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Facts
The assessee, a partnership firm and super stockist, was selected for scrutiny for AY 2017-18 due to large cash deposits during the demonetization period. The Assessing Officer made additions to income based on an alleged discrepancy in closing stock, applying an arbitrary Gross Profit rate, and disallowed business expenses for "Tea, Tiffin etc." The assessee disputed these additions, arguing that its accounts were audited, cash deposits were explained, and the AO's methods violated natural justice and lacked evidentiary basis.
Held
The tribunal found the CIT(A)'s order to be cryptic, lacking specific adjudication and reasoning, and based on the assessee's inability to fully dislodge a chart issued by the AO. Consequently, all issues related to the assessment order were restored to the file of the CIT(A) for readjudication afresh, with a directive to provide the assessee with sufficient opportunity of being heard.
Key Issues
1. Whether the Assessing Officer's additions based on alleged closing stock discrepancy and arbitrary application of Gross Profit rates were sustainable without concrete evidence or adherence to due process. 2. Whether the disallowance of business expenses for tea and tiffin was justified given the nature of the business and the submission of audited accounts. 3. Whether the CIT(A)'s order, being cryptic and lacking specific adjudication, warranted a remand for fresh consideration with proper opportunity to the assessee.
Sections Cited
143(2), 142(1), 145A, 270A, 44AB, 37(1)
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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: SHRI GEORGE MATHAN & SHRI SANJAY AWASTHI
O R D E R
Per George Mathan, JM :
1. This is an appeal filed by the assessee against the order dated 27.12.2024 of the ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, passed in DIN & Order No.ITBA/NFAC/S/250/2024- 25/1071619653(1) for the assessment year 2017-2018.
2. Shri P.K.Ray, Shri S.N.Patra & Shri Trideep Nayak, ld. ARs appeared on behalf of the assessee. Shri Abhijit Adhikary, ld. Sr.DR appeared on behalf of the revenue. 3. At the time of hearing, ld. AR was specifically asked to point out how the assessee has responded to the chart issued by the Assessing Officer, which is recorded in page 3 of the assessment order. Other than referring to various replies that have been filed by the assessee, which were uploaded from the portal, no specific reply to the said para was pointed out. Admittedly, the assessee has not been able to dislodge the said chart.
2 Further a perusal of the order of the ld. CIT(A) at page 4, para 5 under the head Adjudication, clearly shows that the ld. CIT(A) has not given any reasoning for his adjudication. The most cryptic would be a term that could be given to such an order. The assessee has admittedly filed the written submission before the tribunal, which reads as under :- Written Submission Your Honour's The Appellant most respectfully states as under: The Appellant begs to draw your kind attention that the Appellant is a is a Partnership firm under trade name M/s Amit Kumar Sen, a super stockiest of renowned companies of India such as Gujrat Cooperative Milk Marketing Federation (AMUL), Nestle India Ltd., Jhonson & Jhonson Ltd., Glaxo Smith Kine, GD Pharmaceuticals etc. The Appellant mainly sales through the software provided by the company to the distributors under his allotted area in Hooghly district. The Appellant has been filing return of income regularly by paying due tax. The Appellant has been maintaining his books of accounts regularly which is duly audited as per the guideline of the Income Tax Act, 1961.The Appellant filed his return of income on 31.10.2017 for the Assessment year 2017-18 on the basis of audited accounts. The Appellant was selected for scrutiny under CASS system and reason behind the selection was "Large value cash deposit during demonetization period" and notice u/s 143(2) and notice u/s 142(1) of the Income Tax Act, 1961 was served upon the Appellant for the relevant assessment year 2017-18. The Ld. Assessing Officer framed the following allegations & raised an unjustified demand and being aggrieved of the assessment Order, the appellant filed the present appeal before your honour for the sake of end of justice. During