M/S KANAK VRINDAVAN RESORTS LIMITED,JAIPUR vs. INCOME TAX OFFICER, WARD 6(2), JAIPUR

1.1. That, ld. CIT(A) further erred in confirming the action of ld. AO by relying upon unrealistic details. Thus the action of ld. CIT(A) in confirming the disallowance made by ld. AO solely on account of non-furnishing of certain details, is against the law and therefore expenditure so claimed by the assessee company should be allowed.

1.2 That the action of ld. CIT(A) as well as ld. AO in disallowing the expenditure by solely relying on the inaccurate inspector’s report and without refuting the evidence furnished by the assessee company is against the law and clearly shows the preconceived notion to make the disallowances in the hands of assessee company.

2. That the appellant craves the right to add, delete, amend or abandon any of the grounds of appeal either before or at the time of hearing of appeal.

2.1 In this appeal, the assessee has raised following additional grounds being legal in nature relying on the decision of the Apex Court in the case of NTPC Limited 229 ITR 383: -

1. On the facts and circumstances of the case and in law, the ld. CIT(A) grossly erred in confirming the action of ld. AO in making disallowance of M/s Kanak Varindavan Resorts Ltd. vs. ITO expenses claimed by the appellant u/s 37 of the Income Tax Act, 1961, without pointing out any defect in the books of account regularly maintained by the appellant and duly audited, and without rejecting such books of account as required under section 145 of the Act. Thus the disallowance so made by ld. AO and thereafter sustained by ld. CIT(A) is contrary to settled principles of law, and order so passed deserved to be quashed and subsequent disallowance so made deserves to be allowed.

While going through the information / details submitted by the assessee ld. AO noted that the assessee has debited the following expenses to the profit and loss account which are not fully allowable and thereby he observed as under :

(i) Employee benefit expenses: The assessee has claimed total expenses of Rs.12,90,000/- under this head. During the course of assessment year 2015-16 it has been observed that the assessee's company Directors are also common Directors in other 3 company/concern namely (i) Samarpana Enterprises Pvt. Ltd. (earlier known as Manglam Enterprises Pvt. Ltd.) PAN-AABCM3057F (ii) Isavasya Shikshan avam Swanusandhan Kendra Pvt. Ltd., PAN-AAICS7464D and (iii) Nirvan Giri Krishi Sansthan. During the course of assessment proceedings of AY 2015-16 Inspector of this office was directed to visit the office of the assessee's company, M/s Kanak Varindavan Resorts Ltd. vs. ITO then the inspector in his report informed that there is no sign board found of the assessee company in the premises of the assessee company at E-185, Ram Path, Shyam Nagar, Jaipur, he also submitted that the premises is also covered with a single boundary wall covering plot No. E-183, E-184 and E-185, Ram Path Shyam Nagar, Jaipur. The Directors of the assessee company Shri Ashish Tiwari and Akhilesh Tiwari are also residing at E-183. Moreover, the directors as well as his father are also active in the politics. Thus, it cannot be ruled out that the employees of the assessee are not used for other activity other than the assessee's work. Further, the directors of other three companies/concerns are common, so there is possibility of using the employees for other companies'/concerns' day to day activities. Thus considering the circumstances of the case, it will be fair and reasonable to disallow, Rs. 5,00,000/- out of total expenses of Rs. 12,90,000/- under this head and added in the total income of the in the assessee.

(ii) Vehicle running expenses:

The assessee has claimed total expenses of Rs. 5,70,658/- under this head, but personal use of vehicles cannot be ruled out. During the course of assessment year 2015-16 it has been observed that the assessee's company Directors are also common Directors in other 3 company/concern namely (1) Samarpana Enterprises Pvt. Ltd. (earlier known as Manglam Enterprises Pvt. Ltd.) PAN- AABCM3057F (ii) Isavasya Shikshan avam Swanusandhan Kendra Pvt. Ltd., PAN-AAICS7464D and (iii) Nirvan Giri Krishi Sansthan. During the course of assessment proceedings of AY 2015-16 Inspector of this office was directed to visit the office of the assessee's company, then the inspector in his report informed that there is no sign board found of the assessee company in the premises of the assessee company at E-185, Ram Path, Shyam Nagar, Jaipur, he also submitted that the premises is also covered with a single boundary wall covering plot No. E-183, E-184 and E-185, Ram Path Shyam Nagar, Jaipur. The Directors of the assessee company Shri Ashish Tiwari and Akhilesh Tiwari are also residing at E-183. Moreover, the directors as well as his father are also active in the politics. Thus, it cannot be ruled out that the vehicles are not used for other activity other than for the assessee's work. Further, the directors of other three companies/concerns are common, so there is possibility of using the vehicles for other companies/concerns day to day activities. Thus considering the circumstances of the case, it will be fair and reasonable to disallow Rs. 2,00,000/- out of the total expenses of Rs. 5,70,658/- under this head and added in the total income of the assessee.

