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Facts
The assessee, a dealer in motor cars, filed their return of income. The AO disallowed a portion of personnel expenditure and incentive/commission expenditure due to discrepancies in employee numbers and lack of supporting documents. Additionally, an estimation was made for TP registration income.
Held
The Tribunal upheld the disallowances and additions made by the lower authorities, finding that the assessee failed to provide sufficient evidence to justify the claimed expenditures and income. The reliance on a High Court judgment was deemed not applicable to the present case.
Key Issues
Whether the disallowance of personnel expenditure and incentive/commission, and the addition on account of TP registration income, are justified in the absence of proper documentary evidence. Applicability of a High Court judgment regarding adhoc disallowances without rejecting books of accounts.
Sections Cited
143(1), 143(2), 142(1), 234
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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
These appeals are filed by the assessee challenging the orders of NFAC, Delhi dated 27/03/2025 and 31/03/2025 in respect of the A.Ys. 2014-15 and 2015-16 respectively.
2. Both these appeals are related to the same assessee and the issues involved are one and the same, the appeals are taken up for hearing together and the appeal in is taken as the lead case and the decision arrived will apply mutatis mutandis to the another & 1446/Bang/2025 appeal. The grounds raised
by the assessee in are as under:
1. The order passed by the authorities below insofar as it is against the Appellant, is opposed to law, weight of evidence, natural justice and probabilities on the facts and circumstances of the Appellant's case.
The Appellant denies itself liable to be assessed at Rs.66,02,192/- as against the returned income of Rs.25,73,260/- for the assessment year 2014-15, on the facts and circumstances of the case.
3. Grounds on disallowance of personnel expenditure, Rs.24,50,932/- a. The authorities below are not justified in restricting the personnel expenditure to Rs.95,o0,000/- against Rs.1,19,50,932/- claimed by the appellant, on the facts and circumstances of the case. b. The authorities below have erred in making disallowances on arbitrary basis without appreciating the fact that the expenditure claimed is genuine, on the facts and circumstances of the case. c. The authorities below have erred in arriving at a conclusion that the appellant has inflated the man power, salary expenditure, and allowances which is incorrect, on the facts and circumstances of the case.
4. Grounds on disallowance of incentive and commission expenditure, Rs.7,50,000/-: a. The authorities below have erred in arriving at a conclusion that the incentives and commission is not linked to business, on the facts and circumstances of the case. b. The authorities below have failed to appreciate that the incentive and commission expenditure of Rs.19,00,200/- claimed by the appellant is genuine and no disallowances is warranted on the facts and circumstances of the case. c. The authorities below are not justified in arriving at a conclusion that the incentive of Rs.5oo/- is paid per vehicle sale, on the facts and circumstances of the case. d. The authorities below are not justified is disallowing the expenditure on the grounds that such expenditure is & 1446/Bang/2025 inflated which is purely based on surmises and conjectures, on the facts and circumstances of the case.
5. Grounds on addition of Rs.8,28,000/- towards TP registration income: a. The authorities below have failed to appreciate that the appellant has not earned any income from Vehicle registration, on the facts and circumstances of the case. b. The authorities below have failed to take cognizance of the fact that appellant merely acts as an agent in collecting the TP registration charges and no profit is earned on such transaction on the facts and circumstances of the case. c. The learned assessing office has erred in arriving at a conclusion that the appellant has earned income of Rs.800/- per vehicle registration, which is arbitrary and not backed by any reasoning, on the facts and circumstances of the case.
6. The learned CIT(A) has erred in confirming the order of the learned assessing officer, as adhoc disallowances of expenditure and adhoc addition of income is not warranted without rejection of books of accounts, on the facts and circumstances of the case.
The Appellant denies the liability to pay interest under section 234 of the Act in view of the fact that there is no liability to additional tax as determined by the learned Assessing Officer on the facts and circumstances of the case.
8. The Appellant craves to add, alter, modify, substitute, change and delete any or all of the grounds and to file a paper book at the time of hearing the appeal.
9. In the view of the above and other grounds that may be urged at the time of the hearing of appeal, the Appellant pray that the appeal may be allowed in the interest of justice and equity.”
The brief facts of the case are that the assessee is a firm and dealer in motor cars and filed their return of income on 12.11.2014. The said return was processed u/s. 143(1) of the Act. Thereafter the case was selected for scrutiny through CASS and notice u/s. 143(2) was issued. Subsequently, notice u/s. 142(1) was issued and the assessee also appeared and produced & 1446/Bang/2025 the necessary records. The AO sought for the details of various expenses. The AO alleged that the ESI and PF contribution is very low when compared to the salary payment and sought the details of salaries and allowances, ESI & PF and incentives and commissions. The assessee also submitted the employees list, however on inspection the AO found that there are only 264 employees instead of 274. The AO sought for the identity or photo identity of the employees who worked for part of the period of the year but the assessee informed that details could not be available in view of the fire incident and shifting of the HR office. The AO not accepted the genuineness of the number of employees. The AO in comparing the list of employees with the bio-data, found that there are some discrepancies between the list supplied by the assessee and the datas available. The AO found that there are discrepancies in the employees appointed and the list of employees furnished by the assessee. Similarly, the names of the employees does not tally with the pay rolls submitted by the assessee and in fact no proper explanation was given by the assessee. Therefore the AO had concluded that the expenditure on salary and allowances are inflated and therefore estimated the expenditure and assessed the excess claim of expenditure.
