K.G.N.ENTERPRISE,VERAVAL vs. INCOME TAX OFFICER, VERAVAL

Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal.

Learned Counsel for the assessee submitted that ad- hoc disallowance of Rs. 6,52,511/- out of total expenses Rs. 7,67,086/- is very harsh and heavy. In the assessee`s case no books of accounts were rejected by the assessing officer. The assessee has started new business and therefore, some more expenses are expected. The disallowance is not based on valid reasons that payment was made in cash and not verifiable from bank. No notices were issued by the assessing officer to the recipients of salary. Hence, the disallowance is purely based on surmise and presumption, therefore, such addition may be deleted.

I have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. I note that the only issue involved in this appeal is disallowance of Rs.6,52,511/-out of salary expenses, claimed by the assessee. I note that assessing officer has made disallowance of salary by considering and appreciating the incorrect facts. I also observe that the contention of the learned assessing officer while making disallowance and learned CIT(A) while confirming the disallowance in the impugned order are not sustainable, justified and correct. Per contra, I observe that the assessee has successfully established that the salary expense has been paid in lieu of services rendered by the recipient towards administrative and financial activities of the assessee. It is also the prerogative of the assessee to decide that how much salary is to be paid to a particular person which is useful for his business.

I also note that the assessing officer reopened the assessee’s case u/s.147/148 of the Act, to examine contractual receipts amounting to Rs. 11,87,999/-, however, the ultimate addition was made by the assessing officer on different issues, then, the issue raised in the reasons recorded. The reasons were recorded by the assessing officer stating that the assessee was in receipt of contractual receipts to the tune of Rs.11,87,989/-. However, addition was made by the assessing officer on different item, based on the ad hoc disallowance of salary to the tune of Rs.6,52,511/-. We note that assessing officer may assess or reassess the income in respect of any issue K.G.N. Enterprise vs. ITO which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice; however, if after issuing a notice under section 148 of the Act, the assessing officer accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income, for that I rely on the judgment of Hon`ble Bombay High Court in the case of Jet Airways (I) limited 331 ITR 236 (Bom), wherein it was held as follow:

An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Sec. 147 has this effect that the assessing officer has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under s. 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.”

I also note that in assessee’s case, assessee’s books of accounts were not rejected, besides the disallowance made by the assessing officer were not based on valid reasons and such disallowance is based on surmises and conjunctures, despite of submitting plethora of evidences, by the assessee, during the assessment proceedings. The assessing officer did not find any mistake and error and did not K.G.N. Enterprise vs. ITO highlight any deficiency in the documents submitted by the assessee. Hence, I am not inclined to accept the contention of the Assessing Officer in any manner and hence the addition so made is deleted. Hence this ground of the assessee is allowed.