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Facts
The assessee, an individual, filed an income tax return which was selected for limited scrutiny. The Assessing Officer disallowed a portion of various expenses claimed by the assessee due to lack of proper supporting documents, such as self-made vouchers instead of salary registers or other verifiable evidence. This led to an addition to the assessee's total income.
Held
The Tribunal held that the disallowance of expenses by the Assessing Officer was not warranted, referencing a coordinate bench's decision. It was noted that no penal action or proof of initiation of penal proceedings under the relevant Act was established against the assessee, making the exceptions to deductions under Section 37(1) inapplicable.
Key Issues
Whether disallowance of expenses is justified when the assessee provided self-made vouchers, and no penal action was initiated against the assessee under the relevant Act.
Sections Cited
143(2), 142(1), 37(1), 102, 103, 104, 105, 105A, 105B, 40(1), 40(2A)
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Income Tax Appellate Tribunal, ‘SMC’ BENCH, KOLKATA
Before: Shri Duvvuru RL Reddy, Vice-(KZ)
Assessment Year: 2016-2017 Aadarsh Laddha,………………….………...……Appellant (Legal Heir of Kailash Chand Laddha) 31, Giri Babu Lane, Kolkata-700012, W.B. [PAN:ABAPL2499R] -Vs.- Income Tax Officer,…………………………..…..Respondent Ward-37(1), Kolkata, 3, Government Place West, Kolkata-700001 Appearances by: Shri Sidhharth Kejriwal, C.A., appeared on behalf of the assessee Shri Kallol Mistry, JCIT, Sr. D.R., appeared on behalf of the Revenue Date of concluding the hearing: December 09, 2025 Date of pronouncing the order: December 31, 2025 O R D E R
The present appeal is directed at the instance of assessee against the order of ld. Additional/Joint Commissioner of Income Tax (Appeals), Aurangabad dated 28.03.2025 passed for Assessment Year 2016-2017.
The facts in brief are that the assessee is an individual, who filed his return of income electronically on 21.09.2016 declaring (A.Y. 2016-2017) Aadarsh Laddha (L/H. of Kailash Chand Laddha) total income of Rs.10,55,930/-. The case was selected for limited scrutiny through CASS with the reason that (i) low income compared to large commission receipts (commission receipts in P&L Account and total income in Part-B-TI of ITR) and (ii) mismatch in sales turnover reported in audit report and ITR (Form 3CD and total sales/gross receipt in Part-A-P&L of ITR). Accordingly notices under section 143(2) and 142(1) of the Act were issued and duly served upon the assessee. During the FY 2015- 16, the assessee was engaged in general commission agent, earned interest income and also trading in shares. In the instant case, the assessee carried the business of a commission agent and had disclosed gross receipts of Rs.67,68,688/- under the head ‘business or profession’ and disclosed net profit amounting to Rs.11,61,073/-, disclosed income from salary of Rs.29,197/-, income from house property amounting to Rs.33,600/- and income from other sources of Rs.59,104 and claimed deduction under chapter-VIA of Rs.2,27,049/- and finally arrived at the total income of Rs.10,55,930/-.As per audited profit & loss account, it is seen that a total expenses [Rs.6,10,525/- + Rs.4,17,700/-] i.e. in total Rs.10,28,225/- debited towards casual staff payment and incentive paid to staff respectively. A show-cause notice was issued to the assessee asking to produce the salary register along with supporting document for proper verification. In response, the assessee produced self-made vouchers for claiming staff payment and incentive paid to staff instead of salary register. Ld. Assessing Officer disallowed 20% of the said expenditure and added back the amount of Rs.2,05,645/- to the total income of the assessee. With (A.Y. 2016-2017) Aadarsh Laddha (L/H. of Kailash Chand Laddha) regard to the conveyance expenses for staff, it is seen that the assessee debited Rs.7,05,282/- towards the expenses and for this a show-cause notice was issued to produce monthly conveyance expenses along with the supporting documentary evidence, and in response, the