INCOME TAX OFFICER, WARD-62(1), DELHI, DELHI vs. RENU VERMA, DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B”: NEW DELHI BEFORE MS MADHUMITA ROY, JUDICIAL MEMBER AND SHRI KRINWANT SAHAY, ACCOUNTANT MEMBER

ITA Nos. 9194/Del/2025 (A.Y 2018) Income Tax Officer Vs. Renu Verma Ward-62(1), 506, South Extension, Delhi Tower, Plot No. 389, South Extension Part-II, Delhi (Appellant) (Respondent) PAN: AFRPV4817N

Assessee by : Sh. Sanjay Kumar Aggarwal, CA and Shri Chandresh Gupta, CA Revenue by: Shri Mahendra Singh, Sr. DR

Date of Hearing 29/06/2026 Date of pronouncement 13/08/2026 O R D E R PER MADHUMITA ROY, J. M.: The instant appeal filed by the Revenue is directed against the

order dated 29.10.2025 passed by the Ld. Commissioner of Income-

tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter

referred to as the Ld. CIT(A)/NFAC] under Section 250 of the Income

Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of the

Assessment Order dated 17.02.2021 passed by the Assessment Unit,

Income-tax Department (hereinafter referred to as ‘the ld. AO’) under

Section 143(3) read with Sections 143(3A) & 143(3B) of the Act,for

Assessment Year 2018.

engaged in the business of collection agency, entered a contract with

HDFC Bank Ltd. for collection of payments from persons who don't Page | 1

2 ITA No. 9194/Del/2025 ITO Vs. Renu Verma make the payment to bank on time or whose account is transferred

to NPA (Non-performing assets) or whose account is transferred to

NPA in short period of time. The assessee has contract for collection

of business loan, personal loan and credit card.

considering the assessee as amount paid for professional and

technical account.

08.10.2018claiming refund of Rs. 31,21,000/-. The case of the

Assessee was selected for scrutiny under CASS to examine the issue

of refund claim and notice, therefore, under Section 143 of the Act

dated 22.09.2019 was issued whereupon supporting documents was

ultimately furnished along with the copy of ITR, computation of

income, balance sheet, Trading Profit and Loss A/c, expenses ledger

account. The said assessment was completed by the Ld.

A.O. upon making addition on different counts

includingdisallowance of salary and wages to the tune of Rs.

1,92,45,597/-, which was subsequently deleted by the First

AppellateAuthority. Hence, the instantappeal before us.

wages is the subject matter before us.

3 ITA No. 9194/Del/2025 ITO Vs. Renu Verma 6. During the course of assessment proceeding upon perusal of

the profit andloss account of the appellant, the Ld. A.O. found that

there was an illegitimateincrease towards expenses of salary and

wages. The Assessee claimed Rs. 3,21,04,162/- under these heads

as against Rs. 1,16,89,605/- claimed in the previous year. There

was 174.63% increase under these heads; comparing to the total

service turnover, it would be Rs. 84.49% emerged during the year

and 72.74% emerged in the last year as per the Ld. A.O. As the

expenses on account of salary and wages where on high side, the

same was not accepted and 10% i.e. 11,68,960/- was treated as

reasonable being increase in the rate of dearness during the year.

Thus, addition of Rs. 1,92,45,597 (Rs. 3,21,04,162/ -116,89,605 +

11,68,960/-) being the difference of 10% increase was made in the

hands of the Assessee which was deleted by the Ld. CIT(A).

statement of facts which reads as under:-

“4. The following statement of fact has been submitted by the appellant:

"1. That the Appellant is an individual and engaged in the business to act as a Authorised Collection Vendors under its proprietorship firm namely M/s Masters Management Services whereunder the Appellant is granted the assignment/contract to collect the outstanding dues from the Credit Card, Personal Loan and Consumer Durable Loan customers of the various banks such as HDFC Bank Limited etc. to whom the bank had issued the credit card or granted the personal loan or granted the finance facility Page | 3

4 ITA No. 9194/Del/2025 ITO Vs. Renu Verma for purchase of the customers consumer durable goods and who had defaulted in makingpayment of the amount used on their credit cards or defaulted in making the payment of the EMI of the Personal loan or Consumer durableloans etc. 2. That the Appellant is regularly filing its returns of income and was being assessed to tax.

