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Facts
The assessee appealed against an assessment order where the AO made an addition of 10% on expenditure, stating lack of evidence. The DRP reduced the disallowance to 5% on administrative and selling expenses, excluding employee expenses. The assessee further appealed to the ITAT.
Held
The Tribunal noted that the assessee did not provide sufficient evidence for the expenses even before the Tribunal. However, in the interest of natural justice, the issue was remitted back to the AO to examine the documentary evidence for administrative and selling expenses.
Key Issues
Whether the assessee has provided sufficient evidence for the claimed business expenses, and if not, whether the disallowance made by the AO and DRP is justified.
Sections Cited
143(3), 144C(13), 37(1)
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI PAWAN SINGH, JM &
(Assessment Year: 2022-23) Meelendra Singh, ITO (IT)-4(2)(1), 503, Pushpakumj, ‘A’ Road, Kautaliya Bhavan, Bandra, Vs. Churchgate, Mumbai-400020. Mumbai-400051. PAN: BFAPS5402N Appellant) : Respondent) Appellant /Assessee by : Shri H.N. Motiwalla, AR Revenue / Respondent by : Shri Krishna Kumar- Sr. DR : 03.04.2025 Date of Hearing : 07.04.2025 Date of Pronouncement O R D E R Per Padmavathy S, AM:
This appeal by the assessee is against the final order of assessment passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) by the Income Tax Officer (IT)-4(2)(1), Mumbai dated 24.12.2024 for Assessment Year(AY) 2021-22. The assessee has raised the following grounds of appeal:
1. On the facts and in the circumstances of the case, the learned ITO (IT) 4(2)(1), Mumbai, erred in passing the order under section 143(3) r.w.s. 144C(13) of the Income tax Act, 1961 and making the addition of Rs. 5,91,325/- as per direction of Dispute Resolution Panel.
Meelendra Singh 2. On the facts and in the circumstances of the case, the learned Dispute Resolution Panel erred in directing the Assessing Officer to disallow 5% of Rs. 1,18,26,490/- i.e. Rs. 5,91,325/-in respect of administration and selling expenses on the ground that "no evidence of expenses has been brought on record till date" without appreciating that schedule 8 of the Financial statement clearly depicts details of said expenses. Therefore the said direction is without any merit.”
The assessee is an individual and deriving income from Profit & Gains from Business or Profession, Capital Gains and Income from Other Sources. For AY 2021-22, the assessee filed the return of income on 03.11.2022 declaring a total income of Rs. 550/-. The return was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) during the course of assessment noticed that the assessee has incurred various expenses and called on the assessee to furnish the necessary details substantiating the expenses. The AO made and addition at 10% of the expenditure amounting to Rs. 20,01,563/- stating that the assessee could not establish that the entire expenditure was incurred wholly and exclusively for the purpose of business and that no cogent evidence was submitted. The assessee has raised further objections before the Dispute Resolution Panel (DRP). Before the DRP, the assessee submitted that the amount of expenditure considered by the AO for the purpose of disallowing 10% is incorrect. The assessee further submitted that during the year under consideration as per the financial statements, the assessee has claimed expenditure towards payment to employees amounting Rs. 64,74,174/- and Administrative & Selling Expenses to the tune of Rs. 1,18,26,463/-. Accordingly, the assessee submitted that the total expenditure claimed by the assessee is Rs. 1,83,00,637/- and not the figure of Rs. 2,00,15,631/- as considered by the AO for the purpose of disallowances. The assessee also submitted before the DRP that the assessee has incurred the above expenses entirely for the purpose of business and the AO is not correct in estimating the disallowance at 10% on the ground that the assessee has not furnished the substantive evidence in Meelendra Singh support of the claim of expenditure. The DRP after considering the submissions of the assessee gave partial relief to the assessee by holding that – “The submission of the appellant shows that the amount of expenses incurred during the year are Rs.1,83,00,637 only, in comparison to Rs.2,00,15,630 taken for calculation of disallowance in the draft order. Further, employee payments constitute a major chunk at Rs.64,74,147. Employee expenses are subject to payroll taxes and there generally cannot be a cash element. Further, the financial statements have been duly audited and Form 3CB has been submitted. Nothing has been bought on record by the Ld. JAO to suggest that salaries have a cash element. Thus, the employee expenses are to be excluded from the disallowance calculation. That said, administrative and selling expenses amounts can be subjected to test under 37(1) of ITA 1961, as no evidence of expenses has been bought on record till date. Looking at the facts and circumstances of the case, the panel directs that the percentage of disallowance be taken at 5%. The amount of disallowance be restricted to 5% of Rs. 1,18,26,490 (Rs.1,83,00,637 - Rs.64,74,147 (employee expenses)) = Rs 5,91,325.”
The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO pursuant to the directions of the DRP.
We have heard the parties and perused the material on record. We notice from the perusal of the AO’s order that the grounds for disallowing a percentage of the total expenditure is that the assessee has not discharged the onus of proving that the expenditure claimed is incurred wholly and exclusively for the purpose of business and that the assessee has not submitted any cogent evidence. The AO accordingly the AO estimated the disallowance at 10% but has considered an incorrect amount while calculating the disallowance. The DRP reduced the disallowance to 5% on the correct amount of the Administrative & Selling Expenses and gave partial relief to the assessee. However, from the findings of the DRP as extracted in the earlier part of this order, we notice that the assessee did not furnish any evidences supporting Meelendra Singh the claim of the expenditure before the DRP also. Even before us the assessee has not brought any additional evidence in support of the expenditure. The ld. AR during the course of hearing submitted that the entire expenditure incurred by the assessee have proper supporting evidences, and prayed that one more opportunity may be given to the assessee to submit the necessary evidences in support of the claim of the expenditure. The Ld DR did not raise any objection to the same. Accordingly, in the interest of natural justice and fair play, we are remitting the issue back to the AO for limited purpose of examining the documentary evidences in support of the administrative and selling expenses claimed by the assessee and allow the claim in accordance with law. The assessee is directed to furnish the necessary evidences in support of the claim of the expenditure and co-operate with the assessment proceedings.
In result, appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 07-04-2025. Sd/- Sd/- (PAWAN SINGH) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT