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PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee under section 253 of the Income-Tax Act (the Act) is directed against the order of ld. Commissioner of Income-Tax-3, Mumbai (the ld. CIT(A) dated 04.05.2017, which in turn arises from the assessment order dated 28.03.2016 passed under section 143(3) for Assessment Year 2013-14. The assessee has raised the following grounds of appeal:
1. The Commissioner of Income Tax(Appeals) - 3, Mumbai [CIT(A)] erred in confirming the disallowance of Rs.25,00,000/- u/s 37 of the Income tax Act, 1961 made by the AO holding that the payment made towards labour charges are not verifiable. The Appellant submits that labour charges was paid to A to Z Quality Management Private Limited for the purpose of business of the Appellant and same shall be allowed as deductible revenue expenditure u/s 37 of the IT. Act.
Mum 2017-M/s Silverbird Trading Pvt. Ltd.
2. The CIT(A) erred in confirming the adhoc disallowance of Rs.4,42,629/- (being 20% of the aggregate expenses of Rs.22,13,145/- claimed under the head of consultancy charges, professional and legal expenses, travelling and vehicle running expenses) made by the AO, on the ground that, in comparison to earlier year expenses relating to commission income has increased and is unjustified. The Appellant submits that the above expenses are incurred wholly and exclusively for business and on the facts and circumstance of the case and in law no adhoc disallowances of expense are warranted in the case of the Appellant.
Brief facts of the case are that the assessee-company is engaged in the business Consultant and Agent for FMCG Companies, filed its return of income for Assessment Year 2013-14 on 30.09.2013 declaring income of Rs. 12,62,000/-. The return of income was revised on 31.03.2015 declaring Nil income after claiming loss of current year of Rs. 53,46,814/-. The return of income was selected for scrutiny. The assessment was completed under section 143(3) on 28.03.2016. The Assessing Officer while passing the assessment order made disallowance of labour expenses of Rs. 25,00,000/-.
The Assessing Officer also made adhoc disallowance @ 20% of total expenses of Rs. 22,13,145/-. On appeal before the ld. CIT(A), both the addition/disallowance was confirmed. Therefore, further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us.
We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record.
Ground No.1 relates to disallowance of Rs. 25,00,000/- under section 37 of the Act. The ld. AR of the assessee submits that after selecting the return of 2 Mum 2017-M/s Silverbird Trading Pvt. Ltd. income, the jurisdiction of Assessing Officer was transferred on 08.02.2016 from ITO-1(3)-2, Mumbai to Circle-1(3)-1, Mumbai. The Assessing Officer for the first time, on 15.03.2016 asked the assessee to provide the details of expenses incurred on labour charges. The assessee furnished the detailed on 17.03.2016 that labour charges were paid to M/s A to Z Quality Management Private Ltd. for yearly contract for providing manpower for day to day marketing field work and furnished the copy of ledger. The Assessing Officer disallowed the expenses on his observation that labour expenses were doubtful and that Ward Inspector was deputed to verify the expenses, if paid to M/s A to Z Quality Management Private Ltd. The Inspector reported that no such entity is available on such address provided by assessee. The ld. AR further submits that the assessee provided the address of M/s A to Z Quality Management Private Ltd. and the detailed of labour charges, however, the Assessing Officer disclosed that he has already passed the order. The ld. AR further submits that the assessee furnished all the details before the ld. CIT(A). However, the ld. CIT(A) confirmed the disallowance without verifying the documentary evidence and genuineness of the transaction holding that the assessee not provided necessary evidence to prove that payments were made wholly and exclusively for the purpose of business.
The dl. AR submits that the assessment order was passed by Assessing Officer in a hasty manner and without giving the opportunity to the assessee to substantiate its contentions. The assessee furnished the fresh address of A Mum 2017-M/s Silverbird Trading Pvt. Ltd. to Z Quality Management Pvt. Ltd. The assessee also provided the copy of confirmation and return of income of A to Z Quality Management Pvt. Ltd. The lower authority has not given any finding on such evidences. The assessee paid the labour charges on account of yearly contract with A to Z Quality Management Pvt. Ltd. for providing manpower for day to day marketing field work for marketing purpose. The expenses were incurred wholly and exclusively for the purpose of business of assessee. The ld. AR of the assessee submits that this ground of appeal may be restored to the file of Assessing Officer for verification of fact as the assessment order was passed by Assessing Officer in a hurriedly way and that the ld. CIT(A) also confirmed the addition/disallowance without verifying the evidences.
