M/S KUMAR & BROTHERS,DHOLPUR vs. INCOME TAX OFFICER, WARD-4, BHARATPUR

ORDER PER: VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the order dated 23/03/2018 of ld. CIT(A), Alwar for the A.Y. 2014-15. The assessee has raised following grounds of appeal:

2 ITA 656/JP/2018 M/s Kumar & Brothers Vs ITO 1.1. That, ld. CIT(A) erred in confirming the action of ld. A.O. in making ad hoc addition without pointing out any single instant where the expenses claimed were in excessive or nor for the purposes of business. 2. That the appellant craves the right to add, delete, amend or abandon any of the grounds of appeal either before or at the time of hearing of appeal.”

2. The assessee is a partnership firm and engaged in the business of wholesales cum retails in the trade of fertilizers. The assessee filed its return of income U/s 139(1) of the Income Tax Act, 1961 (in short, the Act) on 28/11/2014 declaring total income of Rs. 2,74,260/-. During the scrutiny assessment, the A.O. has made trading addition of Rs. 1,50,000/- on account of certain expenses due to non-production of complete details/papers in support of the claim. On appeal, the ld. CIT(A) has confirmed the addition but on account of claim of expenses instead of trading addition.

3. Before the Tribunal, the ld AR of the assessee has submitted that the only defect pointed out by the A.O. was that the freight expenses of Rs. 5,06,360/- on pesticides, seeds and Urea were not fully supported by bills/vouchers and part of them were claimed to have been incurred in cash. Consequently, the A.O. has made ad hoc disallowance of Rs. 1.50 lacs. The ld. CIT(A) has confirmed such disallowance made by the A.O., 3 ITA 656/JP/2018 M/s Kumar & Brothers Vs ITO however, ignoring the fact that no trading addition can be made without invoking the provisions of Section 145(3) of the Act. The ld AR has pointed out that when the claim of expenditure is not found to be excessive and it is an essential expenditure in the trading activity of the assessee then merely because some of the vouchers were not found to be proper and ad hoc addition is not justified. He has referred to the details of the turnover, gross profit, G.P. and N.P. of the year under consideration as well as preceeding year and submitted that the assessee’s turnover has increased from 6.29 crores to 7.31 crores. Similarly, the N.P. of the assessee is also increased from .15% to .31% during the year under consideration, therefore, merely because G.P. is reduced due to increase in the turnover. Once the N.P. is higher than the preceeding year, the ad hoc disallowance is called for.

4. On the other hand, the ld DR has relied upon the orders of the authorities below and submitted that when the assessee has failed to produce supporting evidence of expenditure then the disallowance made by the A.O. of Rs. 1.50 lacs is reasonable and proper.

5. I have considered the rival submissions as well as relevant material on record. The A.O. has given reasons for making ad hoc disallowance of Rs. 1.50 lacs that too as a lump sum trading addition as the freight 4 ITA 656/JP/2018 M/s Kumar & Brothers Vs ITO expenses were not fully supported by proper bills and vouchers. Though the term used by the A.O. in the assessment order being the trading addition is not justified when there is no rejection of books of account U/s 145(3) of the Act. However, in substance, the A.O. has made this addition on account of claim of expenses not verifiable. The A.O. has not given the finding that the claim of expenditure is either excessive or bogus having regard to the facts of turnover during the year under consideration and nature of business of the assessee. There is no dispute that in the business of the assessee, the freight expenses are inevitable and therefore, if the claim is not found to be excessive or bogus then merely because of the some of the expenses are not supported by proper vouchers, no ad hoc disallowance is called for. The ld. CIT(A) has confirmed the disallowance in para 5.4 and 5.5 of the impugned order as under:

5.4 I have considered the above mentioned facts of the case. Any expenditure of the nature mentioned above is claimed under section 37 of the Act. In order to get the deduction under section 37 of the Act, primary onus lies on the assessee to prove that such expenditure are incurred wholly and exclusively for the purpose of business or profession. 5.5 In the instant case, the assessee has failed to provide supporting documents to prove that such expenditures are incurred wholly and 5 ITA 656/JP/2018 M/s Kumar & Brothers Vs ITO exclusively for the purpose of business or profession. Therefore, in my considered view a disallowance of Rs. 1,50,000/- out of the expenses claimed on the above mentioned expenditure is reasonable to cover the discrepancies mentioned by the A.O. in the assessment order. Accordingly, the ground of appeal on this issue is dismissed.

If certain claim of expenditure is not found to be incurred wholly and exclusively for the business purpose of the assessee then the same is liable to be disallowed. However, if the expenditure incurred by the assessee is found for the business purpose of the assessee then due to certain irregularity in maintaining the supporting evidence an ad hoc disallowance is not called for. Accordingly, without specifying the instance of the expenditure, which is either excessive or found not incurred for the business of the assessee, the action of the A.O. in making ad hoc disallowance and confirmed by the ld. CIT(A) is not justified. Hence, ad hoc disallowance of Rs. 1.50 lacs is deleted.