the course of Assessment proceeding, the Appellant submitted filled the following the documents for notice u/s 142(1) of the Income Tax Act, 1961 was served upon the Appellant for the Notice Issue Dale Notice No Notice u/s Submission Date Due Date of Officer Documents Submitted Submission List Documents List VAKALATNAM A 20/06/2019 3 20/06/2019 Copy of ITR, Balance Sheet & PL - Audited Accounts including Computation, 2017 20/06/2019 Reply Address Details, 26AS, IT Return Copy 20/06/2019 Bank Details & Statements, Large Case 1 0/06/20 1 9 142(1) 20/06/2019 ITBA/AST/F/ 142(1 )/201 9- Deposit List, 20/1016275235(1) Party-wish Loan Advance Details, IT Audit Report 20/06/2019 Purchase & Sales report, Sundry Debtors & Creditors list, Indirect Expenses Ledger, FORM 26AS 28/06/2019 requested to 24/06/2019 142(1) 28/06/2019 ITBA/AST/F/ 17/201 9- furnish the 20/1016462961(1) pending Bank Details details Bank OD A/c 28/06/2019 Statement Cash Book F.Y. Allahabad 2016-17, 2013- Bank- Current 14, 2014-15, A/c 201 5-1 6 & 08/07/2019 Statement & 4 03/07/2019 143(3) ITBA/AST/F/ 17/201 9- 2017-18, total Sundry Creditors 20/1016639410(1) Ledger Copy turnover, total cash receipts 29/07/2019 & deposited in Purchase bank, total cash Register 02/08/2019 withdrawals, net Advance against profit and total Goods List & Ledger Copy income for F.Y. 2013-14 to 20 17- 1 8. 13/08/2019 21/08/2019 20/08/2019 ITBA/AST/F/17/2019- Party-wise Break Indirect 20/1017389255(1) Expenses Ledger up of Sales, Purchase & Expenses. Compensatio n to Employees Ledger Other Expenses Ledger Rate & Taxes Ledger Insurance Ledger Financial Costs Ledger Book Profit Ledger 21/08/2019 Petion for Adjournment Letter 23/08/2019 Reply Letter 01/09/2019 ITBA/AST/F/17/2019- Month wise 20/1017537515(1) breakup of your sales, purchase & cash deposit. List of Sundry Cash Deposit & Debtors Receive (Closing Balance of cash in hand on 08-1 Debtors 1-201 6 with Conformation denomination, old Copy currencies details during 09-1 1-201 6 to 30-12-2016) Fixed Assets Ledger & Security Deposit Ledger 10/09/2019 Cash Book Copy (01/10/16 to 31/12/2016) 14/09/2019 Reply 24/09/2019 ITBA/AST/F/ 17/201 9- Denomination 20/1017989016(1) (old as well as new currencies) details of cash 5 receipts, cash in hand and cash deposited in bank during demonetizatio n period & in F.Y. 2016-17 with 25/09/2019 evidence. & one Cash Deposit & Collection Report year of month wise sales. purchase, receipts. payments, stock, cash sales, cash receipts & cash deposit in bank not filed. Month-wise 04/10/2019 11/10/2019 ITBA/AST/F/ 17/201 9- final opportunity Cash Deposit &. 20/1018599823(1) Expenses to file all the pending Month-wise 14/10/2019 details and Sale, Purchase documents & 11/10/2019 Closing Stock 6 Reply Letter VAT Return Copy June- 201 6 26AS, VAT Return, VAT Return 28/10/2019 03/11/2019 ITBA/AST/F/ 17/201 9- Monthly Sales, Copy 20/1019505543(1) Salary & September- 2016 Wages, Bonus, PF & ESI VAT Return Copy December- 2016 VAT Return Copy March- 201 7 Discrepancy in Closing Stock and Undisclosed Income The Ld. Assessing Officer (AO) determined an excess closing stock of Rs. 55,44,892!-, calculating it as the difference between Rs. 2,11,86,510/- and Rs. 1,56,41,618/-. Based on a Gross Profit (GP) rate of 5%, the AO then estimated a total sales value of Rs. 56,55,790/-, which was added to the appellant's total income as undisclosed income from undisclosed sales as determined below: Appellants Contention and Supporting Evidence The appellant strongly refutes the Ld. Assessing Officer (AO) s calculation and the addition to income. Here's why: • Cooperation and Compliance: The Appellant asserts full cooperation by providing all requested documents and details to ensure proper justice. • Source of Cash Deposits Verified: During the demonetization period, the appellant deposited lump sum cash in bank accounts and provided detailed explanations with supporting documents. These included: o Audited accounts and audit reports o 26 AS statements o All bank statements 7 o Sundry Creditors ledger and Debtors list o All Indirect expenses ledgers o Sales/Purchase ledgers o Cash Book for the specified demonetization period o Cash deposit and cash collection reports o Month-wise cash deposit and expenses o Month-wise sales, purchases, and closing stock o All four quarter VAT returns o Details of currency deposited during demonetization The appellant states that the Ld. Assessing Officer (AO), after verifying these documents, found no anomalies in the cash deposits, concluding that the source was indeed sales proceeds. • Audited Books and VAT Returns: All sales are fully vouched, align with VAT Returns, and are in agreement with the books of accounts. The books are audited, and the auditor specifically examined the cash book, confirming that all sales were declared in the Trading & Profit & Loss account and subsequently in the returns. There are no adverse remarks from the auditor. • Arbitrary GP Rate Application: The appellant highlights that the Ld. Assessing Officer (AO) prepared a revised chart by adding a Gross Profit column to the appellants uploaded month-wise purchase, sales, and closing stock statement. However, the Ld. Assessing Officer (AO) then arbitrarily applied a hypothetical GP rate of 2% (based on audited accounts and audit reports) to enhance the closing stock value. The appellant argues that since the AO accepted and fetched data for Opening Stock, Sales, and Purchase from the appellants uploaded documents, there should be no question of enhancing the GP and, consequently, the closing stock. • Inconsistent GP Rate Application: The appellant further points out that Ld. Assessing Officer (AO) was inconsistent in applying the GP rate. While calculating the sale value of the disputed enhanced closing stock of Rs. 55,44,892/-, in point No. 3.1.4 of the Assessment Order. a hypothetical GP rate of 5% was applied. This inconsistency, according to the appellant, proves that the calculation was made whimsically, mechanically and surmise.' The statement "Valuation of closing stock has not hampered the revenue under Income Tax Act as because the stock carried forward to next year' generally holds true in the long run for income tax purposes in India, but it's important to understand the nuances. Here's a breakdown of the comments and the underlying principles: 1. Revenue Neutrality in the Long Term:
8 • The Core Idea: The fundamental principle is that closing stock of one year becomes the opening stock of the next year. If you value closing stock higher in Year 1, profit for Year 1 increases. However, this higher closing stock then becomes the higher opening stock for Year 2, which reduces the cost of goods sold (COGS) and consequently reduces the profit for Year 2 (or increases the loss). • Net Effect: Over a period of two years (or more), the impact of a particular valuation of stock tends to neutralize. Any overstatement or understatement in one year's profit is typically offset in the subsequent year. Illustration: o Year 1: Sales - COGS (Opening Stock + Purchases - Closing Stock) = Profit o Year 2: Sales - COGS (Opening Stock + Purchases - Closing Stock) = Profit If Closing Stock in Year 1 is increased, Profit in Year 1 increases. But this increased Closing Stock becomes Opening Stock in Year 2, which increases COGS in Year 2, thus decreasing Profit in Year 2.
2. Impact on Specific Year's Taxable Income: • While the long-term impact on revenue might be neutral, the valuation of closing stock does affect the taxable income of a specific assessment year. • Higher Valuation of Closing Stock: Leads to higher gross profit and thus higher taxable income in that year, potentially resulting in higher tax liability for that year. • Lower Valuation of Closing Stock: Leads to lower gross profit and thus lower taxable income in that year, potentially resulting in lower tax liability for that year.
3. Income Tax Act Provisions: • Section 145A of the Income Tax Act, 1961: This section is crucial. It mandates that for the purpose of valuation of closing stock, all taxes, duties, cesses, and fees (by whatever name called) actually paid or incurred to bring the goods to their present location and condition must be included. This is known as the "inclusive method. • Cost or Net Realizable Value (NRV), whichever is lower: This is the general accounting principle (and often a tax principle as well) for inventory valuation. Its a prudence concept, preventing anticipation of profits. • Consistency: The Income Tax Act generally requires appellant to follow a consistent method of accounting for valuing closing stock. Any change in method must be bona fide and justified.
