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Facts
The assessee-company engaged in manufacturing and selling hot stamping foils filed its return for AY 2012-13. The AO disallowed 50% of certain expenses (Travelling, Sales Promotion, Postage & Telephone, Miscellaneous) due to lack of documentary evidence, making an addition of Rs. 20,17,745/-. The CIT(A) partially allowed the appeal, reducing the disallowance to Rs. 8,00,000/-.
Held
The Tribunal held that the disallowance was made arbitrarily on surmises and conjectures without specific findings and contrary to earlier decisions in similar cases. The partial disallowance sustained by the CIT(A) was deemed unreasonable and unjustified.
Key Issues
Whether the ad-hoc disallowance of expenses sustained by the CIT(A) is justified in the absence of specific findings and sufficient evidence?
Sections Cited
143(3), 92CA(3)
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Income Tax Appellate Tribunal, MUMBAI BENCH ‘E’, MUMBAI
Before: SHRI AMIT SHUKLA, HON’BLE & SHRI ARUN KHODPIA, HON’BLE
O R D E R PER ARUN KHODPIA, AM:
The captioned appeal filed by the assessee is directed against the order of Commissioner of Income Tax, Appeals/ADDL/JCIT(A) Mysore (In short “ld. ADDL/JCIT(A)”), National Faceless Appeal Centre, dated 27.08.2024 for A.Y. 2012-13, which in turn arises from the order u/s 143(3) r.w.s. 92CA(3) passed by the Deputy Commissioner of Income Tax – 12(3)(1), Mumbai (in short “ld. DCIT”), Mumbai dated 11.03.2016. The grounds of appeal raised by the assessee are extracted as under:
“1. That on the facts and circumstances of the case and in law the order passed by the Additional Joint Commissioner of Income Tax (Appeals) [Ld. Addl/JCIT (A)) dated 27 August 2024 is bad both on facts and circumstances of the case and in law since it is based purely on surmises and conjectures without evidence to support the conclusion.
That on the facts and in the circumstances of the case and in law, the Ld. AddI/JCIT(A) erred in sustaining the partial ad-hoc disallowance of INR 8,00,000 made in an arbitrary manner purely on surmises and conjectures for Kurz India Private Limited various business expenses even after admitting that there is nothing placed on record by the Ld. AO pointing any specific instances of non-business purposes. The Appellant reserves its right to add, alter, amend or withdraw any ground of appeal
either before or at the time of hearing of this appeal.”
2. The brief facts of the case are that the assessee-company is engaged in the business of procuring and selling, both in local and export market altering, assembling and manufacturing of hot stamping foils, machine and tooling for the plastic, graphic, wood processing, textile and security product industries and any other industry in India and elsewhere which may use hot stamping technique. The assessee had filed its return of income for the A.Y. 2012-13 declaring a total income at Rs 4,64,49,060/- on 30.11.2012. The case of assessee, thereafter, was selected under scrutiny, notice u/s 143(2) dated 10.09.2013 was issued and duly served on the assessee. In the process of assessment, statutory notices were issued and in compliance, necessary replies were furnished by the assessee company. After deliberations, the ld. AO observed that there was unproportionate increase in the expenses of the assessee under the head Travelling, Sales promotion, Postage & Telephone and Miscellaneous expenses. In justification to the increase in these expenses, the assessee explained before the ld. AO that the rise in travelling expenses was because of opening of new branch and foreign travels during the year also the car running course is increased due to increase in number of cars. Regarding sales promotion increase, the assessee submitted that it was due to holding exhibitions during the year. For Post and telephone expenses, it was the submission by the assessee before the ld. AO that there is rise in courier and communication due to increase of sales during the year. The ld. AO considered the response of assessee; however, she did not find herself convenience with such Kurz India Private Limited explanations and accordingly had observed that the increase in turnover of the assessee was 12%, whereas travelling is increased by 30%, sales promotion by 80%, postage and telephone by 45% and miscellaneous expenses by 20%. The ld. AO thereafter noted that the assessee was asked to furnish complete details along with supporting bills and vouchers, however, the assessee was failed to furnish complete documentary evidence in the form of third-party bills. It is also noted that some of the vouchers, expenses were incurred in petty cash for which self-made vouchers were maintained. In conclusion, ld. AO observed that, in absence of proper documentary evidence 50% of the increase in expenses as compared to previous year is disallowed and added to the assessee’s total income. Accordingly, an addition of Rs. 20,17,745/- (50% of Rs. 40,35,490/-) was made to the taxable income of the assessee by disallowing the aforesaid expenses.
3. Aggrieved with the aforesaid addition by the ld. AO in the expenses of assessee, the assessee preferred an appeal before the First Appellate Authority, who partly allowed the contentions of the assessee and had scaled down the disallowance from Rs. 20,17,745/- to Rs. 8,00,000/- and a relief of Rs. 12,17,745/- was granted.
4. Again, dissatisfaction with the finding of ld. CIT(A), assessee preferred an appeal before the Tribunal which is under consideration in the present matter.
