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Facts
The assessee company, engaged in trading aquatic animal feed and related products, filed its return of income. The Assessing Officer made ad hoc disallowances of 5% on total purchases and certain expenses. The CIT(A) reduced these disallowances to 2%. Both the assessee and the revenue have filed appeals.
Held
The Tribunal held that the Assessing Officer's disallowances were ad hoc and not permissible under the Act without pointing out specific defects. The books of accounts were not rejected, and the assessee had provided substantial details. Therefore, the disallowances were deleted.
Key Issues
Whether ad hoc disallowances on purchases and expenses are permissible without rejecting the assessee's books of accounts and without pointing out specific defects.
Sections Cited
143(3), 144, 145(3), 40A(3), 37(1)
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Income Tax Appellate Tribunal, “G” BENCH MUMBAI
Before: SMT. BEENA PILLAI & SHRI GIRISH AGRAWAL
Date of Hearing : 07.07.2025 Date of Pronouncement : 28.08.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These two appeals, one filed by the assessee and the other by the revenue are cross appeals for the same assessment year. Revenue has and 1201/Mum/2024 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18 contested the relief granted by ld. CIT(A) on the ad hoc additions made by the ld. Assessing Officer by adopting a rate of 5% on the total purchases made by the assessee and on certain expenses incurred which was reduced to 2% by ld. CIT(A). Thus, revenue is in appeal contesting the reduction in the percentage from 5% to 2% and seeking restoration to the addition made by ld. AO adopting a rate of 5%.
1.1. Contrary to this, assessee is in appeal challenging the entire addition made by ld. AO at the rate of 5% to submit that such a disallowance is not permitted under the provisions of the Act as these are ad hoc disallowance without pointing out any defect in the audited financial statements when the incurrence of expenses is not doubted and payments made for these purchases and expenses are through proper banking channel, duly accounted for in the books of account with compliance of all the statutory requirements in these respect. According to the assessee, the ad hoc additions are made on presumptions and therefore do not warrant any addition.
Brief facts of the case are that assessee is engaged in the business of trading aquatic animal feed and related products, trading of farm raised shrimps which is purchased from various shrimp farmers and sold to processing house that freeze and export the shrimps. Assessee also runs retail stores by the name Seafood Mart by Cambay Tiger. Assessee filed its return of income on 16.02.2018 reporting a total income of Rs.1,54,18,710/-. Assessment was completed u/s.143(3), wherein the ad hoc disallowances were made as under: A. Ad hoc disallowance of Rs. 9,23,78,676/- at the rate of 5% of the total purchases of Rs.184,75,73,529/-. and 1201/Mum/2024 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18 B. Ad hoc disallowances of Rs. 28,07,723/- that is 5% of business promotion expenses, cold storage expenses, office expenses, repairs and maintenance expenses and transportation expenses which totals up to Rs.5,61,54,456/-.
In the course of assessment proceedings, assessee was required to justify its purchases with necessary supporting documents in respect of which assessee furnished its details with multiple submissions, details of which are noted as under. Assessee furnished the details with complete details of the purchases amounting to Rs.169,89,80,094/-. Another submission was made vide letter dated 19.12.2019 whereby details including PAN, party name, amount of purchase and their addresses were furnished for purchases amounting to Rs. 10,19,81,128/-. Through the same submission, assessee also submitted a list of parties along with their addresses which related to the total purchases of Rs. 3,96,25,025/- for which the PAN were not readily available. Assessee however, assured that in due course of time, PAN for these parties shall be made available. In another list, assessee furnished details relating to purchases which were less than Rs. 1,00,000/- totalling to Rs.69,87,284/-, wherein details of PAN and addresses could not be furnished.