4. Potential for Litigation and Scrutiny: • Even though the overall revenue impact might be neutral, discrepancies or unreasonable valuations of closing stock can lead to scrutiny and litigation from the tax authorities.
9 • For instance, if an assessee artificially undervalues closing stock in one year to reduce tax, the tax department might challenge it. While the addition made in one year would be deductible in the next, it still involves litigation and potential interest/penalties. In summary, while the statement holds true that in the long run, the valuation of closing stock is revenue neutral due to the carry-forward effect, it significantly impacts the taxable income of individual assessment years. Proper and consistent valuation, adhering to the provisions of the Income Tax Act and relevant accounting standards, is crucial to avoid scrutiny and ensure accurate tax computation for each period. The Assessment Order, which makes an addition of undisclosed income based on an enhancement of closing stock, is fundamentally against of principal of law. The following points highlight the arbitrary and unjustified nature of the assessment:
1.
1. Misinterpretation of Presumptive Stock Discrepancy (Lack of Nexus): The Ld. Assessing Officer (AO) erroneously presumes that a difference in closing stock of Rs. 55,44,892 directly constitutes undisclosed sales. This assumption is made without any investigation into or consideration of standard business practices such as spoilage, necessary stock adjustments (e.g., revaluation, obsolescence), or legitimate variations in valuation methodologies. There is a complete absence of a causal link between the alleged stock discrepancy and any purported undisclosed sales.
2. Violation of Principles of Natural Justice and Section 142(1): Despite some initial delays, the Appellant duly submitted responses on 02-11-2019 and 08-11-2019. The Ld. Assessing Officer (AO)s arbitrary dismissal of these submissions as late,' especially when the assessment proceedings were still open, is unwarranted and constitutes a violation of the principles of natural justice. Ignoring the crucial data and explanations provided by the Appellant undermines the legitimacy and fairness of the entire assessment process.
3. Absence of Evidence Linking Cash Deposits to Undisclosed Sales: Ld. Assessing Officer (AO)s inference that high cash deposits during the demonetization period are intrinsically tied to undisclosed sales is speculative and lacks any corroborative evidence. There is no demonstrated nexus between these cash deposits and any specific undeclared sales transactions. Assumptions without supporting evidence render the addition legally unsustainable.
4. Arbitrary and Unsubstantiated Gross Profit (G.P.) Rate Application: The application of an arbitrary 5% G.P. rate, without any explanation of its basis, is a clear instance of an 10 unsubstantiated addition. The Ld. Assessing Officer (AO)has neither compared this rate with relevant industry benchmarks nor provided historical G.P. data from the Appellants own past records to justify its application. This renders the G.P. estimate arbitrary and devoid of factual backing .
5. Failure to Conduct Independent Verification or Third-Party Confirmation: A fair and thorough assessment necessitates independent verification of alleged undisclosed income. The Ld. Assessing Officer (AO)conspicuously failed to undertake any attempts to verify the claims through third-party sources such as suppliers, customers, or bank records. This lack of due diligence undermines the reliability of the assessment.
6. Conflation of Cash Flow with Revenue (Misunderstanding of Financial Concepts): The Ld. Assessing Officer (AO)has mistakenly equated cash deposits with revenue. Cash inflows during the demonetization period could have legitimate explanations entirely unrelated to undisclosed sales, such as the collection of outstanding receivables, the receipt of legitimate loans, or other non-revenue income. None of these plausible explanations were explored or verified by the Ld. Assessing Officer (AO).
7. Excessive and Sole Reliance on CASS Selection: While the case may have been selected under CASS (Computer Assisted Scrutiny Selection), CASS selection merely initiates scrutiny; it does not, in itself, validate arbitrary additions. The Ld. Assessing Officer (AO) is under an obligation to substantiate any additions with concrete findings and evidence, which has demonstrably not been done in this case.
8. Disregard for Normal Business Fluctuations and Economic Realities: The assessment order completely lacks any analysis of normal business variations. Businesses routinely experience fluctuations in sales, inventory, and cash flow influenced by seasonality, credit terms, market conditions, and other operational factors. The Ld. Assessing Officer (AO)'s failure to consider these inherent business dynamics renders the assessment unrealistic.