(iii) Depreciation expenses:

The assessee has claimed total expenses of Rs. 11,86,847/- under this head. During the course of assessment year 2015-16 it has been observed that the assessee's company Directors are also common Directors in other 3 company/concern namely (i) Samarpana Enterprises Pvt. Ltd. (earlier known as M/s Kanak Varindavan Resorts Ltd. vs. ITO Manglam Enterprises Pvt. Ltd.) PAN-AABCM3057F (ii) Isavasya Shikshan avam Swanusandhan Kendra Pvt. Ltd., PAN-AAICS7464D and (iii) Nirvan Giri Krishi Sansthan. During the course of assessment proceedings of AY 2015-16 Inspector of this office was directed to visit the office of the assessee's company, then the inspector in his report informed that there is no sign board found of the assessee company in the premises of the assessee company at E-185, Ram Path, Shyam Nagar, Jaipur, he also submitted that the premises is also covered with a single boundary wall covering plot No. E-183, E-184 and E-185, Ram Path Shyam Nagar, Jaipur. The Directors of the assessee company Shri Ashish Tiwari and Akhilesh Tiwari are also residing at E-183. Moreover, the directors as well as his father are also active in the politics. Thus, it cannot be ruled out that the premises is not used for other activity other than the assessee's use. Further, the directors of other three companies/concerns are common, so there is possibility of using the premises for other companies day to day activities. Thus considering the circumstances of the case, it will be fair and reasonable to disallow Rs. 5,00,000/- out of total expenses of Rs. 11,86,847/- under this head and added in the total income of the assessee.

Based on the above observation ld. AO completed the assessment proceeding as per provision of section 143(3) of the Act on 09.12.2018.

4. Aggrieved from the order of the ld. AO, assessee preferred an appeal before the ld. CIT(A), which was dismissed by him and while doing so he recorded the following findings on the various grounds raised by the assessee;

5.1.5 The Appellant in is written submission has not provided the financial statements and employee details of other two concerns having common directors. It may be noted that the main issue on which the addition is made by the AO is on account alleged use of common resources and infrastructure by the 3 concerns in which the directors are common and the expenses being debited in the books of the Appellant without the same being proportionately allocated among the 3 concerns. It may be pertinent to note that the AO has based his findings on the field verification carried out at the premise of the Appellant by the Inspector of Income tax. The onus was on the Appellant to rebut the findings of the AO by submitting the financials of all the 3 concerns to show that the expenses are duly allocated among the 3 concerns.

M/s Kanak Varindavan Resorts Ltd. vs. ITO 5.1.6 However, despite having been given an opportunity, the Appellant has merely stated that since the other 2 concerns are independent entities under the Income tax Act, 1961, hence they not required to furnish their financials for the instant appeal. This only confirms the order of the AO and his allegations against the Appellant.

5.1.7 Requirement of section 37 is that the expenditure should be wholly and exclusively laid out and expended for the purpose of business. Merely because the Appellant claims the same would not show that the expenditure was wholly and fully for the purpose of business. This contention was rightly rejected by the Assessing Officer, as nature and object of the outgoing has to be also examined. Word 'wholly' refers to quantum of expenditure and word 'exclusively refers to motive, object and purpose of the expenditure. Personal expenses or money spend for private purpose or expense relatable to another business is not deductible. The Appellant has failed the business expediency test. Further, whether the expenditure was incurred wholly and fully for the purpose of business of the Appellant has to be established and proven by the Appellant. These facts are within the exclusive knowledge of the Appellant and therefore it is under an obligation to place all facts and circumstances before the authorities. In the present case, the Appellant did not produce any material and documents to show that the expenditure under the aforesaid heads was incurred wholly and exclusively for the purpose of business and was not being shared among the 3 group concerns.

5.1.8 In the case of CIT v. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC), the Hon'ble Supreme Court has held that the onus of providing necessary facts in order to avail the deduction under Section 37(1) is on the assessee. If, therefore, the assessee fails to establish the facts necessary to support his claim for deduction under Section 37(1), the claim for deduction of expenditure is not admissible. Further in the case of I.H. Sugar Factory & oil Mils (Pvt.) Ltd. v. CIT (1980) 125 ITR, 293 (SC) the Hon'ble Supreme Court has held that where an assesee claims a deduction the onus is on him to bring all material facts on record to substantiate his claim. The assesse did not furnish or produce any evidence as to what was the expenditure and why it was incurred. The assessee has thus failed to qualify the first test of Section 37(1) of the Income-tax Act, 1961. Merely claiming that the expenses were incurred through bank and evidence of payment is available with bank did not itself make the expenditure allowable in the case of assessee as something more is required to allow the deduction U/s 37(1) of the Income-tax Act, 1961.

5.1.9 In the case of Assam Pesticides & Agro Chemicals v. CIT (1977) 277 ITR 846 (Gau), it was held that it cannot be said that even if the taxpayer does not produce any evidence in support of the claim for allowance, the ITO himself independently is to collect evidence and decide that the allowance claimed is baseless having regard to the legitimate business needs of the assessee. It is for the taxpayer to establish by evidence that a particular allowance is justified. The law does not prescribe any quantitative test to find out whether the onus in a particular case has been duly discharged. A decision of the final fact-finding authority is conclusive and binding.

5.1.10 In the case of Jaipur Electro (P) Ltd. v. CIT (1996) 134 CTR (Raj) 237, it was held that the doctrine that the businessman is the best judge of business expediency does not affect the right and duty of the assessing authority to know whether it was incurred for business purpose and not for other extraneous considerations.

5.1.11 It is thus, the view of the various Courts that to be an allowable expenditure under Section 37(1), the money paid out or away must be:

(a) paid out wholly and exclusively for the purpose of business or profession; and further (b) must not be (1) capital capital expenditure, (ii) personal expense; or (iii) an allowance of the character described in section 30 to 36 and section 80.