3.1. On the nature of business, assessee explained its modus operandi which is reproduced as under. "Our nature of business requires us to engage with farmers who are into the business of marine forming and aquaculture and of rural background, and consequently there might he some purchases, for which complete details could not be provided. However, whatever details were available with them, with respect to the details being called for were provided. As the farmers do not have an organized structure of a business set-up, we were unable to provide certain specific details like PAN etc in certain cases which is even less than 5% of total purchases." and 1201/Mum/2024 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18 3.2. Summary of submissions made by the assessee in respect of the purchases is tabulated as under. Sr Particular (as Amount in Rs Remark for your honor's No. mentioned in reference assessment order) i) Purchase with PAN Rs.1,69,89,80,094/- Enclosed the list of purchases (Page 103 to 106). The same was submitted during the assessment proceeding. ii) Additional Rs.10,19,81,128/- Enclosed the list of purchase Purchases with PAN along with PAN (Page 107). to be submitted The same was submitted during the assessment proceeding but not considered by ld. Assessing officer. iii) Purchases with no Rs.3,96,25,023/- Enclosed the list as annexure PAN (Page 108 to 109) wherein the PAN are stated. We are hereby enclosing the sample invoices (Page 110 to 497) for your goodself ref. iv) Others Purchase less Rs.69,87,284/- Enclosed the list as annexure than Rs. 1 lac (Page 498 to 504) wherein the party-wise PAN and Address arestated Total in Rs. 184,75,73,529/- 3.3. Reference was also made to the tax audit report placed on record whereby quantitative details of principal items of goods traded by the assessee were furnished including the opening stock, purchases made during the year, sales made during the year, closing stock and the shortages, if any. Assessee has maintained all the documents in respect of its trading transactions, details of which were furnished including sample invoices forming part of the paper book. In respect of purchases at serial no. 3 and 4 in the table above, assessee furnished further details including sample invoices for certain parties for which PAN was made available, subsequently. Thus, out of the purchases with no PAN and 1201/Mum/2024 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18 amounting to Rs. 3,96,25,023/-, approximately purchases worth Rs. 1.45 crores remained where the PAN was not available with the assessee. However, assessee had given the details of their address and sample invoices for meeting the compliance requirement of the Assessing Officer to substantiate the purchases made by it. These details are placed in the paper book at page no.108 and 109. Ld. AO took an adverse view by observing in Para 3.3 that in absence of any documentary evidences and only from the breakup of parties, entire claim cannot be verified and thus, he resorted to make a disallowance by taking an ad hoc rate of 5% of total purchases for want of evidences to make a disallowance of Rs.9,23,78,676/- i.e., 5% of Rs. 184,75,73,529/-.
On the second issue relating to similar ad hoc disallowance made by applying the rate of 5% of certain expenses, details of these expenses are tabulated below. Sr. No. Expenses Amount (Rs.) 1 Business Promotion expenses Rs.1,62,26,927/- 2 Cold Storage expenses Rs.1,84,71,917/- 3 Office expenses Rs.36,55,945/ 4 Repair and Maintenance expenses Rs.48,55,699/- 5 Transportation expenses Rs.1,29,43,968/- Total 5,61,54,456/- 4.1. On the above, assessee furnished details of expenses in the format as required by the ld. AO. However, ld. AO without pointing out any defect in audited financial statements and details submitted by the assessee, made ad hoc disallowance by adopting a rate of 5% of the total of these expenses, to make an addition. Various contentions raised by the ld. AO and the submissions made by the assessee thereon is tabulated below for ready reference.
4.2. Ld. CIT(A) in the first appeal has reduced this ad hoc percentage of 5% to 2% and gave partial relief to the assessee. Both, revenue and assessee are in appeal in respect of the addition made by the ld. AO and the relief granted by the ld. CIT(A).
Contentions of the assessee are that ld. AO has made ad hoc disallowances which are not permissible under the provisions of the Act without pointing out any mistake or specific defect with respect to the purchases made by the assessee and expenses incurred, claimed as deduction in computing its total income. In respect of the purchases, the ad hoc disallowances made by the assessee merely on the basis that certain PAN details or supporting were not submitted by the assessee and 1201/Mum/2024 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18 for which ld. AO has failed to take into consideration the nature of business in which the assessee is engaged in. Assessee has furnished the details of the parties with their addresses and invoices where the PAN details were not available. Ld. AO could have taken appropriate measures to inquire from the said parties before resorting to making ad hoc disallowance on the entire purchases of the assessee.
5.1. Further, contention of the assessee is that payments for the purchases are made through banking channel and that ld. AO has not rejected the books of accounts which have been duly subjected to audit and no defect or discrepancy has been pointed out by the auditor in the books of accounts so maintained by the assessee. All the required disclosures have been made in the audit report by the tax auditor. Similar submissions are made by the assessee in respect of each of the expenses for which ad hoc disallowance is made where nothing specific has been pointed out which led to the approach adopted by the ld. AO. In respect of these expenses, assessee also submitted that there is no violation of the provisions contained in section 40A(3) where the payments are made in excess of the threshold limit by making payment in cash.
Per contra, ld. DR asserted that the order of ld. AO be sustained where the disallowance has been made by adopting 5% of the purchases and certain expenses, since assessee failed to produce relevant evidences to justify said expenditure. According to him, assessing officer was justified in making the said ad hoc disallowance and ought to be sustained instead of relief granted by ld. CIT(A) by reducing the percentage from 5% to 2%. For this, he placed reliance on the decision
We have heard both the parties and perused the material on record and given our thoughtful consideration to the submissions made. Assessee has submitted a paper book containing 1045 pages to substantiate the claim made by it in its appeal. Undisputedly, incurrence of expenditure and the purchases made is not disputed by the ld. AO. Assessee has maintained regular books of accounts which are subjected to audit. Tax audit report in Form 3CA and 3CD is placed on record with all the disclosures made therein. Assessee has furnished quantitative details of items in which it has traded. Assessee has also explained the nature of business in which it is engaged in. In respect of the purchases made by the Assessee which is of a significant volume of 184 crores, in respect of these purchases, it is only for a very insignificant portion for which the details in respect of PAN could not be furnished by the Assessee for which also, Assessee has explained its case and justified the non-availability of PAN. The small percentage is tabulated above which comes to less than 2% of the total purchases.