9. Failure to Consider Post-Demonetization Business Impact: The Ld. Assessing Officer (AO)'s order displays a complete disregard for the significant and often irregular cash flow patterns experienced by many businesses in the post- demonetization period due to widespread market disruptions. The conclusions drawn are therefore baseless and disconnected from the prevailing economic reality.
10. Unjustified Initiation of Penalty Proceedings (Section 270A): The initiation of penalty proceedings under Section 270A of the Income Tax Act requires clear and unambiguous 11 evidence of misreporting or concealment of income. Given the Ld. Assessing Officer (AO)'s reliance on presumptive discrepancies without any concrete evidence of deliberate misreporting or concealment, the initiation of penalty proceedings is unjustifiable and legally unsustainable.
11. Overlooked Appellant's Past Compliance Record: The Ld. Assessing Officer (AG) failed to consider the Appellants past compliance history. If the Appellant has a consistent record of transparent and timely filings, the sudden assumption of concealment without supporting evidence is unreasonable and runs contrary to established principles of assessment.
Denial of Opportunity for Cross-Examination and Due Process: The Ld. Assessing Officer (AG) did not provide the Appellant with a fair opportunity to explain the alleged discrepancies or to cross-examine any adverse evidence used against them. Denying the Appellant a chance to present their case and defend themselves constitutes a serious breach of the principles of fair play and due process. In conclusion, the assessment order is based on assumptions, a lack of investigation, and a disregard for established legal principles and business realities. The additions made are arbitrary, unjustified, and lack the necessary legal and factual foundation. Here are a few leading cases of the Hon'ble Supreme Court and High Court where it has been held that related to wrong GP rate initiated by the Ld. Assessing Officer on assessment is unjustified, where audited accounts & Ledger is furnished during the course of assessment.
1. Presumptive additions without evidence are unsustainable: c Case Law: CIT v. K.Y. Pilliah & Sons (1967)63 ITR 411 (SC) The • Supreme Court held that mere suspicion cannot form the basis of an addition. Any addition must be supported by concrete evidence, and the absence of such evidence renders the assessment invalid. In this case, the Ld. Assessing Officer presumed unaccounted sales without proving the actual sale or purchase of excess stock, making the addition unsustainable.
CIT v. Sugauli Sugar Works (P) Ltd. (1999) 236 ITR 518 (SC): • Additions cannot be made based on mere suspicion, conjecture, or guesswork. The Ld. Assessing Officer in the current case assumed undisclosed sales based on a stock discrepancy without any concrete evidence. The Supreme Court ruled that such arbitrary additions are impermissible unless supported by tangible evidence.
CIT v. Daulat Ram Rawatmull (1973) 87 ITR 349 (SC): • The burden of proof is on the Revenue to show that the money or assets in question are undisclosed income. Mere 12 possession of cash or assets does not automatically imply undisclosed income. In this case, the Ld. Assessing Officer added cash deposits during demonetization as undisclosed income without establishing the source of the cash or its link to unreported sales. The addition, therefore, lacks the necessary evidentiary basis.
CIT v. Calcutta Discount Co. Ltd. (1973) 91 ITR 8 (SC): • The Ld. Assessing Officer cannot act merely on suspicions and must base assessments on objective facts and evidence. The arbitrary assumption that a difference in stock must equate to undisclosed sales is speculative. Without proper inquiry or verification, such additions are unsustainable under the law.
Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC): • The Supreme Court emphasized that although the Ld. Assessing Officer has wide powers, they must be exercised judiciously and not arbitrarily. Assessments must be based on material evidence. The addition of Rs.56,55,790/- in this case appears to be an arbitrary exercise of power, as it lacks any material basis or proper inquiry into the actual facts.
CIT v. A. Gajapathy Naidu (1964) 53 ITR 114 (SC): • The Supreme Court held that assessments cannot be based on presumptions or assumptions and must be substantiated with clear, cogent evidence. The Ld. Assessing Officer's assumption that the discrepancy in closing stock indicates unreported income is purely presumptive, making the addition legally unsustainable under this ruling.
No Basis for Arbitrary Gross Profit (G.P.) Addition: • Case Law: CIT v. Devi Prasad Vishwanath Prasad (1969) 72 ITR 194 (SC) : The Supreme Court ruled that the burden of proof is on the Revenue to justify additions, especially when adding estimated profits to income. Arbitrary application of a 5% G.P. rate, without any supporting evidence or industry comparison, fails to meet this burden. Case Law: CIT v. Gotan Lime Khanij Udyog (2001) 256 ITR 243 (Raj) : The court held that the AO cannot apply a G.P. rate based on assumptions without considering past records or industry standards. The Ld. Assessing Officer's arbitrary application of 5% in the present case is similarly flawed.
Unexplained Cash Deposits Must Be Linked to Income: • Case Law: CIT v. D.K. Garg (2017) 404 ITR 757 (Delhi HC) The Delhi High Court held that the AO must establish a clear link between cash deposits and undisclosed income. In the absence of such a link, additions based on mere deposits are unsustainable. In this case, the Ld. Assessing Officer has 13 failed to establish that the cash deposits were from unreported sales. • a Case Law: ACIT v. Baldev Raj Charla (2008) 304 ITR 105 (Del) The court emphasized that cash deposits alone cannot be treated as income unless corroborated by evidence showing they were generated from undisclosed sales. The Ld. Assessing Officer's reliance on cash deposits during demonetization without linking them to actual sales is baseless.
Non-Consideration of Submissions Violates Natural Justice: • Case Law: Pr. CIT v. Samtel India Ltd. (2019) 416 ITR 565 (Del) The court ruled that passing an order without considering the Appellant's submissions violates the principles of natural justice. Despite the Appellant's delayed submissions, the Ld. Assessing Officer's disregard for the evidence submitted renders the order procedurally flawed. • Case Law: R.W. Promotions (P) Ltd. v. CIT (2018) 407 ITR 553 (Born) : It was held that ignoring relevant explanations or evidence provided by the Appellant without justification violates the principles of fair play and equity.
Penalty Proceedings Cannot Be Initiated on Mere Presumption: a Case Law: CIT v. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 158 (SC) : The Supreme Court held that a mere disallowance of a claim or addition to income does not automatically imply concealment or misreporting of income. The Ld. Assessing Officer's initiation of penalty proceedings under Section 270A without clear evidence of intent to evade tax is legally unsustainable. • Case Law: CIT v. Nath Bros. Exirn International Ltd. (2007) 288 ITR 670 (Del): The Delhi High Court ruled that penalties cannot be imposed based on estimated additions or assumptions. Since the additions here are based on presumptive discrepancies, the penalty initiation is unjustified.
Stock Discrepancy Requires Independent Verification: Case Law: CIT v. Anandha Metal Corporation (2005) 273 ITR 262 (Mad): The court held that discrepancies in stock must be verified independently, and arbitrary additions based on stock differences are invalid without proper verification. The Ld. Assessing Officer's failure to reconcile stock differences with independent data weakens the assessment order.
12. CIT vs. Bilahari Investments (P) Ltd. (2018) 404 ITR I (SC): In this case, the Ld. Assessing Officer estimated the GP rate at 12.5% without considering the audited accounts of the Appellant.
14 The Supreme Court held that the Ld. Assessing Officer's estimation was arbitrary and without any basis. The court directed the Ld. Assessing Officer to re-compute the GP rate based on the audited accounts.
CIT vs. Shree Rama Multi-Tech Ltd. (2019) 412 ITR I (SC): In this case, the Ld. Assessing Officer estimated the GP rate at 15% without considering the industry benchmarks and the past records of the Appellant. The Supreme Court held that the Ld. Assessing Officer's estimation was unjustified and directed the Ld. Assessing Officer to re-compute the GP rate based on the industry benchmarks and past records.