5 ITA No. 9194/Del/2025 ITO Vs. Renu Verma 6. Thus, vide order of assessment dated 17.02.2021 made u/s 143(3) of the Act the total income of the Appellant has been arbitrarily determined at Rs. 2,23,10,230/- by making huge additions of Rs. 1,94,46,650/- as described above.

5.1 During the course of Appellate proceedings, the appellant has submitted his reply on 01.05.2024 and 21.03.2025. The appellant has submitted almost same reply on all the dates. In his reply, the appellant has submitted as under:

"Ground of Appeal no 1

1.1 The Ground of Appeal 1 pertains to the impugned addition amounting Rs. 33,950/- made by the Ld. AO in its assessment order on account of ad-hoc disallowance of 20% of the Staff Welfare Expenses [Rs. 169,729] incurred during the relevant year. It is submitted that the Ld. 'AO' has made the said addition merely on the basis of surmises, conjectures and suspicion and without bringing into record any cogent material in this regard and without appreciating the nature of business activities being carried by the appellant.

1.2 The Ld. 'AO' had raised the query vide its notice issued u/s 142(1) of the act dated 16/12/2020 in regard to the expenses incurred by the appellant during the relevant year, wherein he demanded the ledger a/c of all the expenses claimed by the appellant in the P & L A/c for the relevant year along with the justification for the each of them.

1.3 In response to the aforesaid query, the appellant vide its reply dated 31/12/2020 furnished the detailed ledger a/c of the staff welfare expenses pertaining to the concerned year disclosing the mode of payment, amount paid and the name of the payee along with the dates of payment etc.

6 ITA No. 9194/Del/2025 ITO Vs. Renu Verma

1.4 Further, in addition to the reply dated 31/12/2020 and in justification of the total Staff Welfare Expenses amounting Rs. 1,69,729/-, the appellant vide its reply to the show cause notice on 15/02/2021, furnished before the Ld. AO the copy of various invoices issued by one of the major vendor of the appellant namely M/s Garg Sons along with the complete details of the payment made by the appellant to M/s Garg Sons during the entire concerned year.

(Copy of Ledger a/c of staff welfare expenses enclosed at page 56-68 of paper book)

1.5 In this regard we would firstly like to apprise your good self about the nature of business activities being performed by the appellant and its direct relation to the manpower required to perform said business activities. It is submitted that appellant is in business of recovery of the outstanding/delayed payment of the amount utilized by the credit card holders and other type of loan etc. availed bysaid persons from the banks, and tagged as defaulters by the banks for not making payments within the prescribed time limit to the respective Banks or other lending institutions, on behalf of the banks/lending institutions who have appointed the Appellant's firm as the agency to collect the aforesaid amount on their behalf. The modus operandi of the appellant's recovery business is such that it requires to deploy its manpower to have the direct face to face interaction with the defaulters on the behalf of the lenders and to persuade them to make payment due from them at the earliest

1.6 The nature of business activity being undertaken by the appellant prima facie does not require to engage machineries and tools at her office, but the assessee needs to buy the time of people, so that more recovery could be made from the defaulters in list and her revenue in the form of receipt from the banks and lending institutions as fees for recovery increases accordingly. In order to conduct her business operations, the appellant overall had 100 plus manpower in her entity during the year of which 85% of manpower were employed on field and 15% were employed for office administration work. The staff members of the appellant are needed to roam everywhere

7 ITA No. 9194/Del/2025 ITO Vs. Renu Verma and anywhere in the city and interact with the people in list and to induce them to repay the amount overdue from them, such meetings involved various out of pocket expenses incurred by the employee for their own purpose like food, beverages, conveyance etc. which are borne by the appellant only.

1.7 Also, being the face of her firm M/s Master Management Services, the appellant had meeting with her clients and her manpower to discuss the plan and procedure for initiating the recovery process and to obtain the list of various defaulters from whom the appellant was required to retrieve the overdue payments, these meetings were conducted to not only exchange the list of defaulters but to know, if there are any special cases which requires more caution and attentiveness.

1.8 It is submitted that the expenses incurred by the appellant under the head "Staff Welfare Expenses" not only included the payments made for the expenses borne by the appellant for her manpower, but owing to the nature of activities of business it prominently included the amount spent by the appellant during multiple meetings held with the clients and by the staff members while travelling and reaching to the concerned person which is listed in the defaulters list given by the client. The mode of operation of business as discussed above clearly expresses, that the expenses incurred by the appellant under the head "staff welfare expenses" are not the overhead expenses and are in fact the operational expenses incurred to achieve the prime business objective of theOrganisation. Also, it may please be noted that the staff welfare expenses accounts for the expenses made both outside or inside the office premises of the appellant.