The Appellant in the instant case has failed to prove that the entire expenses claimed in its books are solely spent for the purpose of its own business and there is no common expense which has expended for the other 2 concerns. It may be noted that the Appellant has furnished the details of 3 vehicles and has not mentioned whether the same vehicles were used for the work of other 2 concerns or were being exclusively used for its very own business. Similarly, the Appellant has failed to establish that the employees allegedly on the pay roll of the Appellant company are exclusively catering to the business of the Appellant and not for the other 2 group concerns. The Appellant was required to prove this fact by submission of documentary evidence like names and details of the employees of all the 3 group concerns and Form 16 issued to them and substantiating the payment of their salaries through the bank account statement. The Appellant has merely stated that the expenses on employees and vehicles have been wholly and exclusively spent for its own business without any documentary proof for the same.

5.1.12 Further regarding the vehicle expense claimed, the Appellant was asked to furnish the details of vehicles, purpose of vehicles used and documentary evidences of expense incurred. The Appellant has furnished the following:

On perusal of the same it is seen that all the vehicle details provided by Appellant are luxury vehicle and the personal element in the use of the same cannot be ruled out. Further, the Appellant company has also not provided the details of vehicles registered in the name of the other companies/ concerns where the directors are common. There is also a likelihood that the above mentioned vehicles were being used for the businesses of the other 2 concerns in which the directors of the Appellant company are common. No log book has been maintained by the Appellant and produced during the appellate proceedings to establish the fact that the vehicles have been used wholly and exclusively for the purposes of business.

5.1.13 In the case of CIT v. Shahibag entrepreneurs (P) Ltd. (1995) 215 ITR 810 (Guj), it was held that it cannot be disputed that before an assessee can become entitled to an allowance under Section 37(1), he must satisfy the Department of the purpose for which the amount is spend. ITAT Cuttack in the case of Sunrise Jewellers, Rayagada vs Ito, Rayagada Ward, Rayagada on 12 March, 2021 wherein the Hon'ble Tribunal has held as under:

"during the course of assessment proceedings the assessee did not give details as required by the AO in respect of certain expenses as quoted (supra) and for want of sufficient evidence/vouchers. The AO disallowed the lumpsum of the total expenditure claimed. The contention of the Id. AR is not acceptable that the adhoc disallowance cannot be made. During the course of assessment proceedings the AO specifically asked to the assessee for production of the evidence/bills and vouchers but the assessee did not produce any vouchers. He has nightly confirmed 10% of the total expenditure. The AO was unable to verify the actual expenses incurred by the assessee with proper supporting vouchers. Therefore, the ground raised by the assessee is rejected.”

5.1.14 The High Court of Karnataka in the case of Tata Coffee Ltd. [2020] 121 taxmann.com 139 (Karnataka) has held that where assessee claimed deduction on account of miscellaneous expenditure under section 37(1) but failed to produce relevant evidence to justify said expenditure, Assessing Officer was justified in making adhoc disallowance of same.

5.1.15 The Hon'ble Delhi High Court in the case of Sandeep Marwah [2019] 101 taxmann.com 123 (Delhi)/[2019] 260 Taxman 231 has held as under:

Where assessee claimed deduction in respect of business promotion expenses, in view of fact that assessee did not produce material and documents to show that said expenditure was incurred for business purpose, mere fact that payments were made through credit card would not be sufficient to prove their genuineness and, thus revenue authorities were justified in making disallowance of 50 per cent of expenses claimed as deduction

5.1.16 The ITAT Cuttack in the case of Rajendra Kumar Sahoo vs. ACIT, Circle- 1(1), Cuttack [2021] 123 taxmann.com 131 (Cuttack-Trib.)[16-03-2020] has held that where assessee debited certain amount towards business promotion expenses and travelling expenses, since assessee inserted these entries in books of account merely with support of some internal vouchers and no complete bills and vouchers were produced by him, Assessing Officer was justified in disallowing 25 per cent of such expenditures

5.1.17 Though the Appellant has contended that the expenditure on employee and vehicle was incurred in the interest of the business. However, the nature and purpose of the said expenditure and the manner in which the said expenditure is relatable to the business of the Appellant was not clarified. Further, the Appellant could not furnish necessary supporting documents to substantiate its claim of it being incurred for the purpose of the business of the Appellant. Thus, in view of the above mentioned facts, the disallowance made by the AO is hereby confirmed. The Appeal filed on ground No. 1 & 2 are dismissed.

In the result, the appeal is Dismissed.”

“Brief facts of the case are that assessee is a closely held Public Limited Company, incorporated on 26.09.1995 and is engaged in the business of Purchase, sales and development of real estate and also other allied activities. The registered office of the company is situated at E-185, Ram Path, Shyam Nagar, Sodala, Jaipur. Return of Income for the year under appeal was filed by assessee on 17.10.2016, declaring total loss at Rs. 11,82,272 (APB 01-03). Case of assessee was selected for scrutiny and the details and information as sought for during the course of assessment proceedings were furnished and assessment was completed vide order dated 09.12.2018 passed u/s 143(3), by making lump sum disallowance of Rs. 7,00,000/- (out of salary expenses and vehicle running expenses) and further lump sum disallowance of Rs. 5,00,000/- out of the depreciation claimed. Aggrieved of the disallowances so made by ld.AO, assessee has preferred an appeal before the ld. CIT(A) wherein ld. CIT(A) vide its order dated 06.02.2025 dismissed the appeal of the assessee. Therefore, present appeal has been filed against the order of ld. CIT(A).