CIT vs. M/s. Mahalaxmi Cotton Ginning Pressing and Oil Industries (2020) 423 ITR I (SC): In this case, the Ld. Assessing Officer estimated the GP rate at 12% without considering the audited accounts and the industry benchmarks. The Supreme Court held that the Ld. Assessing Officer's estimation was arbitrary and without any basis. The court directed the Ld. Assessing Officer to re-compute the GP rate based on the audited accounts and industry benchmarks. Based on the provided Supreme Court and High Court pronouncements, if the appellant has furnished audited accounts and ledgers during the course of assessment, and the Ld. Assessing Officer has made an addition of Rs. 56,55,790/- to the total income based on an estimated or wrong GP rate due to presumed undisclosed sales from undisclosed stock, such an addition is likely unjustified and unsustainable for the following reasons:
1. 1. Disregard for Audited Accounts: Multiple judgments (e.g., Bi/ahari Investments, Shree Rama Multi-Tech, Mahalaxmi Cotton Ginning Pressing and Oil Industries) explicitly state that the Ld. Assessing Officer cannot arbitrarily estimate GP rates without considering audited accounts.
2. Lack of Concrete Evidence: The addition appears to be based on presumed unaccounted sales and "stock discrepancy without proving actual sates or concrete evidence, which directly contradicts rulings in K. Y. Pilliah & Sons, Sugauli Sugar Works, Daulat Ram Rawatmull, and Calcutta Discount Co. Ltd.
3. Arbitrary Application: The arbitrary application of a GP rate without supporting evidence, industry comparison, or consideration of past records fails the burden of proof on the Revenue, as highlighted in Devi Prasad Vishwanath Prasad and Gotan Lime Khany Udyog.
4. Failure to Link Discrepancy to Income: The Ld. Assessing Officer has failed to establish a clear link between the alleged stock discrepancy and actual undisclosed sales or income, as emphasized in D.K. Garg and Baldev Raj Charla.
15 5. Violation of Natural Justice: If the appellants submissions, including audited accounts and ledgers, were disregarded, the assessment order is procedurally flawed (Samtel India Ltd., R. W. Promotions (P) Ltd.). Therefore, based on the principles established in these landmark cases, the addition of Rs. 56,55,790/- as undisclosed income due to undisclosed sates from undisclosed stock, when audited accounts and ledgers were furnished, would likely be challenged successfully and should be deleted from the total income. Grounds for Appeal Against Disallowance of Tea, Tiffin, etc. Expenses: The disallowance of Rs. 3,27,984/- under the head "Tea, Tiffin etc." by the Ld. Assessing Officer (AO) for the Assessment Year 2017-18 is arbitrary, inconsistent with logical reasoning. and legally unsustainable. The assessment order appears to be based on assumptions rather than substantive evidence, violating established principles of natural justice and the Income-tax Act, 1961.
Factual Background and Nature of Expenses The Appellant, a super stockist for reputed companies like AMUL, Nestle India Ltd., and Johnson & Johnson, operates on a large scale. Such extensive business operations inherently necessitate constant engagement with internal staff, including clerical staff, sales personnel, and distributors. Providing tea and tiffin to these individuals is a customary, essential, and indispensable practice in the course of business to maintain productivity, morale, and facilitate day-to-day operations. It is crucial to distinguish "Tea & Tiffin expenses from "Entertainment Expenses.' While entertainment expenses are typically incurred for external clients and distributors, tea and tiffin expenses are incurred for the Appellant's internal staff, serving a distinct and vital purpose for the smooth functioning of the business.
2. Compliance with Statutory Provisions 2.1. Compliance with Section 44AB of the Income-tax Act, 1961 The Appellant's accounts were duly audited under Section 44AB of the Income-tax Act, 1961, and the audit report was submitted. This audit, conducted by independent auditors, inherently involves verification of financial records, including expenses like Tea & Tiffin, thereby ensuring their accuracy and authenticity. The Ld. AO's disallowance, despite a clean audit report, raises serious concerns about the reliance placed on the audited financials. 2.2. Allowability of Business Expenses under Section 37(1) of the Income Tax Act, 1961: Section 37(1) of the Income-tax Act, 1961, clearly allows any expenditure (other than those mentioned in 16 Sections 30 to 36) wholly and exclusively incurred for the purposes of the business. The Tea & Tiffin expenses are directly and intrinsically related to the Appellant's business operations. These are not personal expenses but are incurred to facilitate the efficient conduct of the business, making them fully deductible under Section 37(1) of the Income Tax Act, 1961.