1.9 Further, from the ledger a/c of staff and welfare expenses incurred during the concerned year it can be evidenced that small amount on multiple days was expended throughout the concerned year, which were apparently paid only through cashless mode of payment to the restaurants or other food outlets during the day to day business meetings of the appellant.

1.10 However, the Ld. AO vide its impugned assessment order made the addition for the amount of Rs. 33,950/- on

8 ITA No. 9194/Del/2025 ITO Vs. Renu Verma an ad-hoc basis, by rejecting the justification given by the appellant for the occurrence of expenses in a very ambiguous manner and stating very 10 baselessly that the appellant has failed to discharge its onus to prove the genuineness of the expenses. Further, no cogent material or reasonable basis was produced by the Ld. 'AO' to establish that how the appellant has failed to convey the genuineness of the expenses incurred by the appellant. The relevant extract of the assessment order is as under:

(A) Addition on account of disallowance of staff welfare expenses:

A perusal of profit and loss a/c reveals that assesseee has incurred expenses in the name of staff welfare of Rs. 1,69,729/- Regarding these expenses, the assessee submitted that the expenses incurred at various shops while having discussions with employees how to proceeds with collection and approach customers and also filed details of payments made to Garg Sons along with copy of sample of invoices". The contention of the assessee has been considered and there is no merit in it. The contention of the assessee that she incurred expenses at various shops while having discussion with employees is baseless as most of the bills have been paid to Garg Sons which do not commensurate with the business of the assessee. As per invoices furnished by the assessee, these are kitchen items and other house hold items and quantity of these items appears on higher side. From the end of the year, the assessee raised bills on 28th March. 2018 and purchased kitchen item such as floor cleaner 6 @700/- and other items in number of quantity. No authentic evidence which lead to establish that assessee has actually incurred and it was necessary for business needs was fumished. Further onus to prove that these are genuine expenses are on the assessee which still remain with the assessee. As the assessee has not discharged her onus, a disallowance @20% of these expenses is made and

1.11 It is submitted that, the Ld. AO has clearly failed to appreciate and comprehend the nature of activities of the appellant, as he did not pay attention to the fact that the appellant is engaged in recovery of overdue amount, in which these kinds of expenses are very much legitimate.

9 ITA No. 9194/Del/2025 ITO Vs. Renu Verma Further, it is pertinent to note that nothing in contrary to the documents and justification furnished by the appellant was produced by the Ld. 'AO,' and the conclusion was drawn merely on the basis of suspicion, surmises and conjectures without possessingany rational basis for disallowing the 20% of the total staff welfare expenses.

1.12 Further, the Ld. 'AO' in its assessment order has only mentioned about the invoices raised by M/s Garg Sons to the appellant, disregarding the fact that firstly out of total expenses of Rs. 1,69,729/- the amount of Rs. 82,828/- was paid to the said party and secondly from the invoices furnished to the Ld. AO it can be effortlessly established that most of the items were for office use only, as the invoices included items like Biscuits, Floor Cleaners, Tea Packets, Coffee Packets etc. The said vendor being located nearest from the business premises of the appellant was the first option to buy the stuff needed for office use on day to day basis.

1.13 It is submitted that the Ld. 'AO' has failed to appreciate the submissions made by the appellant and did not produce even an iota of evidence to substantiate that the staff welfare expenses were not incurred for business purposes, he just remained stiff to his statement that the appellant has failed to discharge its onus to prove the genuineness of the expenses, without putting any further query himself in baseless and vague manner.

1.14 It is submitted that the Ld. 'AO' being the quasi- judicial authority, is bound to discharge its onus to prove that in what manner the appellant is wrong in claiming the disallowed amount of expenses, however in the instant case no such legitimate document/details/fact/information was produced to support the contention of the Ld. AO that the staff welfare expenses incurred by the Ld. AO is not for business purpose, also nothing in contrary to the facts and documents as furnished by the appellant was brought on the record by the Ld. AO.

1.15 Also, it is submitted that the Books of Accounts of the appellant for the concerned year was duly audited, whereby the tax auditor did not disallow any expense claimed by the appellant in the P & L A/c. The tax audit

10 ITA No. 9194/Del/2025 ITO Vs. Renu Verma report was issued while drawing an inference that the appellant has claimed all the expenses lawfully as per the provisions laid in Sec 30 to 36 and 37 of the 'Act' and no disallowances were made as such.