At this juncture, your honours kind attention is invited to the fact that ld. AO had made disallowance of expense claimed u/s 37 of the Act, without rejecting books of accounts u/s 145(3) of the Act which is against the settled provisions of law. Your honours would appreciate that such issue is purely legal in nature and no thorough investigation is involved in the matter and can be raised at any stage of appellate proceedings in view of judgement of Hon'ble Supreme Court of India in case of NTPC LTD. reported in 229 ITR 383. Thus, assessee at appellate stage has raised such grounds of appeal as additional grounds of appeal along with application dated 25.08.2024 with a request to admit the same, which read as under:

3. On the facts and circumstances of the case and in law, the ld. CIT(A) grossly erred in confirming the action of ld. AO in making disallowance of expenses claimed by the appellant u/s 37 of the Income Tax Act, 1961, without pointing out any defect in the books of account regularly maintained by the appellant and duly audited, and without rejecting such books of account as required under section 145 of the Act. Thus the disallowance so made by ld. AO and thereafter sustained by ld. CIT (A) is contrary to settled principles of law, and order so passed deserved to be quashed and subsequent disallowance so made deserves to be allowed.”

With above background, ground-wise submission is as under. Moreover, as the additional ground of appeal is legal in nature, thus submission on the same is being furnished prior to submission on other grounds of appeal:

Additional Ground of Appeal No. 3: In these grounds of appeal, assesse has challenged the action of ld. CIT(A) in sustaining the disallowance made by ld. AO without rejecting books of accounts u/s 145(3) of the Act, arbitrarily. Brief fact pertaining to this ground of appeal is that, in the year under consideration ld. AO had made the disallowance of certain expense as under without pointing out any defect in the books of account of assessee nor rejecting books of accounts u/s 145(3) of the Act—

S.No. Particulars Amount Claimed Amount Disallowed 1. Employee Benefit 12,90,000/- 5,00,000/- Expense 2. Vehicle Running 5,70,658/- 2,00,000/- Expense 3. Depreciation 11,86,847/- 5,00,000/- Total 30,47,505/- 12,00,000/-

In this regard it is submitted that it is settled provision of law that no disallowance can be made on estimate basis without rejecting the books of accounts u/s 145(3) of the Act. However, in the instant case ld. AO concluded the assessment by making aforesaid disallowance on estimate basis without even rejecting the books of accounts. At this juncture provisions of section 145(3) of the Act is reproduced as under— “145. Method of accounting — (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) [has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2)], the Assessing Officer may make an assessment in the manner provided in Section 144.]"

On perusal of aforesaid provisions it is evident that if ld. AO is satisfied about the existence of irregularities in the books of account as per Section 145(3) of the Act, it shall proceed in the manner provided under section 144 of the Act and can make additions on estimate basis only after rejecting the books of accounts. In this regard reliance is placed on the following judicial pronouncements— Principal Commissioner of Income Tax vs. R.G. Buildwell Engineers Ltd. [2018] 99 taxmann.com 284 (SC)/[2018] 259 Taxman 370 (SC)[01-10-2018] Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Onus to prove) - In course of assessment, assessee claimed deduction of expenses towards bricks, machinery repair, cartage, labour expenses etc. - Assessing Officer disallowed 10 per cent of said expenses on ground that insufficient evidence was adduced - Tribunal set aside said ad hoc disallowance on two grounds, firstly, assessee's books of account were not rejected and secondly, such expenses were allowed consistently in post in scrutiny assessments - High Court upheld order passed by Tribunal - Whether SLP filed against view taken by High Court was to be dismissed - Held, yes [Para 2] [In favour of assessee] [2024] 160 taxmann.com 93 (Delhi)/[2024] 298 Taxman 533 (Delhi)/[2024] 468 ITR392 (Delhi)[01-03-2024] Section 145, read with sections 144 and 153A, of the Income-tax Act, 1961 - Method of accounting - Rejection of (General) - Assessment years 2013-14 and 2014-15 - Assessee-company was engaged in providing corporate gifting solutions to various companies - Asearch and seizure operation under section 132 was conducted upon AMQ group of companies including assessee - Assessing Officer issued a notice under section 153A to assessee - Assessing Officer made additions to income of assessee on account of estimation of unaccounted profit, disallowance of expenses and inflated purchases - It was noted that Assessing Officer was provided with requisite bills, vouchers and addresses of trans acting parties but he did not make any effort to confirm veracity of alleged Bogus or inflated bills - Whether since Assessing Officer made additions to income of assessee on estimate basis without rejecting books of account, said additions were to be deleted - Held, yes [Paras 25 and 29] [In favour of assessee] Hon’ble High Court of Bombay in the case of Pr. CIT v. Swananda Properties (P.) Ltd. [2019] reported in 111 taxmann.com 94 in regard to similar issue held as under— "11. We note that the books of account of the respondent were rejected by the Commissioner of Income-tax (Appeals) under section 145(3) of the Act. However, the Tribunal found in the impugned order that the invocation of section 145(3) of the Act is unjustified as no defect was noted in the books of account to disregard the same. We note that the Commissioner of Income-tax (Appeals) in his order while rejecting the books of account does not specify the defect in the record. The basis of the rejection appears to be best judgment of assessment done by him. The rejection of the books should precede the best judgment assessment. On facts, the Revenue has not been able to show any defect in the respondent's records which would warrant rejection of the books and making a best judgment assessment. Thus, on facts the view taken by the Tribunal is a possible view. Therefore, no substantial question of law arises. Thus not entertained." In the case of Pr. CIT v. Marg Ltd. [2017] 84 taxmann.com 52 (Mad.), Hon’ble High Court of Madras has held as under:- "4(c). Therefore, it is sine qua non that the Assessing Officer to come to a conclusion that the books of account maintained by the assessee are incorrect, incomplete or unreliable and reject the books of account before the proceeding to make his own assessment. In the instant case, there is no reference in the assessment order of the Assessing Officer regarding rejection of books of account."

