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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri A. T. Varkey & Dr. M. L. Meena]
1 ITA No. 2516/Kol/2019 M/s. Steel Products Ltd., AY 2011-12 आयकर अपीलीय अधीकरण, �यायपीठ –“A” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA [Before Shri A. T. Varkey, Judicial Member and Dr. M. L. Meena, Accountant Member] I.T.A. No. 2516/Kol/2019 Assessment Year: 2011-12 M/s. Steel Products Ltd. Vs Deputy Commissioner of Income- (PAN: AAECS9294F) . tax, Circle-11(2), Kolkata. Appellant Respondent
Date of Hearing (Virtual) 29.07.2021 Date of Pronouncement 06.08.2021 For the Appellant Shri Miraj D. Shah, AR For the Respondent Smt. Ranu Biswas, Addl. CIT, Sr. DR
ORDER Per Bench:
This is an appeal preferred by the assessee against the order of the Ld. CIT(A)-4, Kolkata dated 04.09.2019 for AY 2011-12.
Assessee’s appeal is time barred by 19 days and the assessee has filed a condonation petition for condoning the delay. After hearing both the sides, we condone the delay and the appeal of assessee is admitted for hearing.
At the outset itself the Ld. AR Shri Miraj D. Shah pointed out that though the assessee has raised three grounds of appeal, ground nos. 1 and 3 are general in nature which does not require any adjudication and the only relevant ground is ground no. 2, which is against the action of the Ld. CIT(A) in confirming the addition of Rs.31,50,424/- out of manufacturing, selling and administrative expenses on ad hoc basis.
The brief facts as noted by the AO is that pursuant to the revisional order of the Ld. CIT u/s. 263 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) interdicting the original assessment order passed u/s. 143(3) of the Act on 27.03.2014, the AO in the second round of assessment noted that the assessee company had sales turnover of Rs.71,79,26,0982/- and other income of Rs.3,51,54,228/- in this assessment year 2011-12,
2 ITA No. 2516/Kol/2019 M/s. Steel Products Ltd., AY 2011-12 whereas sales turnover and other income in the preceding assessment year 2010-11 was only to the tune of Rs.51,76,81,388/- and other income was only Rs.1,62,88,291/-. Therefore, according to the AO, there was 37% growth in sales turnover and 215% growth in other income. So, he asked the assessee to explain the reason for suffering loss even though there was substantial growth in sales turnover and income from other sources. According to AO, pursuant to his query, the assessee brought to his notice that the assessee has three manufacturing units. Out of which two units are located in the State of West Bengal and the other one at Raipur, in the State of Chattishgarh. According to the assessee, the sales turnover for the preceding AY 2010-11 was at Rs.51,76,81,388/- and since major transactions of sales were made to places which were near/adjacent to the manufacturing units resulted in the assessee company incurring less expenses on transportation cost, whereas in this relevant assessment year under consideration (AY 2011-12) the assessee company received orders for supply of goods from different parts of India and it was pointed out to AO that majority of the sale orders were from faraway places. So the delivery charges increased because goods had to be delivered far away from manufacturing unit. And moreover, it was pointed out that since production increased other expenses also increased when compared with that of the preceding years. Thus according to assessee, because of these factors manufacturing, selling and administrative expenses got increased in this relevant assessment year. However, this contention of the assessee was not found to be acceptable to the AO. Thereafter, through a chart has brought out as under:
Particulars FY 2010-11 FY 2009-10 Increase in % Commission 2203534 479851 360% Delivery charges 22435777 7015761 220% Miscellaneous expenses 6865135 2854817 140% Total 31504446 10350429 204%
Drawing attention to this chart, the AO observed that assessee could not explain the reason for sharp increase in the expenses on the aforesaid items mentioned therein and, therefore, he was of the opinion that the expenses might have included expenses being personal in nature. Therefore, 10% of the total amount of expenses at Rs.3,15,04,446/- i.e. Rs.31,50,424/- was disallowed. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who gave partial relief to the assessee by allowing the expenses on commission paid of Rs.2,20,353/- by taking note that the commission charges were nothing but the bank
3 ITA No. 2516/Kol/2019 M/s. Steel Products Ltd., AY 2011-12 guarantee charges paid to the bank directly against the purchases made on credit. Therefore, he allowed it u/s. 37 of the Act, whereas for the other two expenses i.e. delivery charges to the tune of Rs.2,24,35,377/- and miscellaneous charges of Rs.68,65,135/- he confirmed the order of the AO making 10% deduction @ Rs. 22,43,537/- and Rs.6,86,513/- respectively and thus partly allowed the appeal of the assessee. Aggrieved by the aforesaid action of the Ld. CIT(A), the assessee is in appeal before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that this is the second round of assessment. The original assessment was framed on 27.03.2014 u/s. 143(3) of the Act. Thereafter pursuant to the order u/s. 263 of the Act passed by the Ld. CIT, the AO has given effect to this order by passing the assessment order dated 30.03.2016 u/s. 143(3)/263 of the Act. The AO noted that in this assessment year compared to the preceding assessment year 2010-11 there was substantial growth in sales turnover and income from other sources. However, according to the AO, the assessee has suffered losses which he asked the assessee to explain. Pursuant to the same, the assessee brought to the notice of the AO that the assessee had three units of which two are functioning from West Bengal and one from Raipur, Chattishgarh. According to the assessee in the preceding AY 2010-1 the sales of its