WEST COAST FINE FOODS (INDIA) PVT LTD,MUMBAI vs. DCIT 13(3)(2), CHURCHGATE, (MUNBAI)

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/-. West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

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.

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." West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

2. Summary of submissions made by the assessee in respect of the purchases is tabulated as under. Sr No. Particular (as mentioned in assessment order) Amount in Rs Remark for your honor's reference i) Purchase with PAN

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 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

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/-

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 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

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 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

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 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

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.

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%. West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

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.

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.

4. Nothing has been disproved by bringing anything cogent by the revenue on the submissions made by the assessee. There are no West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

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 ITA No.862/2019, 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 [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 West Coast Fine Foods (India) Pvt. Ltd. AY 2017-18

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 (Beena Pillai) Accountant Member Dated: 28 August, 2025 MP, Sr.P.S. Copy to :