Commissioner of Income-tax, Delhi-7 vs. DLF Hilton Hotels [2016] 69 taxmann.com 300 (Delhi)/[2016] 240 Taxman 495 (Delhi)[10-05-2016] I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Miscellaneous expenditure) - Assessment year 2008-09 - Assessee claimed deduction of certain amount as miscellaneous expenditure - Assessing Officer disallowed 50 per cent of expenditure - Whether since there was no finding by Assessing Officer that expenditure was not genuine nor account books of assessee had been rejected by him, disallowance of 50 per cent of expenditure was not justified - Held, yes [Para 7] [In favour of assessee] Hon’ble Karnataka High Court in the case of CIT v. Anil Kumar & Co. [2016] 67 taxmann.com 278 has held as under:- "11. Insofar as the estimation of gross profit made by the Assessing Officer modified by the Commissioner of Income-tax (Appeals), the Tribunal has rightly held that when the books of account of the assessee had not been rejected and assessment having not been framed under section 144 of the Income-tax Act the said authorities were in error in resorting to an estimation of income and such exercise undertaken by them was not sustainable. Section 145(3) of the Act lays down that the Assessing Officer can proceed to make assessment to the best of his judgment under section 144 of the Act only in the event of not being satisfied with the correctness of the accounts produced by the assessee. In the instant case the Assessing Officer has not rejected the books of account of the assessee. To put it differently the Assessing Officer has not made out a case that conditions laid down in section 145(3) of the Act are satisfied for rejection of the books of account. Thus, when the books of account are maintained by the assessee in accordance with the system of accounting, in the regular course of his business, the same would form the basis for computation of income. In the instant case it is noticed that neither the Assessing Officer nor the Commissioner of Income-tax (Appeals) have rejected the books of account maintained by the assessee in the course of the business. As such the Tribunal has rightly rejected or set aside the partial addition made by the Assessing Officer for arriving at gross profit and sustained by the Commissioner of Income-tax (Appeals) and rightly held that the entire addition made by the Assessing Officer was liable to be deleted. The said finding is based on sound appreciation of facts and it does not give rise for framing substantial question of law." Ahluwalia Erectors & Fabricators (P.) Ltd. vs. ACIT [2025] 173 taxmann.com 351 (Jaipur - Trib.)[19-02-2025] V. Section 37(1) of the Income-tax Act, 1961- Business expenditure - Allowability of (Salary expenses) - Assessment year 2016-17 - Assessee-company claimed salary expenses -Assessee submitted 23 sample bills averaging to certain amount each which were related to non-permanent labour staff - Assessing Officer noted that in absence of number of employees in each of these categories, it was impossible to estimate accurate labour bill of assessee - Thus, he stated that assessee had not discharged its onus of furnishing these details so that amount of salary expense could not be satisfactorily accepted and, thus, 5 percent of total amount of salary expenses was disallowed on ad hoc basis - It was noted that it was a case of a private limited company and its books of account were audited as per Companies Act as well as Income-tax Act - Further, there was no defect pointed out by Assessing Officer in books of account or that of with vouchers - Even vouchers produced for which Assessing Officer gave credit showed that Assessing Officer acted based on assumptions and presumptions - He had not given any basis by which he arrived to disallow5 per cent of expenses claimed - Whether, on facts, impugned disallowance made by Assessing Officer at rate of 5 per cent was to be deleted - Held, yes [Para 24] [In favour of assessee] Relevant para of ITAT order is also reproduced as under— “24. …… The bench noted that it was case of a private limited company and its books of account are audited as per the Companies Act and as per the Income-tax Act as well. There was no defect pointed out by the ld. AO in the books or that of with the vouchers. Even the vouchers produced for which the ld. AO gave the credit this itself shows that the ld. AO acted based on the assumptions and presumptions. Even he has not given any basis by which he arrived to disallow 5% of the expenses claimed. Thus, there is no such basis and that too without rejecting the books of account no disallowance can be made. To support this view we get strength from the decision our jurisdictional High Court in the case of Commissioner of Income-tax v. Gupta, K. N. Construction Co. [2015]

[2015] 59taxmann.com 293/371 ITR 325 (Rajasthan) wherein the Hon'ble High Court held that; “11. Though the argument of the learned officer of the Revenue can be said to be proper and justified that in a case where the assessee manipulates the accounts by keeping the profit margins commensurate with the past assessment years or slightly increases and that itself by a large cannot be a basis for acceptance of the results. But, in the face of the said facts, if it is for the Assessing Officer to bring on record some concrete material/evidence to make a proper addition. We have already noticed hereinabove that the Assessing Officer has merely disallowed 20 per cent. or 10 per cent., as the case may be, out of the various expenses, which, in our view, is not proper and he had to bring on record justifiable basis for making of an addition and bring on record some evidence for making of addition.” Respectfully following the binding precedent as above and as cited in the written submission consider the ground no. 6 raised by the assessee and direct the ld. AO delete the disallowance so made on estimate basis.” On perusal of aforesaid judgments referred it is evident that it is settled position of law that the books of account have to be necessarily rejected before ld. AO proceeds to the best judgment assessment upon fulfilment of conditions as mentioned in section 145(3) of the Act. The underlying rationale behind such an action is to meet the standards of correct computation of accounts for the purpose of a more transparent and precise assessment of income. Therefore, any pick and choose method of rejecting certain entries from the books of account while accepting other, without an appropriate justification, is bad an law and such order deserves to be quashed. Grounds of Appeal