assessee produced self-made vouchers claiming conveyance expenses. The ld. Assessing Officer disallowed 20% of the expenses, which comes to Rs.1,41,056/- and added to the total income of the assessee. With regard to the expenses totalling to Rs.6,29,837/- towards advertisement of Rs.1,25,578/-, travelling expenses of Rs.1,02,198/-, telephone expenses of Rs.1,13,068/- and books & periodicals of Rs.1,66,793/-, data collection and processing expenses of Rs.1,22,200/- , the ld. Assessing Officer asked the assessee to produce the relevant documentary evidence, but the assessee produced only self-made vouchers. Being not satisfied, the ld. Assessing Officer disallowed 20% of the said expenditure and added Rs.1,25,967/- to the total income of the assessee. In respect of car maintenance expenditure amounting to Rs.2,86,649/- debited in the profit & loss account, the ld. Assessing Officer asked the assessee to produce the relevant supporting evidence, but there is no cogent evidence to prove that the assessee actually expended car maintenance wholly or exclusively for the purpose of business /profession purposes. Ld. Assessing Officer disallowed 50% of the said expenditure, which comes to Rs.1,43,325/- and added to the total income of the assessee. With regard to the postage and telegram expenses at Rs.5,59,548/-, the assessee failed to produce the supporting documents for genuineness of such expenditure, ld. Assessing (A.Y. 2016-2017) Aadarsh Laddha (L/H. of Kailash Chand Laddha) Officer disallowed 50% of the said expenditure, which comes to Rs.2,79,774/- and added to the total income of the assessee. With regard to the salary expenses as debited by the assessee in the profit & loss account amounting to Rs.7,91,400/-, the assessee failed to substantiate the reason why the salary payment made through cash on vouchers slip only. The ld. Assessing Officer disallowed 50% of the said expenditure, which comes to Rs.3,95,700/- and added to the total income of the assessee. Finally, ld. Assessing Officer determined the total assessed income of the assessee at Rs.28,48,869/-. On being aggrieved, the assessee preferred an appeal before the ld. CIT(Appeals).
Ld. CIT(Appeals) dismissed the grounds of appeal of the assessee saying that in absence of the satisfactory documentary evidence, the contention of the appellant cannot be accepted hence it is found that the ld. Assessing Officer has reasonably disallowed the excess expenses claimed by the assessee and the disallowance made by the ld. Assessing Officer are confirmed and partly allowed the appeal of the assessee.
4. On being aggrieved, the assessee preferred an appeal before the Tribunal. It was the submission of the ld. Counsel for the assessee that similar issue has been taken up by the ITAT, ‘E’ Bench, Mumbai in the case of HDFC Ergo General Insurance Company Limited and the issue has been decided in favour of the assessee. He also submitted that there is no material on record to demonstrate that any action has ben taken by the competent (A.Y. 2016-2017) Aadarsh Laddha (L/H. of Kailash Chand Laddha) authority under the Insurance Act. As per Sections 102, 103, 104, 105 105A and 105B contain provisions to impose penalty for default in complying with or acting in contravention of any provisions of the Act. Whereas Section 105A deals with offences by company and awarding of punishment in case a company is found to be guilty of any office. He submitted that no material has been brought on record by the Department to demonstrate that the competent authority under the Insurance Act or the IRDAI has taken any punitive or penal action against the assessee for violation or contravention of any of the provisions of Insurance Act, as alleged by the assessee. He, therefore, pleaded to delete the disallowance @ 50% on adhoc disallowance made by the ld. Assessing Officer.
5. On the other hand, ld. Departmental Representative submitted that the expenditures incurred by the assessee are in the nature of inducement. Therefore, ld. Assessing Officer has rightly disallowed 50% of the expenditure. He, therefore, pleaded to uphold the orders passed by the revenue authorities.
