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Facts
The assessee, a company in its pre-revenue stage, filed a NIL return for AY 2022-23. The Assessing Officer (AO) disallowed expenses totaling Rs. 54.94 lakhs by arbitrarily allowing only 20% in excess of the previous year's expenses, without providing a valid basis or pointing out any infirmity in the assessee's submissions. The CIT(A) upheld this disallowance.
Held
The Tribunal found the AO's methodology for disallowing expenses to be arbitrary and lacking a cogent basis, especially when the assessee was in a pre-revenue stage. The Tribunal set aside the matter back to the AO for re-adjudication, directing the AO to provide a reasonable opportunity and consider all documentary evidence as per the mandate of law.
Key Issues
Whether the Assessing Officer's arbitrary disallowance of expenses by applying a 20% addition based on the previous year's expenses was justified, particularly when the assessee was in a pre-revenue stage and had submitted supporting documents.
Sections Cited
143(3), 143(2), 37
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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
करदाता का "ितिनिध"/ : Ms. CA Mrudulatha, Assessee Represented by राज" का "ितिनिध"/ : Dr. Sachin Kumar, Sr.AR Department Represented by सुनवाई समा" होने की ितिथ/ : 13.03.2025 Date of Conclusion of Hearing घोषणा की तारीख/ : 19.03.2025 Date of Pronouncement O R D E R "ित रवीश सूद, जे.एम./PER RAVISH SOOD, J.M.
The present appeal filed by the assessee company is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, dated 27/05/2024, which in turn arises from the order passed by the A.O under Section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) dated 04/03/2024 for the assessment year 2022-23. 2. The assessee company has assailed the impugned order on the following grounds of appeal before us:
“1. The order of the Additional / Joint / Deputy / Assistant Commissioner of Income Tax / Income Tax officer, National e-assessment Centre (Learned Assessing Officer) and the Learned. CIT(A) is totally contrary to the facts and evidence on record and therefore unsustainable both on facts and in law.
The Learned CIT(A) and the learned Assessing Officer erred in not considering the submission made by the appellant and thereby disallowing expenses to the extent of Rs. 54,94,166/-.
3. The Learned CIT(A) and the Learned Assessing Officer erred in disallowing the expenses by stating that sufficient submission was not made which is not the correct fact as the appellant had submitted the information called for.
4. The Learned CIT(A) and the Learned Assessing Officer failed to consider the facts that the appellant is in a pre-revenue stage and is incurring expenses in building the technology.
5. The Learned CIT(A) and the Learned Assessing Officer erred in arbitrarily considering an increment of 20% in expenses without providing any valid basis for this arriving at such percentage.
The Learned CIT(A) and the Learned Assessing Officer failed to bring out any cogent reasons for the relevant assessment year in disavowing the expenditure despite the appellant submitting all the supporting documents for the same.
7. The Learned CIT(A) and the Learned Assessing Officer erred in considering the previous years’ expenditure of the appellant as the basis to disallow expenditure for A.Y 2022- 23 when the appellant had submitted the necessary evidences for the relevant A.Y.
8. The Learned. Assessing Officer failed to clearly bring out the reasons for scrutiny whether it was complete or limited, and in doing so has gone beyond the purview of the reasons stated in the order thereby invalidating the entire assessment proceedings.
Any other ground(s) that may be urged at the time of hearing.”
Succinctly stated, the assessee-company had e-filed its return of income for the A.Y 2022-23 on 19/10/2022 declaring its total income at NIL. Subsequently, the case of the assessee-company was selected for scrutiny assessment under Section 143(2) of the Act.
During the course of the assessment proceedings, the A.O observed, that the assessee-company during the year under consideration as well as in the preceding and succeeding years, had based on high-pitched expenses disclosed substantial losses. The A.O. vide his letter dated 23/01/2024, called upon the assessee-company to furnish complete details of the expenses in excess of Rs. 50,000/- alongwith supporting documentary evidence. In compliance, the assessee-company filed with the A.O. the details of expenses in excess of Rs. 50,000/- incurred during the subject year alongwith the copies of supporting bills/vouchers. Thereafter, the A.O. vide his notice dated 13/02/2024, inter alia, observed that the assessee-company had debited certain expenses as regards which variation was proposed. In reply, the assessee-company vide its letter dated 20/02/2024, submitted that it had already with its earlier reply dated 27/01/2024 placed on record the ledger wise details of expenses incurred in excess of Rs. 50,000/- alongwith copies of supporting bills. The assessee- company also enclosed the ledger statement of the major expenses for the subject year grouped under the head “office/administration expenses”.
The A.O. after analyzing the reply filed by the assessee-company, observed that the latter had debited huge expenses in its “Profit & Loss Account” for the subject year. Also, it was observed by him that the assessee-company since its incorporation i.e., on 02/04/2019, had consistently till the year succeeding the subject year disclosed its gross receipts/revenue from operations at Rs. NIL. Accordingly, the A.O taking cognizance of the fact that the expenses debited by the assessee- company during the subject year were substantially highly pitched as against those for the immediately preceding year i.e., A.Y 2021-22, thus allowed its claim for deduction of the said respective expenses only to the extent of 20% in excess of that it had booked in the immediately preceding year i.e., A.Y 2021-22. Accordingly, the A.O., based on his aforesaid observations declined the assessee’s claim for deduction of expenses to the tune of Rs. 54,94,166/-. For the sake of clarity, the observations of the A.O based on which he had worked out the disallowance at Rs. 54.94 lakhs (approx.) are culled out as under:
“During the course of the assessment proceedings, on verification of the Profit & Loss Account and ITR, assessee has debited following huge expenses. Further, on verification of gross receipts / Revenue from operation of FY 2020-21 is NIL and in FY 2021-22 also Rs. NIL.
