the supporting evidence was not furnished, so they can't be verified. There is no finding of the AO that these expenses do not relate to business of appellant or that these expenses are not genuine. He has made the disallowance based on general observation which is not sustainable. To be fair and reasonable, this adhoc disallowance is restricted to 2.5% of Rs. 4,26,40,013/-. Thus, ad-hoc disallowance made of Rs. 10,66,000/- (2.5% of Rs.4,26,40,013/-) is hereby upheld and relief of Rs.31,98,001/- is allowed to appellant.”
. Sri.Nirmal Kumar Mogra.
5. Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal. The assessee has filed a paper book of 270 pages (including the appeal papers) enclosing therein copy of the written submissions filed before the CIT(A), the financial statements for the relevant assessment year, copies of the notices issued, copy of the acknowledgement having filed the details called for by the A.O., copies of the purchase register and the sales register for the relevant assessment year, copy of the bank statement, etc. The learned AR reiterated the submissions made before the first appellate authority.
The learned Departmental Representative supported the order of the CIT(A).
We have heard rival submissions and perused the material on record. For the relevant assessment year, the assessee made total purchases of Rs.4,26,40,013. The A.O. in the impugned assessment order had made adhoc disallowance of 10% of the total purchases by observing that the assessee was asked to furnish the documents in relation to the purchases vide notices dated 31.10.2019, 06.11.2019 and show cause notice dated 11.11.2019. Since the assessee did not produce the necessary documentary evidences, according to the A.O., the above said disallowance of purchase is warranted. It is an admitted fact that the books of account of the assessee are subjected to Tax Audit u/s 44AB of the I.T.Act. Copies of the audited financial statements along with . Sri.Nirmal Kumar Mogra. audit report are placed on record. The assessee had e-filed copies of purchases as well as sales register on 20.11.2019 (the above are placed on record from pages 75 to 176 of the paper book submitted by the assessee). On perusal of the purchase register, it is seen that only a small quantity of purchase are in cash and majority of the payments for purchases were made through banking channels. Copies of the bank account statements are also placed on record. However, these evidences placed before the A.O. seems to have been not considered by him, since the assessment order was passed on 20.11.2019 (though the last date for passing assessment order for the relevant year was on 31.12.2019).
The audited books of account were neither rejected by the A.O. nor he had alleged that the same is not in accordance with section 145 of the I.T.Act. The reliance of the A.O. on the judgment of the Hon’ble Allahabad High Court in the case of M/s.Rimjhim Ispat Limited v. CIT (supra) is distinguishable on facts. In the said case, the assessee failed to substantiate exponential rise in expenditure and more than 100% rise in consumable stores compared to earlier years. However, in the instant case, there is no finding by the A.O. regarding the abnormal increase in purchases. Therefore, the case relied on by the A.O. is not applicable to the facts of the instant case. There is no basis or material with the A.O. to disallow the purchases to the extent of 10% on adhoc basis.
. Sri.Nirmal Kumar Mogra.
The CIT(A) on his part had partly allowed the appeal of the assessee. The CIT(A) had sustained the disallowance to 2.5% of the purchases. However, on perusal of the first appellate authority’s order, he has not given any reasoning for sustaining the disallowance of 2.5% of the total purchases. The CIT(A) had observed that “There is no finding of the A.O. that these expenses do not relate to business of appellant or that these expenses are not genuine. He has made the disallowance based on general observation which is not Such findings of the CIT(A), when not sustainable.” controverted by the Revenue, the sustenance of disallowance of purchase to the extent of 2.5% on adhoc basis without any reasoning is also not legally correct.
The Hon’ble Supreme Court in the case of J.J.Enterprises v. CIT reported in 254 ITR 216 (SC) had held as follows:- “In its principal order, the Tribunal had concluded that the addition was unsustainable because it had been made “on the basis of pure guess work”. The Revenue moved the High Court under Section 256(2) of the Income-tax Act, 1961, and the High Court called for a reference on the basis that the question was a question of law. We are unable to agree with the High Court. In the first place, the Tribunal had held that the addition had been made on the basis of pure guess work and this is a matter of fact in respect of which the Tribunal’s conclusion is final. In the second place, there was no question of remanding the matter to the Assessing Officer for re- examination of the same question.”
The Kolkata Bench of the Tribunal in the case of Shree Venkatesh Agro Food Pvt. Ltd. v. DCIT in IT(SS)A No.54- 56/Kol/2011 had held that when the A.O. is not correct in making adhoc disallowance of 5% on various expenses on the . Sri.Nirmal Kumar Mogra. reasoning that the assessee failed to file the details despite the fact that the assessee’s accounts were fully audited. It was held by the Tribunal that the disallowance purely resorted to adhoc method and without any cogent reason cannot be made. The relevant findings of the Tribunal in this regard reads as follow:-
4. We have heard rival contentions and gone through the facts and circumstances of the case. We find that AO has made disallowance on ad hoc basis @ 5% and there is no basis for making disallowance. We also observe that CIT(A) has simply confirmed the disallowance. Whether the disallowance by restricting @ 5% on account of business expenditure can be made or not in the absence of any reasoning? The disallowance purely by resorting to ad hoc method cannot be made. These are business expenditure, and in the absence of cogent reason, the disallowance should not have been made. We hold that disallowance made by AO is without any basis and hence deserves to be deleted. Accordingly, we delete the disallowance. This issue of assessee’s appeal is allowed.
In the light of the aforesaid reasoning and the judicial pronouncements, cited supra, we hold that the sustenance of disallowance of 2.5% of the purchases by the first appellate authority is not warranted on the facts and circumstances of the case. It is ordered accordingly.
In the result, the appeal filed by the assessee is allowed. Order pronounced on this 13th day of January, 2023.