5. At the outset, the ld. Counsel representing the assessee (in short “ld. AR”) has submitted that the assessment was completed without appreciating the facts of the case and without providing any basis or evidence to support such disallowance. The ld. AR further Kurz India Private Limited argued that the order passed by the ld. CIT(A) was suffering with the error in sustaining the partial adhoc disallowance of Rs. 8,00,000/- made in an arbitrary manner, purely on surmises and conjectures for various business expenses even after admitting that there is nothing placed on record by the ld. AO pointing out any specific instance that such expenses are not for business purpose. The ld. AR placed his reliance on the order of ITAT, Mumbai in the Kushal Virendra Tandon vs ACIT (2022) 134 case of taxmann.com 268, wherein it has been held that:
“It is a matter of fact borne from the records that neither of the lower authorities had pointed out as to what all expenses claimed by the assessee were not supported by documentary evidences, nor earmarked those which as per them did not inspire much of confidence. Also, nothing is discernible from the records which would reveal as to what all expenses the A.O. was of the view had not been incurred by the assessee wholly and exclusively for the purpose of his profession. In the backdrop of the aforesaid facts, we find substantial force in the claim of the Id. A.R that devoid of any such specific finding by the lower authorities, the disallowance of the aforesaid expenses in a most arbitrary manner on an ad hoc basis could by no means be held to be justified.
Ld. AR Further quoted the judgment of Hon’ble Delhi High Court in the case of CIT-IV vs GIVO Ltd (ITA 941/2010), wherein on a similar issue the observations are as under: 6. As far as the issue of foreign travelling expense is concerned, we find that ITAT has observed as under: 4.1 A perusal of the assessment order shows that the disallowance had been made by the Assessing Authority on account of non-filing of the details of travel. A perusal of the order of the Ld. CIT(A) shows that he has verified the assessment record and has found that substantial details had been filed. However, it is noticed that the Ld. CIT(A) drew a conclusion that the travel of the Managing Director to Paris, London, Amsterdam and Hong Kong had apparently no connection with the business of the assessee. It is noticed that the assessee is in the business of textile and garment manufacturing. The disallowance has been made on presumption and the disallowance is an ad-hoc Kurz India Private Limited disallowance. The details of the expenditure have been found to have been produced before the Assessing Authority. Ld. CIT(A) not found any defect in the claim of expenses, could not now make a change in the stand of the Assessing Authority to say that apparently the travel to Paris. London, Amsterdam and Hong Kong was not for business purposes. Further, as the revenue has not been able to point out as to which expenses of foreign travel as claimed by the assessee is not for the business purpose and as the assessee has produced the evidences in relation to the foreign travel before the Assessing Authority and the same has also been accepted by the Ld. CIT(A), the addition on this account more so on ad-hoc basis, is unjustified and the same is deleted. In these circumstances, ground No. 5 of the assessee's appeal stands allowed"
3.9 Further reliance is placed on the following judicial pronouncements: i. Intertoll ICS India (P) Ltd. (2016) 71 taxmann.com 353 (Mumbai – Trib.) ii. ACIT vs Arthur Anderson and Co. (2005) 5 SOT 393) (Mumbai ITAT) iii. Sonic Biochem Extractions (P) Ltd. vs ITO (2013) 35 taxmann.com 463 (MumbI – Trib.) iv. Deputy Commissioner of Income Tax – M/s. Epcot Securities Pvt. Ltd. (Mumbai ITAT). v. M/s. Pearl Farben Chem Pvt. Ltd. vs DCIT (ITA No. 1122/Mum/2010)”
In backdrop of aforesaid submissions, taking support from the judicial pronouncements, the ld. AR submitted that the ld. CIT(A) himself had acknowledged that the expenses are reasonable and commensurate with the turnover of appellant, there was no justifiable basis for sustaining any disallowance. The disallowance was sustained merely on the ground of service the “ends of justice” or as a matter of conciliation in favour of the tax department, is arbitrary and unsustainable in law. It was argued that such disallowance, being based on assumptions, conjectures is liable to
The ld. AR further submits that in assessee’s own case for A.Y. 2013-14, Hon’ble Mumbai ITAT vide order dated 03.07.2024 deleted the similar disallowance that had been upheld by the ld. CIT(A), wherein the relevant findings of ITAT Mumbai are as under:
14. Having considered the submissions of both sides and perused the material available on record, we are of the considered view that once the learned CIT(A) found the expenses to be for business purpose and reasonable considering the huge turnover of the assessee, and also noted the fact that there are no adverse remarks in the tax audit report, we do not find any merit in restricting the disallowance to Rs.10 lakh by the learned CIT(A) without finding any fault in the submissions by the assessee. Accordingly, we direct the deletion of the balance disallowance of Rs.10 lakh upheld by the learned CIT(A). As a result, Ground No.3 raised in assessee's appeal is allowed.
On the other hand, learned Senior Departmental Representative (ld. Sr. DR) representing the revenue had vehemently supported the order of revenue authorities and had requested to upheld the same.
We have considered the rival submissions, perused the material available on record and judicial pronouncements relied upon by the assessee. Admittedly, the case of assessee is squarely covered by the issue in hand which is decided by the co-ordinate “A” bench of ITAT, Mumbai in assessee’s own case for A.Y. 2013-14 referred to supra. Since the issue in hand, the basis for disallowance by the AO which is partially sustained by the ld. CIT(A), are similar to the issue that was in the assessee’s own case in AY 2013-14, therefore, in terms of facts and circumstances emanating from the records, not dislodged by the revenue by Kurz India Private Limited placing on record any contradictory fact or decision, we find substance in the contentions raised by the ld. AR. Accordingly, we are unable to persuade and concur with the findings of ld. CIT(A) in restricting the disallowance to Rs. 8,00,000/-, without having any finding qua the failure of assessee in substantiating the genuineness of expenses or that those are not for the business purpose of the assessee. Consequently, the ad-hoc disallowance of Rs. 8,00,000/- to the extent sustained by the ld. CIT(A), being unreasonable / unjustified is directed to be deleted.
In the result, the appeal of the assessee stands allowed.