ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-2(1)(1), AHMEDABAD, AHMEDABAD vs. H V INFRATEX LTD, AHMEDABAD

The assessee preferred an appeal before CIT(A) challenging the ad-hoc disallowance. The assessee submitted additional evidence under Rule 46A of Income Tax Rules, 1962, justifying its expenses with ledgers, invoices, and supporting documents. The CIT(A) forwarded the additional evidence to the AO for verification and called for a remand report under Section 250(4) of the Act. The AO objected to admitting additional evidence, arguing that the assessee had sufficient opportunities during assessment. However, CIT(A) exercised powers under Section 250(4) of the Act and directed the AO to examine the documents on 24.02.2020. A remand report was submitted by the AO on 19.07.2023 (after 3 years), verifying the genuineness of most expenses.

The AO’s remand report accepted certain expenses such as Bank charges, interest, labor expenses, depreciation, and certain direct expenses. The Asstt. CIT vs. H.V. Infratex Ltd. Asst. Year : 2016-17 No specific discrepancies were pointed out in these expenses by the AO. However, the AO raised concerns about expenses paid in cash, and certain expenses related to rent, salary, insurance, repairs, and transportation. The CIT(A) observed that the AO did not reject the books of accounts, nor did he point out any bogus or non-genuine expenses. The assessee’s accounts were audited under the Companies Act and the Income Tax Act, and no adverse remarks were given in the tax audit report. The CIT(A) relied on judicial precedents, emphasizing that an ad-hoc disallowance without specific defects is not sustainable in law. The CIT(A) found that in the absence of evidence to prove that expenses were not incurred for business purposes, disallowance under Section 37 of the Act was unwarranted. The CIT(A) ruled that additional evidence was rightly admitted under Section 250(4) of the Act and not Rule 46A of I.T. Rules as the AO was given an opportunity to verify it. Since the AO failed to pinpoint specific unverifiable expenses, the ad-hoc disallowance of 25% was arbitrary and unjustified. The CIT(A) deleted the disallowance in full and allowed relief to the assessee.

Aggrieved by the order of CIT(A), the revenue is in appeal before us with following grounds of appeal:

During the course of hearing before us, the Authorized Representative (AR) of the assessee stated that the Revenue’s reference to "Section 46A of the IT Act" is incorrect, as no such section exists in the Act. The AR referred the correct provision is Rule 46A of the Income Tax Rules, 1962, which deals with the admission of additional evidence by CIT(A). The AR further stated that the CIT(A) has not admitted additional evidence under Rule 46A of I.T. Rules, but exercised powers under Section 250(4) of the Act, which allows the appellate authority to call for further inquiry. The AR also stated that The AO was given a full opportunity to verify the additional evidence, and the remand report dated 19.07.2023 confirmed that the expenses were properly examined. The AR placed reliance on the decision of Delhi Bench in the case of ACIT vs. Anu Bajaj (ITA No. 1943/DEL/2023, dated 19.01.2024), where it was held that once relief is granted based on AO’s remand report, the Revenue cannot challenge it further.

The Departmental Representative (DR) relied on the order of AO.

We have carefully considered the rival submissions, the assessment order, the order of the CIT(A), and the material placed on record. The contended, by way of raising first ground, that the CIT(A) admitted additional evidence in violation of Rule 46A of I.T. Rules, arguing that the assessee was given sufficient opportunities during the assessment proceedings but failed to submit the necessary documents. However, from the perusal of the CIT(A)’s order, we find that: i. The CIT(A) exercised powers under Section 250(4) of the Act, which allows the appellate authority to call for further inquiry before disposing of an appeal. ii. The additional evidence was not admitted directly by CIT(A) but was forwarded to the AO for verification through a remand report. iii. The AO examined the additional evidence and submitted his findings, confirming the genuineness of most expenses by way of a remand report dated 19.07-2023. iv. Since the AO had full opportunity to verify the documents, the admission of additional evidence does not violate Rule 46A. The Asstt. CIT vs. H.V. Infratex Ltd. Asst. Year : 2016-17 6 8.1. Therefore, we find no merit in the Revenue’s contention that Rule 46A was violated. The CIT(A) followed the correct legal procedure, and accordingly, Ground No. 1 of the Revenue’s appeal is rejected.

The AO had disallowed 25% of total other expenses of Rs.23,70,14,534/- on an ad-hoc basis, citing the assessee’s failure to produce complete supporting documents during the assessment proceedings. However, the following key points emerge from the record: i. The AO did not reject the books of accounts under Section 145(3). ii. The tax audit report did not highlight any discrepancies in the assessee’s expense claims. iii. The AO’s remand report, submitted during appellate proceedings, did not identify specific defects in the expenses. The AO accepted several expenses as genuine during the remand proceedings. iv. No bogus or non-genuine expenditure was identified by the AO. v. The same nature of expenses was allowed in previous and subsequent years, indicating consistency.

The DR has merely relied on the assessment order of the AO without providing any new arguments to support the disallowance. Since the AO’s own remand report does not justify the ad-hoc addition, we find that the CIT(A) rightly deleted the disallowance.

Accordingly, we find no infirmity in the order of the CIT(A) in deleting the addition of Rs.5,92,53,633/-, and Ground No. 2 of the Revenue’s appeal is also rejected.