1.16 In view of the aforesaid facts of the case the ad-hoc disallowance of Rs. 33,950/- may kindly be deleted, as the same has been made arbitrarily and without any reasonable basis by the Ld. AO.

Legal Analysis

1.17 Furthermore, before delving in to detail it is necessary to discuss about the provisions laid in Sec 37 of the Act, the extracts are produced as under: "37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

Explanation 1-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.Explanation

INCOME TAXDEPARTMEN

[inserted by Finance Act, 2022]

(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure

11 ITA No. 9194/Del/2025 ITO Vs. Renu Verma incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party" [Emphasis Supplied].

1.18 On the per usual of the above section it is pertinent to mention that, the Section 37 of the 'Act' is a residuary section for allowability of business expenditure, the conditions for allowance u/s 37 of the Act are as under:

Such expenditure should not be covered under the specific section i.e.sections 30 to 36.

Expenditure should not be of capital nature

The expenditure should be incurred during the previous year.

The expenditure should not be of personal nature.

The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.

1.19 It is submitted that, expense is not covered u/s 30 to 36 of the Act. Neither the expenditure is of capital nature nor personal in nature. The same was incurred in the previous year, wholly and exclusively for the purpose of business. The learned Assessing Officer has merely mentioned that, the alleged excess charges paid as computed by AO were not meant wholly & exclusively for the purpose of business carried out by assessee, without bringing any evidence on record as to how the Assessing Officer arrived at the adhoc figure of 33,950/- being reasonable in nature for disallowance. It is submitted that in the absence of any valid basis, the said arbitrary addition of Rs. 33,950/- should be deleted. Therefore, the claim as made by assessee for stall welfare expense is allowable in full.

Judgements:

1.20 Assessee to decide the expenditure and not the Revenue- Revenue cannot step in to the shoes of the Assessee

12 ITA No. 9194/Del/2025 ITO Vs. Renu Verma In the below cases by Hon'ble Supreme Court it is well settled law that it is for the assessee to decide how best to protect its interest for the business and not open to AO to decide.

(1) The Hon'ble Supreme Court in CIT Vs. Dhanrajgiri Raja Narasingiri (1973) 91 ITR 544 (SC) has held that

Relevant Extract

"It is for the assessee to decide how best to protect its own interest. It is not open to AO to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure." [Emphasis Supplied]

(2) Jamshedpur Motor Accessories Stores Vs. CIT (1974) 95 ITR 664 (Pat) J.K. Woollen Manufacturers Vs CIT (1969) 72 ITR 612 (SC). Relevant Extract

"In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purposes of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue, (Emphasis Supplied]

(3) The Hon'ble Supreme Court in Hero Cycles (P) Ltd vs. Commissioner of Income tax (Central) Ludhiana reported in [2015] 63 taxmann.com 308 (SC)] has held that

Relevant Extract

"The Hon'ble Supreme Court has again authoritatively upheld the primary right of any businessman/organization to plan and conduct his/ its business, thereby effectively negating any attempts on the part of revenue to step into the shoes of an businessman and sit in judgement on business decisions, particularly with regard to judging the reasonableness of any expenditure and the commercial prudence or correctness of any decision." [Emphasis Supplied]

1.21 No need to meet the 'necessity' condition to incur the expenditure

13 ITA No. 9194/Del/2025 ITO Vs. Renu Verma

In the below case held by the Hon'ble Supreme Court that there is no need to meet the 'necessity' condition to incur the expenditure to claim the deduction.

(Sasson J. David & Co. (P) Ltd. Vs. CIT (1979) 118 TR 261 (:Relevant Extract)

INCOME TAXDEPARTMENT

"Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits assessee can claim deduction even though there was no compelling necessity to incur such expenditure". [Emphasis Supplied]"

1.22 Expenditure incurred for business is wider than incurring profits is allowable

The Calcutta High Court in the below case held that expenses incurred though not directly related to earning to income, may be allowable deductions if they are related to the carrying on of the business.

Birla Cotton Spinning & Weaving Mills Ltd. Vs. CIT (1967) 64 ITR 568 (Cal))

Relevant Extract Though the main objects of business is to earn profits, business purposes are wider than profit-making purposes. Business expediency does not require that expenses should be incurred only for earning immediate profits. Expenses incurred though not directly related to earning to income, may be allowable deductions if they are related to the carrying on of the business. [Emphasis Supplied]

Further, the appellant has furnished several case laws in this regard. Apart from it, the appellant has stated that Provisions of Section 37(1) does not have any restriction to allow the amount partly and has relied upon various case laws.