Expenses Amount Amount 20% Actual Addition (Rs.) (Rs.) addition of expenses in amount expenses A.Y 2022- (Rs.) in amount of 23 Amount A.Y 2022- A.Y 2021- (Rs.) (3+4 23 (2-5) 22 (Rs.) 1 2 3 4 5 6 Salary and 50,26,319 23,93,444 4,78,688 28,93,444 21,32,875 Wages Advertisement 25,38.877 6,07,748 1,21,549 7,29,297 18,09,580 Office 7,91,092 2,63,982 52,796 3,16,778 4,74,314 Maintenance Travelling 7,49,422 54,741 10,948 65,689 6,83,733 Expenses Professional / 9,03,426 4,16,469 93,293 5,09,762 3,93,664 Consultancy Fees / to other Total: 54,94,166
6. Aggrieved, the assessee company carried the matter in appeal before the CIT(A). As the CIT(A) did not find any infirmity in the disallowance of expenses carried out by the A.O., therefore, he upheld the same and dismissed the appeal.
The assessee-company, being aggrieved by the order of the CIT(A), has carried the matter in appeal before us.
We have heard the learned Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record.
9. Ms. Mrudulatha, the Learned Authorized Representative (in short, “ld.AR”) for the asssessee company, at the threshold of hearing, submitted that the A.O had most arbitrarily disallowed the assessee’s claim for deduction of expenses. Elaborating on her contention, the ld. AR submitted that the assessee-company in compliance to the letter dated 23/01/2024 of the A.O., wherein it was called upon to furnish the complete details of expenses in excess of Rs. 50,000/-, had filed with him the requisite details reply alongwith supporting documentary evidence, Pages 11, 12 to 73. The Ld. A.R submitted that the A.O. had thereafter neither pointed out any infirmity in the claim of expenses as was raised by the assessee-company nor directed it to furnish any further details to support the same. Carrying her contention further, the ld. AR submitted that the A.O. while drawing adverse inferences as regards the assessee’s claim of expenses, had lost sight of the material fact that the latter was in the pre-revenue stage and was incurring expenses in building the technology. The ld. AR further submitted that the method adopted by the A.O. for part-disallowing the assessee’s claim of expenses incurred in the normal course of its business, i.e., allowing the same only to the extent of 20% in excess of that it had booked in the immediately preceding year i.e. A.Y 2021-22, therein smacked of arbitrariness and was devoid and bereft of any logical reasoning.
Per contra, the Learned Departmental Representative (in short “Ld. DR”) relied on the orders of the lower authorities.
We have heard the learned Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record.
Controversy involved in the present appeal lies in a narrow compass, i.e. sustainability of the disallowance by the A.O. of the assessee’s claim for deduction of expenses for the subject year which thereafter had been approved by the CIT(A).
Admittedly, it is a matter of fact discernible from the record that the A.O vide his letter dated 23/01/2024, Page 11 of the APB, had called upon the assessee-company to furnish the complete details of expenses that it had incurred during the subject year in excess of Rs. 50,000/-. As observed by us herein above, the assessee-company had, vide its reply, furnished the complete details of the expenses in excess of Rs. 50,000/- alongwith copies of supporting bills/vouchers, Pages 12 to 73 of the APB. Also, we find that the A.O had thereafter vide his “Show-cause” notice (in short, “SCN”) dated 13/02/2024, observing that the assesee’s claim for expenses debited in the “Profit & loss Account” were found to be substantial, inter aila, proposed a variation of the same. In reply, the assessee-company vide its letter dated 20/02/2024, had submitted that it had already furnished the requisite details vide its reply dated 27/01/2024. Apart from that, the assessee- company had enclosed the ledger statements of the major expenses for the subject year grouped under the head “Office/administration expenses”.
We have thoughtfully considered the methodology adopted by the A.O. for disallowing the assessee’s claim of expenses to the tune of Rs. 54.94 lacs (supra). We are unable to persuade ourselves to concur with the manner the A.O. had worked out the part disallowance of the expenses in the hands of the assessee-company. Although the A.O had adopted the assessee’s claim for expenses for the immediately preceding year i.e., A.Y 2021-22 as a yardstick, but had without giving any cogent basis nor pointing out any infirmity in its book results for the subject year circumscribed its claim of expenses to the extent of 20% in excess of what it had booked in the immediately preceding year i.e. A.Y 2021-22. We are unable to fathom that as to how the claim for deduction of expenses by the assessee-company could have been circumscribed and consequentially disallowed based on the aforesaid methodology so adopted by the A.O. As there is nothing discernible from the orders of the lower authorities which would reveal that the assessee’s claim for deduction of expenses was not as per the mandate of section 37 of the Act, we are afraid that the same cannot be subscribed on our part.
At the same time, holding a firm conviction that the issue as regards the allowability of the assessee’s claim of expenses requires to be looked into and verified by the A.O., we, thus, set-aside the matter to his file with a direction to re-adjudicate the same as per the mandate of law. Needless to say, the A.O. shall, in the course of the set-aside proceedings, afford a reasonable opportunity of being heard to the assessee-company which shall remain at liberty to substantiate its claim for deduction of expenses based on fresh documentary evidence, if any.
Resultantly, the appeal filed by the assessee-company is allowed for statistical purposes in terms of our aforesaid observations.