products took place in nearby areas of its units and, therefore, the transportation/delivery expenses incurred was less. However, in this relevant assessment year the assessee received sale orders from different parts of the country and, therefore, the goods had to be delivered at distant places which increased the cost of transportation/delivery; and since the production also increased manifold, expenses also increased likewise in manufacturing, administration etc. The AO did not accept the contention of the assessee and according to him without proper supporting evidence the claim cannot be accepted and the AO was of the opinion that the expenses on account of administrative, selling and manufacturing expenses might have included expenses being personal in nature and, therefore, he was of the opinion that 10% of the total expenses of Rs. 3,15,04,446/- i.e. Rs.31,50,424/- need to be disallowed. On appeal, the Ld. CIT(A) has given partial relief to the assessee by deleting Rs.2,20,353/- i.e. expenses in respect of the commission charges. However, he confirmed the action of the AO in respect of the ad hoc disallowance in respect delivery charges as well as miscellaneous charges and confirmed Rs.22,43,578/- [i.e. 10% of Rs.2,24,35,777/-]; and 10% of miscellaneous charges of
4 ITA No. 2516/Kol/2019 M/s. Steel Products Ltd., AY 2011-12 Rs.68,651/- [i.e. 10% of Rs.6,86,513/-] has been confirmed. This action of the Ld. CIT(A) has been assailed. According to the Ld. AR, ad hoc disallowance could not have been made by the AO since there is no provision in the Act empowering an AO to do so. The only way to venture into such an action according to Ld. AR is by AO estimating the income u/s. 144 of the Act after duly rejecting the books of account as contemplated in section 145(3) of the Act. So, according to the Ld. AR since in this case, the AO has not rejected the books of the assessee, he could not have estimated the disallowance. Per contra, the Ld. DR supported the action of the Ld. CIT(A) and contended that assessee could not furnish evidence in support of the higher expenses claimed to have been incurred though there was substantial increase in the manufacture and sales turnover. Therefore, the AO rightly disallowed 10% of expenses since assessee might have incurred personal expenses and therefore, Ld. CIT(A) has confirmed the same after finding that assessee failed to produce evidence for incurring of expenses. So, she does not want us to interfere in the order of the Ld. CIT(A). In his rejoinder, the Ld. AR submitted that though the Ld. CIT(A) has plenary and co-terminus powers as that of AO, when he is adjudicating an action of AO as the First Appellate Authority, he has to adjudicate as to whether the action of AO is erroneous or consider whether the view of AO is a plausible view in the facts and circumstances of the case. However, if he is of the opinion that an enhancement of income is required, then he can do so only after giving mandatory notice in this respect, which is not the case in this case. According to Ld. AR, the Ld. CIT(A) has confirmed the action of AO i.e. ad hoc disallowance, which has no sanction of law and prayed that it be deleted.
First of all, we do not countenance the action of the Ld. CIT(A) as well as the AO ordering ad hoc disallowance of 10% of expenses. The AO or the Ld. CIT(A) could not have ventured to estimate the income without complying with sec. 145(3) of the Act. In this context, we note that the AO nowhere has given a finding of fact that assessee has not followed the method of accounting as mentioned u/s. 145(1) of the Act. It is also not the case of the AO that assessee has not computed the income in accordance with the accounting standard notified u/s. 145(2) of the Act. Therefore, conditions for invoking section 145(3) of the Act (estimation) of income has not been fulfilled/satisfied. And since the AO has not disputed the correctness and completeness of the books of the assessee, the AO could not have estimated the income by ad hoc disallowance as done in this case. The Ld. CIT(A) as
5 ITA No. 2516/Kol/2019 M/s. Steel Products Ltd., AY 2011-12 well as the AO has said there was certain deficiency in verifying the expenses for non- production of supporting vouchers etc. According to us, if there is deficiency in the vouchers or the bills supporting the incurrence of an expenditure, at the most, the expenses to the extent which are not supported by the vouchers could be regarded to be non-genuine and can be disallowed by the AO. Therefore, in the facts and circumstances of this case since the AO or the Ld. CIT(A) has not rejected the books of account of the assessee they could not have estimated (ad hoc disallowance of 10%) the expenses claimed to have been incurred by the assessee. Moreover, the AO has made the ad hoc disallowance on the supposition that there might be personal expenditure. However, the AO did not notice that the assessee is a company and not a Firm or proprietary concern etc. So, his reason for disallowance also fails. Therefore, the action of the AO as well as the Ld. CIT(A) making ad- hoc disallowance is per se arbitrary and whimsical, therefore, the action of the Ld. CIT(A) confirming the 10% disallowance in respect of delivery charges as well as miscellaneous charges are directed to be deleted. Therefore, the appeal of the assessee stands allowed.
In the result, the appeal of the assessee is allowed. Order is pronounced in the open court on 6th August, 2021.
Sd/- (Dr. M. L. Meena) Sd/- (A. T. Varkey) Accountant Member Judicial Member Dated: 6th August, 2021 Jd, Sr. PS Copy of the order forwarded to: 1. Appellant- M/s. Steel Products Ltd., 96, Garden Reach, Kolkata-700 023.. 2. Respondent – DCIT, Circle-11(2), Kolkata. 3. The CIT(A)-4, Kolkata (sent through e-mail) 4. CIT- , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail) True Copy By Order Senior Private Secretary/DDO ITAT, Kolkata Benches, Kolkata