No.1 to 1.2: In these grounds of appeal, assesse has challenged the action of ld. CIT(A) in confirming the disallowances made by ld. AO of Rs. 12,00,000/- (being Rs. 5,00,000/- out of employee benefit expenses, Rs. 2,00,000/- out of vehicle expenses and Rs. 5,00,000/- out of vehicle depreciation), arbitrarily. In this regard head wise submission is made as under— I. Disallowance of Rs. 5,00,000/- from Employee Benefit Expenses Ld. AO observe as under while making disallowance in the hands of assessee company— “Assessee’s company Directors are also common Directors in other 3 company/concern namely (i) Samarpana Enterprises Pvt. Ltd. (earlier known as Manglam Enterprises Pvt. Ltd.) PAN-AABCM3057F (ii) Isavasya Shikshan avam Swanusandhan Kendra Pvt. Ltd., M/s Kanak Varindavan Resorts Ltd. vs. ITO PAN-AAICS7464D and (iii) Nirvan Giri Krishi Sansthan. During the course of assessment proceedings of AY 2015

16. Inspector of this office was directed to visit the office of the assessee’s company, then the inspector in his report informed that there is no sign board found of the assessee company in the premises of the assessee company at E-185, Ram Path, Shyam Nagar, Jaipur, he also submitted that the premises is also covered with a single boundary wall covering plot No. E-183, E-184 and E-185, Ram Path Shyam Nagar, Jaipur. The Directors of the assessee company Shri Ashish Tiwari and Akhilesh Tiwari are also residing at E-183. Moreover, the directors as well as his father are also active in the politics. Thus, it cannot be ruled out that the employees of the assessee are not used for other activity other than the assessee’s work. Further, the directors of other three companies/concerns are common, so there is possibility of using the employees for other companies’/concerns’ day to day activities.” By observing so, ld. AO had disallowed a sum of Rs. 5,00,000/- out of total employees benefit expenses claimed at Rs. 12,90,000/- for the year under appeal. In this regard, it is submitted that. the main allegation of the Ld. AO is that directors of assessee company are also director in other companies/ firms and the business premises of the assessee company i.e. E-185 is connected with plot no E-183 and 184 (residence of Shri Ashish and Akhilesh Tiwari) with single boundary wall. Therefore, it has been alleged that the employees of the assessee company might have been utilized for other activities also. In support of the claim of employees benefit expenses, during the course of assessment proceedings, assessee has submitted the details of salary expenses ledger and one month salary vouchers of the employees who were working with the assessee company (APB 22-35). Against the aforementioned documentary evidences filed by the assessee, ld.AO has not pointed out any single defect before doubting the genuineness of the expenses claimed. Further, it has not been the case where it was established by ld.AO through conducting independent enquiries for proving that the employees to whom salary is paid are not providing services to the assessee. Moreover, details of the employees of other companies had not been sought from them as per the procedural requirement of the statute and the same were requested from the assessee. Therefore, in the circumstances of the case of the assessee, ld.AO had made disallowances merely on the basis of assumptions and presumptions based on the fact that there are common partners / directors in various firms / companies and the premises where the office of the assessee company situated is having single boundary wall with the house of the directors. It is submitted that there is no bar in the statute that a person cannot be a Director/Partner in more than one company and further the others company/ firms were a separate legal entities engaged having their separate business activity and having their own employees to carry out their business work.

