PRAFULLA SHANTILAL KOTHARI ,PUNE vs. ACIT, CIRCLE 7, PUNE

Rs 19,11,790/- being disallowance of 30% of total salary expenses ii) Rs 1,36,814/- being disallowance of 50% total advertisement expense iii) Rs 1,31,879/- being disallowance of 30% of total vehicle expenses iv) Rs 95,224/- being disallowance of 30% of total travel expenses The assessee is an HUF and is carrying on proprietorship business of online trading in lottery tickets under the name and style J.K. Lottery. During the year under consideration, the assessee has shown profits and gains from business and profession and income from other sources. The assessee is an HUF and filed its e-return of income for AY 2017-18 on 24/10/2017, declaring the total income as Rs 51,25,350/-. The case was selected for scrutiny under CASS under the 'Complete scrutiny criteria. During the year under consideration, the assessee has shown profits and gains from business and profession and income from other sources. Statutory notices were issued to the assessee and the assessee has obliged to the said notices and furnished its replies through e-filing portal. 6.1.1 During the course of assessment proceedings, AO observed that the assessee had debited an amount of Rs 63,72,633/- on account of salary paid by it. The assessee was asked to provide the details of the persons to whom salary was paid and to prove the identity of the said persons. On perusal of the response that was provided by the assessee, it was seen that the assessee had merely provided certain random names and some salary paid to such individuals, without deduction of any TDS. Thus, the assessee had in no way provided any proof whatsoever to establish the identity of persons claimed by the assessee to be in its payroll. Hence, vide showcause notice dated 18/07/2019, the assessee was asked to produce the supporting evidences. In response, assesee submitted that there was a high employee turnover during the year and hence identity proof of each employee is not possible to be ascertained as of now and salary payments are made in cash as it was demanded by the employees and hence the salary expenses should not be disallowed. The assessee has not furnished any details with regard to the individuals to whom salary is paid. Without any documentary proof, the claim made by the assessee does not hold ground. In view of the same, AO disallowed 30% of the expenses claimed by the assessee as salary expenditure, amounting to Rs 19,11,790/- and added back to the total income of the assessee. 6.1.2 During the course of assessment proceedings, AO observed that the assessee had claimed an amount of Rs 2,73,627/- as advertisement expenditures. Vide notice under section 142(1) dated 28/01/2019, the assessee was specifically requested to provide the various details with regard to the advertisement expenditures. However, the assessee failed to provide the details that were asked for. Hence, vide showcause notice dated 18/07/2019, the assessee was asked to explain why disallowance should not be made with regard to these expenses claimed. In response, assesee submitted that the expenses booked as advertisement expenses are in the nature of purchase of stickers, printing of broachers, developing and designing of cards, etc. Such purchases are made from the small vendors and they do not have computerized system of billing and hence they have provided the kacha bills for the same. As assessee has not furnished the details of persons to whom the payment has been made. The assessee has merely claimed certain expenses to be advertisement expenses in nature. A few bills that have been provided by the assessee are also kacha bills and not pakka bills and mostly self-attested cash vouchers only. In this case, the assessee has not discharged the onus that was placed on it as per law and has not been able to provide any of the details which were specifically asked to it. In view of the same, AO disallowed 50% of the expenses claimed by the assessee as advertisement expenses, amounting to Rs 1,36,814/- and added back to the total income of the assessee. 6.1.3 Further, AO observed that the assessee had claimed an amount of Rs 4,39,595/- as vehicles expenditure. Notice under section 142(1) was issued to the assessee, requesting the assessee to provide the documentary proof for these expenses. In reply to the notice issued, the assessee furnished its reply in ITBA. On perusal of the submission provided by the assessee, it was seen that some of the bills provided by the assessee were not in its name. Some of the bills though were in the name of the assessee, the assessee has not been able to provide details of the log book maintained by it to prove that the said vehicles were in fact used for the purpose of business. Hence, vide showcause notice dated 18/07/2019, the assessee was asked to explain why disallowance should not be made with regard to these expenses claimed. The assessee in its reply to the showcause notice has merely claimed that all the vehicles are used for the purpose of business. Since the assessee has not been able to prove that the entire vehicle expenses incurred is exclusively for the purposes of business, AO disallowed the 30% of the expenses claimed by the assessee as incurred for vehicle expenses, amounting to Rs 1,31,879/- and added back to the total income of the assessee. 6.1.4 Further, AO observed that the assessee had claimed an amount of Rs 3,17,412/- as travel expenditure. Notice under section 142(1) was issued to the assessee, requesting the assessee to provide the documentary proof for these expenses. In reply to the notice issued, the assessee furnished its reply in ITBA. On perusal of the submission provided by the assessee, it has observed that the assessee provided bills from certain tours and travels and the bills were raised in the name of the assessee. However, the purpose for which the said travel were undertaken and how the same was related to the business of the assessee was nowhere mentioned by the assessee in its reply. Hence, vide showcause notice dated 18/07/2019, the assessee was asked to explain why disallowance should not be made with regard to these expenses claimed. The assessee in its reply claimed that the expenses incurred in the name of travel is with regard to a scheme for promotion of business wherein the employees would be sponsored with a trip for achieving set targets. However, it is to be noted in this case that the assessee has not provided any details with regard to the identity of the employees. The assessee has not provided any detail as to who are the employees for whom these expenses were incurred. Since the assessee has not been able to prove that the entire travel expenses incurred is exclusively for the purposes of business, AO disallowed 30% of the expenses claimed by the assessee as incurred for travel expenses amounting to Rs 95,224/- and added back to the total income of the assessee. 6.2 During the appeal proceedings, the appellant has challenged the adhoc disallowances. The appellant stated that the books of accounts of the appellant are audited u/s 44AB of the Act and the account books, bills and vouchers were properly maintained in which nothing wrong was found and the books of accounts have not been rejected. The appellant has maintained proper books of accounts as required by law. The learned A.O. has not pointed out any defect in the books of accounts nor the A.O. brought any material to show that provisions of section 145(1) of the Act were applicable and in such situation the A.O. could not resort to any estimate but to complete the assessment after computing the income in accordance with the books of accounts. When the learned A.O. has not raised any objection on the accuracy of the books of accounts addition on mere basis of assumptions and surmises and in absence of any corroborating evidences without considering the submissions made by the appellant is not justified in law and against the principle of natural justice. Further, alternatively, appellant submitted that disallowances made by AO on salary, vehicle expenses, travelling and advertisement were on the higher side and requested to restrict 10% of total expenditure on each of the heads. 6.3 I have carefully gone through the assessment order, submissions made by the appellant. It is seen from the assessment order that the appellant has not produced the documentary evidences with regard to expenditure as required during the scrutiny proceedings. Hence, AO has made adhoc disallowances. However, the AO has made this disallowance based on certain observation without pointing out any specific defect in books of accounts. In view of the above, considering facts and circumstances of the case, it is observed that disallowances made by AO on salary, vehicle expenses, travelling and advertisement were on the higher side. Hence, AO is directed to restrict the disallowances 15% of total expenditure on salary, vehicle expenses, travelling and advertisement expenses. Accordingly, the appeal is partly allowed.