7.1. It is important to note that ld. AO has not rejected or made any negative observation in respect of the parties from whom purchases have been made for which assessee has furnished PAN details. In respect of the parties for which PAN details are not available, their addresses and the invoices are placed on record which were sufficient for the appropriate actions which ld. AO could have taken. In respect of certain expenses tabulated above, similar approach has been adopted by ld. AO of resorting to an ad hoc disallowance of 5%. and 1201/Mum/2024 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18 7.2. In the present case before us, it is noticed that neither the ld. AO nor ld. CIT(A) have rejected the regular books of accounts maintained by the assessee in the course of its business which have been subjected to audit. Ld. DR has not been able to show any defect in the records of the assessee warranting rejection of books of accounts and adopting ad hoc percentage of 5% or 2% to make a disallowance on the entire purchases of the assessee and certain expenses tabulated above.
7.3. Before resorting to such an estimation for disallowance, it is sine qua non that the Assessing Officer has to come to a conclusion that the books of accounts maintained by the assessee are incorrect, incomplete or unreliable and reject the same before proceeding to make his own assessment on ad hoc basis/on a best estimate basis. Section 144 of the Act provides for the manner in which best judgment assessment has to be completed. From the provisions contained in section 144, it is noted that the Assessing Officer derives authority to make additions on the basis of estimates, only upon fulfilment of conditions mentioned in section 145(3). It is only when the Assessing Officer is satisfied about the existence of irregularities in the books of accounts as contained in section 145(3) that it can proceed to make a best judgment assessment as provided under section 144. In the present case, there is neither rejection of books of accounts maintained by the assessee, nor it is a case where any defect or specific deficiencies are pointed out by the authorities below in respect of the disallowances made. Submissions made by the assessee in the course of assessment proceedings are uncontroverted.
7.4. Nothing has been disproved by bringing anything cogent by the revenue on the submissions made by the assessee. There are no and 1201/Mum/2024 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18 observations by the authorities below that conditions prescribed under section 37(1) have been violated by the assessee to make the disallowance. We find that the disallowance made by ld. AO and that by ld. CIT(A) is purely on ad hoc basis whereby one has adopted a rate of 5% and was reduced to 2% at the first appellate stage. Nothing has been doubted on the bona fides of the expenditure claimed by the assessee. Considering the facts on record as narrated above, submissions made by the assessee forming part of the paper book giving all the details and explanation and the provisions of the Act contained in section 144 r.w.s. 145(3) as well as section 37(1), we find that the addition made by ld. AO by adopting an ad hoc rate of 5% on the total purchases as well as certain expenses details of which are tabulated below is uncalled for and is not in accordance with the provisions of the Act. The additions so made by ld. AO are deleted.
We draw our force from the decision of the Hon’ble High Court of Delhi in the case of PCIT vs. Forum Sales Pvt. Ltd. in dated 01.03.2024, which dealt with a similar issue and held in favour of the assessee. We also make a reference to the decision of Hon’ble High Court of Delhi in the case of PCIT vs. R.G. Buildwell Engineers Ltd. [2018] 99 taxmann.com 283 (Del), wherein in Para 4, Hon’ble Court observed that omission to reject the books of accounts in which even the ad hoc disallowance could have been made and also the historical treatment of such expenses cannot be termed as unreasonable on the reasoning given by the ITAT. Hon’ble High Court thus, held that no substantial question of law arose on the appeal filed by the Revenue and it upheld the reasoning given by the Tribunal on the ad hoc disallowance made by the Revenue. On the appeal by the Revenue before the Hon’ble Supreme Court in PCIT vs. R.G. Buildwell Engineers and 1201/Mum/2024 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18 Ltd. [2018] 99 taxmann.com 284 (SC), the SLP so filed was dismissed. Accordingly, grounds raised by the assessee in its appeal are allowed.
In the result, appeal of the assessee is allowed.
In the appeal filed by the Revenue, the contest is on the relief granted by ld. CIT(A) of reduction of rate from 5% to 2%. In essence, through its appeal, Revenue is seeking restoration of ad hoc disallowance at the rate of 5% adopted by the ld. AO. Since, we have allowed the appeal of the Assessee deleting the ad hoc disallowance made by adopting a rate of 5% by ld. AO, the appeal of the Revenue stands infructuous. Accordingly, grounds raised by the Revenue are dismissed as infructuous.
In the result, appeal of the assessee is allowed and appeal by the Revenue is dismissed. Order is pronounced in the open court on 28 August, 2025