M/s Kanak Varindavan Resorts Ltd. vs. ITO Apart from this, it is submitted that, during the year under consideration, none of the Directors of the assessee company has received any remuneration from the assessee company, owing to the absence of any substantial revenue generation in the year under appeal. Therefore, on.ly bare minimum expenses were incurred on account of employees salary through settlement of dues of the regular employees employed with the assessee company. Furthermore, from the report of the inspectors it is also clear that there are total three plots i.e. Plot no E-183, 184 and 185 out of which Plot no. E-185 is the registered office of the assessee company and was not used as the residence by the Directors or their family members. In fact, by this arrangement, it is convenient to manage the business affairs of the assessee company as the Directors are readily available as and when required. Further ld. CIT(A) during the course of appellate proceedings sought details pertaining to employees of other entities from the assessee company, by presuming that assessee company would be having access to sensitive data of these other entities merely on the ground that assessee company share the premises with such companies and has common directorship. In this regard it is submitted that M/s Samarpana Enterprises Pvt. Ltd. & M/s Isavasya Shikshan Avam Swanusandhan Kendra Pvt. Ltd. are two separate legal entities, assessee company mere having same registered office does not mean that assessee company have access to their set of books of accounts. It is further submitted, if ld. AO or ld. CIT(A) still required such data than they could have exercises powers as embedded in the Act. Therefore the disallowance so confirmed by ld. CIT(A) made by the ld. AO is solely based on mere whims and fancies that there is possibility of utilizing the employees for other companies’/concerns’ day to day activities. This itself suggests that the disallowance have been made on the basis of mere possibilities without pointing out any defects in the documents and evidences submitted in support of expenses claimed by the assessee. Against these documentary evidences, ld.AO failed to bring any material on record proving that the employees of the assessee company were used for other business concerns/ personal purposes. Furthermore, the report of the inspector heavily relied upon for making disallowance was never confronted with the assessee and from the extract of the same as referred in the assessment order. It nowhere suggests that the inspector deputed had made spot enquiries from any of the employees before reaching to the conclusion that they might have been worked for other group companies/ firms or for the personal work of the directors or their family members. Since, the expenditure was incurred wholly and exclusively for the purpose of business and salary was paid to the employees under business exigency and it is well settled position of law that AO cannot walk into the shoe of the businessman to look into the necessity and purpose, thus, the expenditure being legitimate and duly accounted deserves to be allowed. In the circumstances, it is humbly prayed that the disallowance of Rs. 5,00,000/- made by ld. AO deserves to be deleted and is being prayed accordingly. II. Disallowance of Rs. 2,00,000/- from Vehicle Expenses. Ld. AO has disallowed a sum of Rs. 2,00,000/- out of vehicle expenses claimed at Rs. 5,70,658/- by making similar observations as has been made for disallowance out of salary expenses and by finally observing that – ………further, the directors of other three companies/concerns are common, so there is possibility of using the vehicles for other companies’/concerns’ day to day activities. Thus considering the circumstances of the case, it will be fair and reasonable to disallow Rs. 2,00,000/- out of the total expenses of Rs. 5,70,658/- under this head.” In this matter, it is submitted that the assessee company has claimed vehicle expenses which were incurred on the use of vehicles during its day to day business operations. These expenses includes expenses on account of running of vehicles, repair maintenance and insurance which were paid out of the funds owned by the assessee company. The details of such expenses along with bills and voucher were produced for verification (APB 29-50) before the Ld. AO. Against these documentary evidences, Ld.AO had failed to pointed out any single defect. Further, it is submitted that these expenses were incurred exclusively for carrying out the business affairs of the assessee company. Further, ld. CIT(A) confirm the action of ld. AO in making the disallowance of vehicle expense solely on the basis of allegation of common directors/partners and allegations made in inspector report of adjoining plots, which are already been rebutted above, thus the same is not reproduced again herein. The disallowance so made by the ld. AO is based on mere whims and fancies that there is possibility of using the vehicles for other companies/concerns. This itself suggests that the disallowance is made solely on the basis of mere assumptions and presumptions without pointing out any defects in the documents filed in support of expenses claimed by the assessee. In doing so, ld, AO had failed to bring any adverse material on record which proves that the vehicle expenses were commonly used for other business concerns also. It is also a matter of fact that the assessee is a company having separate legal entity and the vehicles owned by it were used solely for the business purposes thus no disallowance could be made for personal user. It is therefore prayed that the disallowance of Rs. 2,00,000/- as confirmed by ld. CIT(A) deserves to be deleted. III. Disallowance of Rs. 5,00,000/- from depreciation. Apart from the aforementioned disallowances, the Ld. CIT() confirm the action of ld. AO in disallowing a sum of Rs. 5,00,000/- out of depreciation expenses claimed at Rs. 11,86,847/- on total assets by making similar observations as has been given at page no. 07 above. In this regard, it is submitted that, depreciation is a statutory claim and no disallowance could be made for common use. Further, the assets were wholly and exclusively used for business purpose and no other use was made by the assessee nor it was established by ld.AO through conducting enquires and simply on assumptions and presumptions it was imagined that the assets owned by the assessees company were used for non- business purposes. It is thus submitted that depreciation as claimed deserves to be allowed. Further, during the course of assessment proceedings, books of accounts were produced before Ld. AO who had not pointed out any specific defect and by making general observations has made the disallowance. It is therefore prayed that the disallowance of Rs. 5,00,000/- made by ld. AO deserves to be deleted and is being prayed accordingly. In this regard reliance is placed on the following case law: 92 TTJ 1060 MUKESH K. SHAH VS. ITO (MUMBAI) Depreciation – Allowability – Disallowance for personal use of car – Car used for business – Depreciation being a statutory allowance, cannot be restricted on the basis of the volume of business use and volume of personal use – Therefore, depreciation on car cannot be disallowed on the ground of personal use of car. It is further submitted that the Ld. AO has no material to conclude that the payments made to the employees was not for the services rendered and as such the action of the Ld. AO to make any disallowance is totally and wholly unsustainable. As the disallowance could be made only on the basis of some valid material and in absence thereof, the expenditure so claimed is an eligible business expenditure in terms of the provisions of section 37(1) of the Income tax Act, 1961. The provisions as contained in sub-section (1) of section 37 of the Act are as follows: "37. General.--(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession".

M/s Kanak Varindavan Resorts Ltd. vs. ITO Explanation.--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure." Upon perusal of the above mentioned provision of the Act, it could be concluded that in order to claim deduction of expenditure under section 37(1) of the Act, as has been held in the case of Indian Molasses Co. P. Ltd. v. CIT 37 ITR 66 (SC) the following conditions should be satisfied: (i) The expenditure in question should not be of the nature described under the specific provisions of sections 30 to 36; (ii) The expenditure should not be of the nature of capital expenditure; (iii) It should not be a personal expenditure; and (iv) The expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession. It is thus clear that conditions at (i), (ii) and (iii) above are negative conditions whereas the condition at (iv) above is a positive condition. If the expenditure satisfies the negative conditions, it has to satisfy the positive condition in order to be eligible for deduction under section 37(1) of the Act. Thus, section 37(1) allows deduction of any "expenditure" subject to conditions noticed above. The case of the assessee fulfills all the conditions laid down therefore the expenditure as claimed is allowable in terms of the provisions of section 37(1) of the Income Tax Act, 1961. In fact, the disallowance is made on conjectures, surmises and suspicion. It is setteled law that no addition can be made on the basis of surmises, suspicion and conjectures. Reliance for this proposition is placed on 37 ITR 271 (SC) Uma Charan Shaw & Bros. Co. Vs. CIT. It has been further held in the following cases that suspicion howsoever strong cannot take the place of proof: 1. 37 ITR 151 Omar Salay Mohammad Sait Vs. CIT 2. 26 ITR 736 Dhirajlal Girdharilal Vs. CIT 3. 26 ITR 775 Dhakeshwari Cotton MillsLtd. Vs. CIT 4. 37 ITR 288 Lal Chand Bhagat Ambica Ram Vs. CIT 5. 91 ITR 8 CIT Vs. Calcutta Discount Company Ltd. It is further submitted that the expenditure being incurred in the day to day business activity and is wholly and exclusively for the purpose of the business for which the AO cannot walk into the shoe of the businessman to verify the necessity or the business expediency. In this regard further reliance is placed on the following decisions.

