VARUNA SHIPPING SERVICES,MANNADY, CHENNAI vs. ACIT CENTRAL CIRCLE 3(3),CHENNAI, CHENNAI

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 18, Chennai, dated 14.03.2023 relevant to the assessment year 2018-19.

Brief facts of the case are that the assessee is a partnership firm being customs brokers licensed by Custom House. The assessee filed the return of income for the assessment year 2018-19 on 31.10.2018 admitting total income of ₹.8,15,550/-. A survey operation under section 133A of the Income Tax Act, 1961 [“Act” in short] was conducted at the business premises of the assessee on 18.02.2019. Subsequently, the case was selected for scrutiny and notice under section 143(2) of the Act was served on the assessee. Further notice under section 142(1) of the Act dated 06.02.2021 calling or details has been served on the assessee. After examining the details furnished by the assessee, the Assessing Officer has completed the assessment under section 143(3) of the Act dated 17.09.2021 assessing total income of the assessee at ₹.2,95,29,971/- after disallowing inflated expenses to the extent of ₹.1,50,00,000/- as well as addition on account of income earned from sale of services of ₹.1,37,14,421/-.

With regard to the addition of ₹.1,50,00,000/-, during the course of survey proceedings, the Assessing Officer has observed that certain expenses debited in profit and loss account toward shipping expenses, salary expenses & other administrative expenses were found to be inflated by ₹.1,50,00,000/-. Since the assessee could not furnish breakup of the expenses as well as bills and vouchers in support of the claim of above expenses, the Assessing Officer disallowed the same and brought to tax. On appeal, the ld. CIT(A) sustained the disallowance to the extent of ₹.75,00,000/- and the balance addition was deleted.

On being aggrieved, the assessee is in appeal before the Tribunal. By filing detailed paper book and referring to the sales of the assessee, the ld. Counsel for the assessee has submitted that the average net profit was only 1.6% and therefore, disallowance of huge expenditure was not justified and unwarranted.

On the other hand, the ld. DR relied on the order of the ld. CIT(A).

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including various details furnished in the form of paper book filed by the assessee as was furnished before the ld. CIT(A). In the appellate order, the ld. CIT(A) has observed that there was general observation made by the Assessing Officer that the expenses were inflated to the extent of ₹.1,50,00,000/-. It was further observed that no breakup details were given and as to how the said sum of ₹.1.50 crores was arrived and it may be on estimated basis and not based on actual inflation found out during the course of survey. The ld. CIT(A) further stated that it cannot be ruled out that the assessee had not inflated some expenses, which fact was admitted by the partner also during the course of survey. Accordingly, the ld. CIT(A) sustained the disallowance to the extent of ₹.75.00 lakhs and deleted the balance disallowance of ₹.75.00 lakhs. The contention of the ld. Counsel that the average net profit was only 1.6%, though proper bills and vouchers could not be produced; the disallowance of huge expenditure was not justified. We find force in the argument of the ld. Counsel. We find that the assessee, a partnership firm being Customs Brokers licensed by Custom House, and in its line of business, since the assessee could not furnish proper bills and vouchers, it cannot be said that the assessee has not incurred shipping expenses, salary expenses and other administrative expenses, etc. As rightly pointed out by the ld. CIT(A), the inflation must be on an estimated basis and not based on actual inflation found out during the course of survey and granted relief to the extent of ₹.75,00,000/-. In view of the above facts, we are of the considered opinion that the assessee deserves further relief of inflated expenses and it is not correct to confirm the disallowance sustained by the ld. CIT(A) at ₹.75,00,000/- as the inflation was based on estimation as observed by the ld. CIT(A). Accordingly, we sustain the disallowance to the extent of ₹.10,00,000/- as inflated expenses and the balance disallowance of ₹.65,00,000/- stands deleted.

In the result, the appeal filed by the assessee is partly allowed. Order pronounced on 30th August, 2023 at Chennai.