Similarly, the incentive and commission also restricted since the same is not in commensurate with the vehicles sold. The AO had not accepted the incentives since the same is more in the month of March whereas no such huge sale of vehicles were reported. Further, the AO had alleged that the commission paid to one Mr. Ajjappa, Accountant of the firm could not be believed since he is not at all involved with sales promotion. The AO also verified the ITR of Mr. Ajjappa and gave a finding that the incentive is 63% more of the declared income and also claimed the refund of entire TDS. Therefore the AO had disallowed the claim of incentives and commission for want of supporting documents. & 1446/Bang/2025
The AO also estimated the TP registration income at Rs. 800/- per vehicle. The AO had made the addition because of the various discrepancies and also no supporting documents were produced by the assessee.
As against the orders, the assessee filed appeals before the Ld.CIT(A). The Ld.CIT(A) after considering the issues in details and also the data and handmade vouchers furnished by the assessee, had not accepted the claims and confirmed the orders of the AO. The assessee is in appeal before this Tribunal challenging the orders of the Ld.CIT(A).
7. At the time of hearing, the Ld.AR reiterated the grounds and also relied on the documents filed before the Ld.CIT(A). The Ld.AR also filed an application to admit the additional ground. In the said additional ground, the assessee submitted that the adhoc disallowance made by the AO without rejecting the books of accounts is not correct. The Ld.AR also relied on the judgment of the Hon’ble Jurisdictional High Court reported in 386 ITR 702 (Kar) in the case of CIT vs. Anil Kumar & Co. and prayed to allow the appeal.
The Ld.DR relied on the orders of the lower authorities and submitted that the judgment relied on by the Ld.AR can be distinguished based on the facts of the present case and prayed to dismiss the appeal.
We have heard the arguments of both sides and perused the materials available on record.
We have perused the assessment order in which the AO had considered the explanations offered by the assessee and arrived a conclusion that the assessee had increased the employees strength in order to claim more deduction whereas no documentary evidences were made available to sustain their contention that there is no discrepancy in the number of employees. The assessee also not produced any records about the fire incident and the shifting of HR office. We are not able to understand & 1446/Bang/2025 what methodology the assessee had adopted in maintaining the records relating to the employees. The AO also inspected the assessee and physically verified the employees. The AO also verified the employees details available in the folder file available in the premises. In view of that, the AO had no other way except to disallow the proportionate expenditure on the salary and allowance of the employees. Even before the Ld.CIT(A), the assessee could not reconcile the variations. Therefore the Ld.CIT(A) in his order dated 27/03/2025 had observed as follows: “As the discrepancies as discussed above, have not been properly explained by the appellant with relevant evidences, the claims, made in this regard before the appellate authority, are not acceptable. Thus, there is no infirmity in the actions of the AO in not accepting the full claim of expenditure claimed under the hear Salary and Allowances and AO after looking into the quantum of business & contribution towards ESI & PF, estimated the expenditure under this head at Rs.95,00,000/-. Hence, excess claim of expenditure amounting to Rs.24,50,9321- [Rs.1,19,50,932 - 95,00,0001 was rightly disallowed by the AO. Thus, the claims made by appellant in this ground are rejected and the ground of appeal is hereby dismissed.”
11. Even before us the assessee had not produced any documents to show that there is no mismatch in the number of employees and therefore the claim is in order. Therefore we are confirming the addition made by the AO.
12. The next addition made by the AO is about the commission and incentive paid to the employees. The assessee submitted that the commission and incentives are paid to the employees based on the sales achieved by them. The assessee had not adduced any supporting documents to show that the claims were made by the employees and also no correlation was made by the assessee about the claim made by the employees and the corresponding payments. Corroborative evidences will be available with the assessee but no such evidences were furnished. The assessee had also not furnished any evidence to show that the services rendered by the individuals. Similarly, in respect of the commission paid to & 1446/Bang/2025 Mr. Ajjappa, Accountant for the insurance service rendered by him, the AO alleged that no details about the services rendered by the accountant was placed.
13. Before the Ld.CIT(A), the assessee submitted that the Accountant was paid for dealing with the insurance claim but no proper evidence was filed by the assessee. Before the AO, the assessee submitted a reason but changed the reason before the Ld.CIT(A). In such circumstances, the authorities had confirmed the additions. In fact the Ld.CIT(A) in his order, in paras 6.2.4 and 6.2.5 had given a clear finding which were not controverted by the assessee before this Tribunal by adducing evidences and therefore we have no hesitation to confirm the addition.
14. Insofar as the estimation of income from TP registration activities is concerned, the AO had disbelieved the version of the assessee by observing that the sample hand made vouchers are under various heads and also considering the fact that the assessee had collected the money from the customers for rendering registration services. The AO also stated that the collection of money and later on returned and paid to the brokers are not supported by any corroborative evidence. The Ld.CIT(A) after considering the issue and the fact that the assessee had collected the on road cost of the vehicles from the customers, had confirmed the order of the AO. The assessee had not produced any documents to take a different view and therefore we do not find any reason to differ from the orders of the lower authorities.
15. In respect of the additional ground raised by the assessee that adhoc disallowance could not be made without rejecting the books of accounts and the reliance made on the Hon’ble Jurisdictional High Court judgment, we are of the view that the Hon’ble Jurisdictional High Court judgment cannot be relied on to the facts of the present case. Even in the judgment, the Hon’ble Karnataka High Court had considered the addition made in respect & 1446/Bang/2025 of the sundry creditors and confirmed the remand order passed by the Tribunal. The Hon’ble High Court, insofar as the estimation of gross profit made by the AO and modified by the Ld.CIT(A), had held that the addition based on the gross profit cannot be made without rejecting the books of accounts. Therefore the judgment would not support the case of the assessee.
16. We therefore find no fault in the order of the lower authorities and confirmed the same in toto.
In the result, both the appeals filed by the assessee are dismissed.
Order pronounced in the open court on 12th December, 2025.