Empire Jute Co. Ltd. Vs. CIT 124 ITR 1 (SC) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. S.A. Builders Vs. CIT 158 Taxman 74 (SC) Section 37(1) of the Income Tax Act, 1961 – Business expenditure – Allowability of – Assessment years 1990-91 and 1991-92 – Whether expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency – Held, yes. (2009) 32 SOT 9 (Pune) Dy. CIT v. Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. A.Ys.: 1993-94, 1995-96 to 1999-2000 and 2001-02 Dated.: 28.03.2008 S. 37(1)—For the expenditure to be allowable u/s. 37(1), it may be incurred ‘voluntarily’ and without any ‘necessity’ and if it is incurred for promoting business and to earn profits, assessee can claim deduction u/s. 37(1), even though there was no compelling necessity to incur such expenditure. In these circumstances of case, it is submitted that, action of Ld. CIT(A) in confirming the disallowances of Rs. 12,00,000/- (being Rs. 5,00,000/- by disallowing employee benefit expenses, Rs. 2,00,000/- by disallowing vehicle running expenses and Rs. 5,00,000/- by disallowing depreciation expenses) made by ld. AO on mere assumption and presumption without any material on record, therefore, disallowances so made deserves to be deleted. ”

S. No. PARTICULARS PAGE NOS.

Copy of Return of Income along with Computation of the Total Income for 01-03 1. AY 2016-17 04-18 Copy of the Auditors Report and balance Sheet, P&L Statement for AY 2.

S. No. PARTICULARS PAGE NOS.

2016-17 Copy of Reply submitted to Ld. AO dated 26.10.2018 alongwith following 19-21 3. enclosures - 22-35 a) Copy of the Salary Expenses Ledgers along with Vouchers 36-57 b) Copy of the Vehicle Expenses Ledgers along with Bills/Vouchers Copy of Written Submission submitted before Ld. CIT(A) during First Appeal 4. 58-64 proceedings 5. Copy of additional written submission filed on 28.12.2024 along with - 65-66 67 a) Copy of chart showing list of Employees of appellant company b) Copy of chart showing list of vehicles on which vehicle running 68 expenses were claimed

3. Commissioner of Income-tax vs. Girnar Construction Co. Taxman 691 (Rajasthan)/[2003] 261 ITR 463 (Rajasthan)/[2003] 181 CTR 248 (Rajasthan) [08- 02-2002]

Record reveals that the assessee being a corporate entity regularly has to get its accounts audited under the Income Tax Act and that of the under the Companies Act. The expenditure on Men Power, Vehicle accounts. The bench noted that the assessee is corporate entity. Even if the expenditure are incurred for the benefit of the employee or that of the other company the same can be treated as perquisites but the expenditure thereby incurred cannot be disallowed and that too in part considered as for the purposes of the business and part not, and that too without rejecting the books of account which are audited. At this stage it would be appropriate to deal with the provision of section 145 of the Act which reads as follows;

Method of accounting. 145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

As is evident that section 145(3) provides that if the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided too in part he has not given the required notice pointing out any specific defects in the books of account and thereby proceeded to made the lump sum disallowance which are not permitted. We support of our view from the various decision cited by the ld. AR of the assessee and the one which directly applicable to the facts of the case is own Hon’ble High Court in the case of Commissioner of Income Tax Vs. Gupta, K. N. Construction Co. [ 59 taxmann.com 293 (Rajasthan) ] wherein the Hon’ble High Court held that;

Even this Jaipur bench has also considered the above judgement and thereby directed to delete the lump sum disallowance in the case of Ahluwalia Erectors & Fabricators P. Ltd. Vs. ACIT [ 173 taxmann.com 351 ].

Therefore, on being consistent and following the judicial precedent relied on before us we accept the additional ground raised by the assessee.

Since we have accepted the technical ground raised by the assessee the other grounds raised by the assessee become academic at this stage.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 02/09/2025.

Sd/- Sd/- ¼ujsUnz dqekj½ ¼jkBkSM+ deys'k t;UrHkkbZ½ (NARINDER KUMAR) (RATHOD KAMLESH JAYANTBHAI) U;kf;d lnL;@Judicial Member ys[kk lnL; @Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 02/09/2025 *Ganesh Kumar, Sr. PS आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- Kanak Vrindavan Resorts Ltd, Jaipur M/s Kanak Varindavan Resorts Ltd. vs. ITO 2. izR;FkhZ@ The Respondent- ITO, Ward 6(2), Jaipur 3. vk;dj vk;qDr@ The ld CIT vk;dj vk;qDr¼vihy½@The ld CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File (ITA No. 543/JP/2025) 6. vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत