DEEPAK SHIVRAM SHETTY,MUMBAI vs. INCOME TAX OFFICER- 34(1)(1), MUMBAI, KAUTILYA BHAVAN

The brief facts of the case are that the assessee is an individual engaged in the business of selling prepaid recharge coupons and e-top-ups of Loop Mobile through his proprietary concern, M/s My Phone. For the Assessment Year 2014-15, the assessee filed his return of income declaring a total income of ₹17,62,140/-. During the course of assessment proceedings, the Assessing Officer noticed that against commission income of ₹1,52,21,874/-, the assessee had claimed various business expenses aggregating to ₹1,44,14,880/-.Out of these, the Assessing Officer selected expenditure of ₹1,26,86,306/- incurred by the assessee under various heads such as sales promotion expenses, sub-dealer promotion expenses, business promotion expenses and promotional discounts for further verification. The Assessing Officer repeatedly asked the assessee to produce bills, vouchers and supporting documentary evidence viz. complete details of the recipients, their names and addresses, supporting bills, details of employees, sub-dealers and other evidence to establish that the expenditure had been incurred wholly and exclusively for the purposes of business. According to the Assessing Officer, although certain self-made cash vouchers and summary statements of monthly expenses were furnished, the assessee failed to produce supporting bills and vouchers or documentary evidence despite several opportunities. The Assessing Officer also carried out independent verification by issuing notices under section 133(6) of the Act to some of the parties, however, most of such notices could not be served. The Assessing Officer further observed that most of the expenditure had been incurred in cash and the vouchers did not contain complete details of the recipients or supporting bills. The Assessing Officer held that the expenditure was not fully verifiable and a part thereof could not be said to have been incurred wholly and exclusively for the purposes of business within the meaning of section 37(1) of the Act.The Assessing Officer made an ad hoc disallowance of 30% of the expenditure of ₹1,26,86,306/- and added a sum of ₹38,05,892/- to the total income of the assessee while completing the assessment under section 143(3) of the Act. 3. Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). During the appellate proceedings, the assessee filed written submissions along with additional evidences contending that the expenses were the business expenditure incurred in accordance with the terms of the agreement entered into with Loop Mobile, a substantial part of the expenditure was incurred through recharge vouchers (RCVs) rather than cash, and the Assessing Officer had made an arbitrary ad hoc disallowance without rejecting the books of account under section 145(3) of the Act. The learned CIT(A) called for a remand report from the Assessing Officer on the additional evidences furnished by the assessee. In the remand report, the Assessing Officer objected to the admission of the additional evidences on the ground that sufficient opportunities had already been granted during the assessment proceedings but the assessee had failed to furnish the requisite supporting documents. The Assessing Officer further reported that even during the remand proceedings the assessee had merely furnished the same details that had been produced during assessment, such as self-made vouchers, unsigned undertakings and names and addresses of certain persons, but had still failed to furnish independent documentary evidence being bank statements showing the payments said have been made. The learned CIT(A) observed that the assessee merely reiterated the earlier submissions and failed to furnish any fresh material or satisfactory explanation to rebut the observations contained in the remand report by the Assessing Officer. The CIT(A) observed that despite repeated opportunities both during the assessment proceedings and during the remand proceedings, the assessee had failed to produce documentary evidence to establish the genuineness of the expenditure. The learned CIT(A) held that the disallowance of 30% of the expenditure was justified in the facts of the case and accordingly confirmed the addition of ₹38,05,892/- made under section 37(1) of the Act. 4. The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee.

We have heard the rival contentions and perused the material available on record. The solitary issue involved in the present appeal relates to the ad hoc disallowance of ₹38,05,892/- being 30% of the expenditure of ₹1,26,86,306/- claimed by the assessee under various heads by invoking the provisions of section 37(1) of the Act. The Assessing Officer made the impugned disallowance on the ground that the assessee failed to produce complete supporting bills and vouchers and a substantial portion of the expenditure was not verifiable. The learned CIT(Appeals) confirmed the action of the Assessing Officer by observing that despite the opportunity granted during the remand proceedings, the assessee had failed to furnish any fresh documentary evidence to substantiate the claim of expenditure.

Before us, the learned Counsel for the assessee submitted that the issue is squarely covered by the decision of the Coordinate Bench of the Tribunal in the assessee's own case for the Assessment Year 2015-16 in ITA No. 7036/Mum/2022, order dated 20.04.2023, wherein under identical facts and circumstances, the Tribunal restricted a similar ad hoc disallowance from 30% to 10% of the expenditure. It was submitted that the assessee is carrying on the same business of distribution and sale of prepaid recharge coupons as a Direct Marketing Associate (DMA) of Loop Mobile and the nature of expenditure, the method of accounting and the mode of distribution through Recharge Coupon Vouchers (RCVs) are identical. It was, therefore, contended that following the principle of consistency, similar relief deserves to be granted in the present year also. The learned Departmental Representative, on the other hand, relied upon the orders of the Revenue authorities.

We have considered the rival submissions and have also perused the decision of the Coordinate Bench in the assessee's own case for Assessment Year 2015-16 in ITA No. 7036/Mum/2022 dated 20.04.2023. We find that the issue before the Coordinate Bench was identical, wherein the Assessing Officer had made an ad hoc disallowance of 30% of similar business expenditure claimed by the assessee under various heads. After examining the peculiar nature of the assessee's business and the evidence available on record, the Coordinate Bench held as under: "...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 are paid by these 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 retailers. It has been stated that due to closure of Loop Mobile, the assessee could not sell the prepaid vouchers lying with him and, therefore, incurred huge losses on account of stock lying with him. 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 Assessing Officer, it seems that most of these expenses are overlapping and these expenses are not open for complete verification, though the Assessing Officer had made his endeavours while making the disallowance. Thus, it cannot be categorically held that all the expenses incurred by the assessee, particularly sales promotion expenses, business promotion expenses, special discounts to dealers and sub-dealers promotion expenses, can be fully 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 is reduced to 10% from 30%, which will meet the ends of justice." 6

The aforesaid findings of the Coordinate Bench show that while the Tribunal accepted that complete verification of every item of expenditure was not possible and the assessee had not fully discharged the burden cast upon him under section 37(1) of the Act, it simultaneously held that an ad hoc disallowance of 30% was excessive considering the peculiar nature of the assessee's business of distribution of prepaid recharge vouchers, the thin margins involved, the distribution of incentives through Recharge Coupon Vouchers (RCVs), and the commercial realities of the telecom distribution business. The Tribunal accordingly held that restricting the disallowance to 10% of the expenditure would meet the ends of justice.

In the present year also, we find that the business carried on by the assessee is identical and the nature of expenditure disallowed by the Assessing Officer is similar to that considered by the Coordinate Bench in Assessment Year 2015-2016. The Revenue has not brought any distinguishing feature on record nor has it pointed out any material change either in facts or in law which would justify taking a view different from the one adopted by the Coordinate Bench in the assessee's own case. It is a well-settled principle that where the facts and circumstances are identical, consistency demands that a view already taken in the assessee's own case should ordinarily be followed in the absence of any distinguishing feature.

Respectfully following the decision of the Coordinate Bench of the Tribunal in the assessee's own case for Assessment Year 2015-16 in ITA No.7036/Mum/2022 dated 20.04.2023, we hold that the ad hoc disallowance of 30% sustained by the Revenue authorities is excessive. Accordingly, we direct the Assessing Officer to restrict the disallowance to 10% of the expenditure instead of 30%. The Assessing Officer is directed to recompute the income of the assessee accordingly after granting consequential relief.

In the result, the appeal of the assessee is partly allowed.