6. I have heard both the sides and perused the material available on record. The only grievance of the ld. Assessing Officer is that the assessee has produced self-made vouchers for claiming staff payment and incentive paid to staff instead of salary register. Therefore, inflated expenditure under this head cannot be ruled out. I have also perused the order dated 30.07.2025 passed by the ITAT, ‘E’ Bench, Mumbai in the case of HDFC Ergo General (A.Y. 2016-2017) Aadarsh Laddha (L/H. of Kailash Chand Laddha) Insurance Company Limited (referred supra), wherein it was held in para 20 & 21 of this order as under:- “20. Having held so, it is now necessary to advert to the issue as to whether, the payment can at all be disallowed by invoking Explanation- 1 to Section 37(1) of the Act. On a reading of Explanation-1 to Section 37(1) of the Act it becomes clear that any expenditure incurred by assessee for any purpose, which is an offence or is prohibited by law shall not be regarded as expenditure incurred for the purpose of business, hence, no deduction can be allowed. So the exceptions are, the expenditure incurred must not be for any purpose which is an offence, secondly which is prohibited by law. As far as the first limb of Explanation 1 is concerned, it cannot be said that the expenditure incurred by the assessee is in the nature of an offence. At least there is nothing on record to suggest that any prosecution has been launched against the assessee to try any offence committed under the Insurance Act or the assessee has been held guilty for committing any offence. Second limb of the explanation is for expenditure prohibited by law. The relevant law in the present case is the Insurance Act. The AO has alleged that the assessee has violated the provision of Sections 40(1) and 40(2A) of the Insurance Act and IRDAI guidelines. In this context, the allegation of the Departmental Authorities is the assessee has paid commission in excess of what is authorized under the Insurance Act. Per contra, assessee has claimed that it has paid agency commission for motor insurance purely in accordance with the provisions of Insurance Act, which is 10% of the premium value. It is the case of the assessee that the alleged excess payment made is not insurance commission but payment made towards services rendered in relation to non-core activities such as policy servicing and related activities.
21. Though, the Departmental Authorities have not accepted the aforesaid claim of the assessee, however, there is no material on record to demonstrate that any action has been taken by the competent authorities under the Insurance Act. As per our understanding, Sections 102, 103, 104, 105, 105A and 105B contain provisions to impose penalty for default in complying with or acting in contravention of any provisions of the Act. Whereas, Section 105A deals with offences by company and awarding of punishment in case a company is found to be guilty of any offence. No material has been brought on record by the Department to demonstrate that the competent authority under the Insurance Act or the IRDAI has taken any punitive or penal action against the assessee for violation or contravention of any of the provisions of Insurance Act, as alleged by the AO. Thus, when the assessee has not been declared to be guilty of any offence nor there is any penal action initiated against the assessee for violation of the provisions of the Insurance Act or IRDAI guidelines, in our humble opinion, the exceptions provided under Explanation-1 to Section 37(1) of the Act would not apply. In this context, we respectfully agree with the observations made by the coordinate Bench in case of Milestone Real Estate Fund (Supra). Pertinently, in case of M/s Cholamandalam MS General Insurance Co. Ltd. [2025] 174 taxmann.com 603 (Mad.), identical issue of disallowance of payment (A.Y. 2016-2017) Aadarsh Laddha (L/H. of Kailash Chand Laddha) made to motor vehicle dealers u/s. 37(1) of the Act came up for consideration. While deciding the issue, the Hon’ble Court upheld the decision of the Tribunal restoring the issue to the AO to decide afresh. Keeping in view the order of CESTAT in case of the same party. The decision taken by the Tribunal to restore the issue was for the fact that the CESTAT decision was not available before the Departmental Authorities. However, in the facts of the present appeal, the material on record do establish that the orders of CESTAT, though, were furnished before learned First Appellate Authority, however, they were completely ignored. Therefore, we do not intend to remit the issue to the Departmental Authorities. Thus, on overall consideration of facts and materials on record, we are inclined to accept assessee’s claim and hold that the payment made is allowable as deduction u/s. 37(1) of the Act. In view of our decision on merits as above, other grounds raised by the assessee have become infructuous hence, dismissed”.
7. After considering the ratio laid down by the Coordinate Bench of ITAT, ‘E’ Bench, Mumbai, I find that this issue is squarely covered in favour of the assessee. In this case also, there is no penal action or there is no proof to demonstrate the initiation of penal proceedings for violation of the provisions of the Insurance Act. Therefore, I have no hesitation to come to the conclusion that the disallowance is not warranted. Thus, these grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 31/12/2025.