The appellant respectfully submits the following grounds of appeal, which are taken without prejudice to one another:

1. The Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] erred in upholding the assessment order passed by the Learned Assessing Officer (Ld. AO) under section 143(3) of the Income-tax Act, 1961. The said order is bad in law, invalid, and liable to be quashed, as it has been passed: i. Without providing a proper and adequate opportunity of being heard; ii. In violation of the principles of natural justice; and iii. Without rejecting the books of accounts, which is a necessary precondition for making an ad hoc disallowance.

2. The Ld. CIT(A) erred both on facts and in law in arbitrarily upholding a 15% disallowance of expenses, without identifying any specific expenditure that was inadmissible and without addressing the specific objections raised by the appellant against the observations of the Ld. AO.

3. The Ld. CIT(A) erred in not considering the appellant's request to restrict the disallowance to 10% of the total expenditure under each head, despite the fact that the disallowance made was excessive and on the higher side.

4. The Ld. CIT(A) was not justified in restricting the disallowance to 15% of the total expenditure when no cogent basis or supporting material was provided by the Ld. AO to justify such an estimation.

5. The Ld. CIT(A) erred in upholding the 15% disallowance on expenses such as salary, vehicle expenses, travelling, and advertisement expenses without independently addressing the rationale for such disallowance. Instead, the Ld. CIT(A) merely confirmed the findings of the Ld. AO without proper examination of facts and legal principles applicable. 6. The appellant craves leave to add, alter, amend, or delete any of the above grounds of appeal

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6. The Ld. Counsel for the assessee submitted that the Assessing Officer has not rejected the books of accounts but has gone for ad-hoc disallowance which is very high. He submitted that although Ld. CIT(A) has given partial relief even then also the same is very high. Referring to the copy of financial statements for financial years 2013-14 to 2015-16, which are placed at page nos.38 to 43 of the paper book, he submitted that a comparison of these financial statements with that of current year would show that the expenses claimed during the year are commensurate with the volume of business. He accordingly submitted that the entire disallowance should be deleted. In his alternate plea, he submitted that some further relief should be granted to the assessee out of such ad-hoc disallowance.

7. Ld. DR, on the other hand, heavily relied on the order of the Ld. CIT(A). He submitted that Ld. CIT(A) has already granted substantial relief to the assessee and the Revenue is not in appeal, Ld. CIT(A) should be upheld under the facts and circumstances of the case since the assessee could not substantiate with evidence to the satisfaction of the Assessing Officer regarding incurring of these expenses.