Furthermore, the appellant has stated that the Adhoc disallowance is not permissible without specific identification and has relied upon various case laws.

14 ITA No. 9194/Del/2025 ITO Vs. Renu Verma

The submission of the appellant in respect of other disallowance are almost similar to the above.

After duly considering the ground of appeal, facts of the case, submission made by the appellant and the issues involved, this order is being issued.”

“6.1.3. I have gone through the assessment order, fact of the case and submission made by the appellant. I find that the Assessing Officer is generally not justified in making an ad hoc disallowance of expenses without pointing out specific defects or evidence of non- genuineness. If the AO was not satisfied with the documents submitted by the appellant in respect of claim of her expenses, he could potentially disallow the unsupported expenses. However, an arbitrary percentage- based disallowance is typically considered unreasonable. Disallowance cannot be based on mere suspicion or because an assessee failed to produce all documents, especially when the AO has not identified any specific defects in the accounts or vouchers furnished on a sample basis. An ad hoc percentage disallowance, like 20% of all expenses, is often seen as arbitrary and without a factual foundation.

The AO’s disallowance was made on an "ad hoc" percentage basis, which indicates a lack of a proper, item- wise examination of expenses. The AO's action should be based on material evidence and specific reasoning, not conjectures. The AO is expected to perform a detailed and fair assessment based on the material on record. An arbitrary ad hoc addition may be challenged as an abuse of the AO's powers.

However, if the assessee completely fails to cooperate or submit required details, the AO could conduct a best judgment assessment under Section 144. In such scenario, the Act has provided provision u/s. 145(3) to reject the books of account of the assessee and estimate the net profit of the assessee on the basis of best judgment of the AO. However, even in such a case, the estimate must be

15 ITA No. 9194/Del/2025 ITO Vs. Renu Verma based on some rational reasoning and not be a wild guess.

The Hon’ble High Court of Delhi in the case of Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd [2018] 99 taxmann.com 283 has held as under:

“Business expenditure - Allowability of (Onus to prove) - In course of assessment, assessee claimed deduction of expenses towards bricks, machinery repair, cartage, labour expenses etc. - Assessing Officer disallowed 10 per cent of said expenses on ground that insufficient evidence was adduced - Tribunal set aside said ad hoc disallowance on two grounds, firstly, assessee's books of account were not rejected and secondly, such expenses were allowed consistently in post in scrutiny assessments - High Court upheld order passed by Tribunal”.

The Hon’ble High Court was of the opinion that the principal reasoning of the ITAT, i.e. omission to reject the books of account, in which event the ad hoc disallowance could have been adjusted and also the historical treatment of such expenses, cannot be termed as unreasonable; in support of its ultimate conclusion.

The Hon’ble Supreme Court in the case of Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd [2018] 99 taxmann.com 284 (SC) has dismissed the SLP filed against the above order of the Hon’ble High Court of Delhi and upheld the order of the Hon’ble High Court of Delhi.

In the instant case, the AO has not rejected the books of account of the appellant. Therefore, in view of the above discussion and relying on the above judicial pronouncement of Hon’ble Supreme Court, the additions made by the AO on account of ad hoc disallowance of all the expenses is hereby deleted.

The grounds of appeal are allowed.

6.2 In ground no. 06, the appellant has stated that credit of TDS was not given to her by the AO. In this regard, the

16 ITA No. 9194/Del/2025 ITO Vs. Renu Verma AO is directed to verify the 26AS statement of the appellant and allow her the credit of TDS as applicable.

The ground of appeal is allowed for the statistical purpose.”

been provided with the proper details to substantiate the claim, but

no best judgment as per Section 144 of the Act was made neither

estimated the net profit by rejecting the books and in that event the

estimate so made needs to be reasonable as rightly observed by the

Ld. CIT(A) and thus, having not been done so by the Ld. A.O., the

deletion of addition by the Ld. CIT(A) is found to be just and proper,

so as not to warrant interference.

Order pronounced in the open court on 13/08/2026.

Sd/- Sd/- (KRINWANT SAHAY) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 13/08/2026 R. Naheed, Sr PS Copy forwarded to

17 ITA No. 9194/Del/2025 ITO Vs. Renu Verma