SHRI. VIKASCHAND OMPRAKASH AGARWAL,MUMBAI vs. ITO 17(3)(5), MUMBAI

First grievance of the assessee relates to upholding ad hoc disallowance of expenses.

Rival contentions have been heard and record perused. The assessee is involved in manufacturing of plastic items. During the Shri Vikaschand Omprakash Agarwal Vs ITO course of scrutiny assessment, the A.O. made ad hoc disallowances of various expenses. By the impugned order, the ld. CIT(A) has given partial relief and the assessee is in further appeal before the ITAT.

We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that a survey was carried out on the assessee at its head office, its Daman factory and Hardwar factory. The assessee was asked to reconcile physical cash found at Mumbai of Rs.92,000/- for all concerns as against cash in hand as per cash book of various concerns of Rs.8,76,042/- as on 31/08/15. It was clarified at the time of recording of the statement that expense vouchers for August were to be entered in the cash book in various concerns. In this regard, 34 vouchers for expenses to be booked in different concerns and after considering the personal withdrawals effected by proprietors, the cash balance reconciled. The assessee was asked to reconcile the petty cash balance as available at Haridwar factory. The cash balance as per petty cash book as on 15/08/15 at plant was Rs.2,31,049/-after considering the expenses to be booked for the balance period of 15/08/15 to 31/08/15, the closing cash balance as on 31/08/15 was Rs.1,76,690/- which was also reconciled with the physical cash found during the course of survey in the premises. Necessary reconciliation along with details are placed. Further, an amount of Rs.5,63,561/- was reflected as cash balance as Shri Vikaschand Omprakash Agarwal Vs ITO per books of account, the said cash balance reflected comprises of cash in hand at Head Office of Rs.96,380/- and cash in hand at Haridwar of Rs.4,67,181/-, the total of which is Rs.5,63,561/-. Out of said cash balance effect for expenses for the period 01/08/15 to 31/03/15, which amounts to Rs.2,90,491/- was to be reduced. After reducing the said from the balance of Haridwar of Rs,4,67,181/- the closing stock balance would be Rs.1,76,690/-. The A.O. did not agree with the assessee’s contention and disallowed 10% of staff welfare expenses, travelling and conveyance expenses and general expenses. 25% of expenditure incurred on insurance, repairs and maintenance, vehicle expenses and depreciation of motor cars was also disallowed. The A.O. also disallowed salary paid to three different units totaling to Rs. 10,00,000/-. By the impugned order, the ld. CIT(A) has restricted the disallowance on salary and wages to the extent of Rs. 2.00 lacs. The disallowance on account of staff welfare expenses, travelling and conveyance expenses and general expenses was restricted to 5% as against addition of 100% made by the A.O. Similarly the expenditure on account of insurance, repairs and maintenance, vehicle expenses and depreciation of motor cars were reduced to the extent of 12.5% as against the addition of 25% made by the A.O. However, neither the A.O. has given clear reasoning for the disallowance so made nor the ld.

Shri Vikaschand Omprakash Agarwal Vs ITO CIT(A) has given any justification for upholding 50% of the disallowances. The precise observation of the ld. CIT(A) was as under:

On the other hand the ld. AR placed on record similar expenses claimed in the earlier years was allowed even in the assessment framed U/s 143(3) of the Act. We also observe that against the turnover of Rs. 5602.70 lacs the assessee has shown profit of Rs. 950.29 which works

The next grievance of the assessee relates to thrusting upon the assessee’s claim of additional depreciation U/s 32(1)(iii) of the Act. In the return of income, the assessee has not claimed additional depreciation, however, the A.O. reduced assessee’s income by Rs. 31,885/- being amount of additional depreciation, which was confirmed by the ld. CIT(A).

We have considered rival contentions and found that during the course of assessment, the A.O. found that the assessee has not claimed additional depreciation on plant and machinery, however, the A.O. reduced assessee’s income amounting to Rs. 31,885/- being the amount of additional depreciation. In terms of provisions of Section 32(1)(iii) of the Act, the assessee is entitled for allowance of depreciation on its block of assets at such percentage as prescribed under the Rules. As per sub-section (1)(ii) of Section 32, explanation 5 so introduced by Finance Act, 2001 depreciation will be allowable Shri Vikaschand Omprakash Agarwal Vs ITO whether or not claimed in computation of income. Sub-section (1)(iia) was introduced by Finance Act, 2005 in case of new machinery or plant which has been acquired and installed after 31st March, 2005 by an assessee engaged in the business of manufacture or production of any article of thing, a further sum equal to 20% of actual cost of such machinery or plant shall be allowed as deduction. As per the ld AR, such additional depreciation is allowed by way of incentive for acquisition and installation of new plant and machinery it is not in the nature of normal depreciation which is required to be claimed in the P&L account. Such depreciation is claimed in the computation of income only. As per the ld AR, the CBDT while explaining provision of Finance Act 2005 under circular No. 3 of 2006 dated 27th February, 2006 in para 3.6 observed: “In order to encourage investment, the Finance Act, 2005 has amended section 32 to increase the rate of additional depreciation to twenty percent on new machinery and plant other than ships and aircrafts, acquired and installed after the 31st day of March, 2005, and dispensed with the condition of additional depreciation to be allowed to a new industrial undertaking and the condition of expansion in installed capacity.”

On the other hand, the ld DR has relied on the orders of the authorities below.

In the result, appeal of the assessee is allowed in part, in terms indicated hereinabove. Order pronounced in the open court on 12th March, 2020.