3. Violation of Principles of Natural Justice The Ld. Assessing Officers disallowance of the expense without issuing a draft assessment order or providing a fair and adequate opportunity to explain the necessity and nature of such expenses constitutes a grave violation of the principles of natural justice. The right to be heard is a fundamental tenet of any quasi-judicial proceeding. As emphasized in CIT v. S. Chenniappa Mudaliar (1969 AIR 1068), a proper opportunity to present ones case is paramount. The Ld. Assessing Officers action, in this regard, renders the disallowance procedurally flawed and legally unsustainable.
4. Insufficiency of Evidence and Arbitrary Disallowance The Appellant provided the ledger account for Tea & Tiffin expenses. The Ld. Assessing Officer's vague allegation of insufficiency of evidence, despite the submission of audited accounts and specific ledger details, is unsubstantiated and does not justify the disallowance. The burden to prove that an expense is not genuine or not for business purposes lies with the revenue, especially when accounts are audited and supported by ledgers.
5. Reliance on Established Case Law The following judgments from the Honbie Supreme Court further substantiate the Appellant's claim: • CIT v. Waichand and Co. Pvt. Ltd. (1967) 65 ITR 381 (SC): This landmark judgment establishes that the reasonableness of an expense should be judged from the perspective of the businessman and not the Revenue. The Ld. Assessing Officer cannot substitute his commercial wisdom for that of the assessee when legitimate business expenditures are incurred. The expenditure on tea and tiffin, from a business perspective, is clearly reasonable and customary. • S.A. Builders Ltd. v. CIT (2007) 288 ITR I (SC): The Hon'ble Supreme Court emphasized that expenditure incurred for business purposes should not be disallowed merely because the Ld. Assessing Officer believes it is excessive or unnecessary, unless clear evidence is provided to the contrary. The Ld. Assessing Officer. in this case, has failed to provide any such clear evidence. • CIT v. Dhanrajgiri Raja Narasingirji (1973) 91 ITR 544 (SC): This judgment affirms that expenses necessary for business, even if 17 incidental or ancillary, should be allowed under Section 37(1) of the Income Tax Act, 1961. Tea & Tiffin expenses, being integral to the smooth running of business operations, fall squarely within this principle. • CIT v. Sales Magnesite (P) Ltd. (1995) 214 ITR I (SC): The Supreme Court held that expenses incidental to business activities, even if not directly productive, qualify as allowable deductions if incurred in the course of business. Providing refreshments to staff is an incidental activity that contributes to a conducive working environment, thereby supporting business operations. Conclusion and Prayer In light of the foregoing, the disallowance of Rs. 3,27,984/- towards Tea & Tiffin expenses is arbitrary, factually incorrect, and legally unsustainable. The expense is a necessary and customary business expenditure, fully allowable under Section 37(1) of the Income-tax Act, 1961. Furthermore, the Ld. Assessing Officer's failure to provide a fair opportunity to explain the necessity of the expense constitutes a clear violation of principles of natural justice. Therefore, it is respectfully submitted that the disallowance be deleted, and the addition of Rs. 3,27,984/- be deleted from the total income of the Appellant for the Assessment Year 201718. The assessment order, being riddled with speculative assumptions, arbitrary calculations. and procedural lapses, lacks any solid foundation in fact or law and thus warrants annulment of this particular disallowance. The Appellant draws your kind attention that the Adjudicating Authority has mislead and it has in against of natural justice under our judicial system of union of India as it has proved that every taxpayer under union of India Ave a fundamental right to express the view of their facts of income before the revenue authority according to PART Ill FUNDAMENTAL RIGHT of THE CONSTITUTION OF INDIA under the Article 19. It has also protected in respect of conviction for offences, if any person has been given any wrong descriptions or misrepresentation before the commission of executing authority of the Act as per Article 20 of THE CONSTITUTION OF INDIA. The duty of the commission of executing authority of the Act shall right to guide for protection the liberty of liability before the authority of Act as per Article 21 of THE CONSTITUTION OF INDIA read with Article 265 of THE CONSTITUTION OF INDIA mandates that no tax shall be levied or- collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law: Extract of Article 265 of Constitution of India "265. Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law "