5. On the other hand, the ld. DR for the Revenue supported the order of lower authorities. The ld. DR further submits that assessee is engaged in the business of Consultancy and has shown the expenses on labour charges. The assessee has not proved the nexus of the expenses with the business of the assessee. In support of his submission, the ld. DR for the revenue relied upon the decisions of Hon’ble Bombay High Court in case of Indian Galvanics Cyrium Foils Ltd. vs. DCIT [2018] 95 taxmann.com 259 (Bom), In case of Dhimant Hiralal Thakar vs. CIT [2015] 64 taxmann.com 177(Bom.), Dystar India (P.) Ltd. vs. DCIT [2013] 33 taxmann.com 114 (Mumbai Trib.), and in Habibur Raheman F. Ansari vs. DCIT [2014] 50 taxmann.com 87 (Mumbai Trib.). Mum 2017-M/s Silverbird Trading Pvt. Ltd.
6. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also deliberated on various case laws relied by ld. DR for the revenue. We have noted that the jurisdiction of Assessing Officer was transferred from ITO-1(3)-2 to ACIT- Circle 1(3)-1. The Assessing Officer for the first time raised query on 15.03.2016 about the various expenses claimed by assessee. The assessee furnished his submission on 17.03.2016 contenting that the assessee paid labour charges to A to Z Quality Management Pvt. Ltd. on account of yearly contract for providing persons for day to day marketing field work. The Assessing Officer deputed the Inspector to verify the address of business premises of A to Z Quality Management Pvt. Ltd. The Inspector allegedly reported that no such entity is available on the given address. We have noted that the report of Inspector that entity M/s A to Z Quality Management Pvt. Ltd. is not available at the given address was not confronted to the assessee.
The assessee before us contended that the address of M/s A to Z Quality Management Pvt. Ltd. was changed from C-305, Antop Hill Housing Co.
Ltd., VIT College Road, Wadala(E), Mumbai-37 to 339, Antop Warehousing Co. Ltd. , VIT College Road, Wadala(E), Mumbai-37. The assessee also filed confirmation and income tax return of M/s A to Z Quality Management Pvt. Ltd. The contention of ld. AR of the assessee is that the Assessing Officer passed the order without giving sufficient time and confronting the fact about the verification of address to the assessee. It is further contention Mum 2017-M/s Silverbird Trading Pvt. Ltd. of ld. AR of the assessee is that despite filing sufficient documentary evidence before ld. CIT(A), the action of Assessing Officer was confirmed.
We have noted that the relevant documentary evidence was not considered by the lower authority qua the addition/disallowance on account of labour expenses, therefore, we deem it appropriate to restore the issue to the file of Assessing Officer to consider the documentary evidence furnished by assessee and to pass the order afresh in accordance with law. Needless to order that before passing the order, the Assessing Officer shall grant the sufficient opportunity to the assessee. Since, we have restored this issue to the file of Assessing Officer to decide the issue afresh, therefore, in view of the various decision relied by ld. DR, the Assessing Officer is also directed to consider the ratio of aforesaid decision relied by ld. DR, if the expenses incurred by assessee wholly and exclusively for the purpose of business. In the result, this ground of appeal is allowed for statistical purpose.
7. Ground No.2 relates to adhoc disallowance of Rs. 4,42,629/- (being 20% of the aggregate expenses of Rs. 22,13,145/- claimed under the head of consultancy charges, professional and legal expenses, traveling and vehicle running expenses). The ld. AR of the assessee submits that the assessee claimed expenses on account of consultancy charges, professional and legal expenses, travelling and vehicle expenses. The Assessing Officer disallowed 20% of the expenses holding that comparative to earlier years the expenses related to commission has increased which is unjustified. Therefore, the Mum 2017-M/s Silverbird Trading Pvt. Ltd. Assessing Officer disallowed 20% of the expenses on adhoc basis. The ld. AR submits that the 20% of disallowance on adhoc basis is unjustified. The ld. AR in alternative submits that disallowance may be restricted to 5% of the expenses.
8. On the other hand, the ld. DR for the revenue supported the order of lower authorities.
9. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have noted that the Assessing Officer as well as ld. CIT(A) has not doubted the genuineness of expenses.
The basis for disallowances adopted by Assessing Officer and confirmed by ld. CIT(A) that the assessee has not justified the increased expenditure comparative to the last year. In our view when genuineness of expenses were not doubted, the disallowance @ 20% of expenses is on higher side, therefore, we direct the Assessing Officer to restrict the said disallowances to the extent of 10% only. In the result, this ground of appeal is also partly allowed.
10. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 29/01/2019.