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Income Tax Appellate Tribunal, MUMBAI BENCHES “SMC”, MUMBAI
Before: SHRI G.S. PANNU (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the assessee against order dated 27.10.2017 passed by the Ld. Commissioner of Income Tax (Appeals)-45, Mumbai, for the assessment year 2014-15, whereby the Ld. CIT (A) has partly allowed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee firm engaged in the business of trading of Tractors, filed its return of income for the assessment year under consideration declaring the total income of Rs. 3,23,890/-. The return was processed u/s 143 (1) of the Act. Since, the case was selected for scrutiny notices u/s 143 (2) and 142 (1) were issued to the assessee by the AO. In response to the said notices, the authorized representative of the assessee attended the proceedings and filed details from time to time. It was noticed that 2 Assessment Year: 2014-15 the assessee had debited various expenses in the profit and loss account amounting to Rs. 90,41,336/-. Accordingly, the AO asked the assessee as to why disallowance @ 10% should not be made in view of the fact that some of the payments were made in cash and some of the expenses are not supported with documentary evidence. The AR submitted that only payments of marketing and sale expenses and administrative expenses were made partly in cash, however, the expenses were made exclusively for the purposes of the business. The AO rejecting the contention of the assessee made disallowance of 10% of the total expenses amounting to Rs. 9,04,133/-. The AO inter alia making additions of the aforesaid amount determined the total income of the assessee at Rs. 16,90,470/-.
Aggrieved by the assessment order, the assessee challenged the same before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee partly allowed the appeal and restricted the disallowance of 10% to the marketing and sales expenses and administrative expenses and deleted the expenses made in respect of freight charges, salary and incentives. Still aggrieved, the assessee is in appeal before the Tribunal.
The assessee has challenged the impugned order passed by the Ld. CIT
(A) on the following effective grounds:-
1. “The Hon’ble Commissioner of Income Tax (Appeals)-45 Mumbai has grossly erred in confirming the arbitrary adhoc disallowance of Rs. 5,12,910/- (being 10% of the Marketing & Administrative Expenses) actually incurred both by cash as well as banking channel during the course of carrying on the business of the Appellant without appreciating the fact and materials on record.
3 Assessment Year: 2014-15 SI Nature of Expenses 10% of No. Expenses Claimed Disallowance a. Marketing & 21,81,274 2,18,127 Sales Expenses b. Administrative 29,47,834 2,94,783 Expenses Total 51,29,108 5,12,910 The Appellant may kindly be permitted to adduce any other relevant grounds at the time of hearing of this appeal.
For these and other grounds which might be urged to be allowed at the time of hearing, the Appellant humbly prays that Hon’ble Tribunal, be kind enough to consider the facts and circumstances and be kind enough to direct the learned Assessing Officer to delete the arbitrary additions made and render justice.”
Before us, the Ld. counsel for the assessee submitted that the Ld. CIT (A) has wrongly confirmed the disallowance of 10% of the total expenses incurred on marketing & sales and administrative expenses. The learned counsel further submitted that payment of marketing and sales expenses and administrative expenses were made partly in cash and partly by cheques. Since, the AO has not pointed out any evidence to rebut the contention of the assessee that the amounts in question were paid exclusively for the purposes of the business of the assessee, the Ld. CIT(A) ought to have deleted the addition made by AO on ad hoc basis. Relying on the decision of the Lucknow Bench of the Tribunal, rendered in the case of Mukesh kumar Mahwah vs. ITO, ITA number 615/LK W/2014, the Ld. counsel submitted that since the impugned order is contrary to the findings of the Tribunal, the same is liable to be set aside.
On the other hand, the Ld. departmental representative (DR) relying on the findings of the Ld. CIT(A) submitted that since the Ld. CIT(A) has restricted 4 Assessment Year: 2014-15 the addition only to marketing and sales expenses and initiative expenses on the ground that the said expenses were made partly in cash and partly by cheques, there is no infirmity in the findings of the learned CIT(A).
We have heard the rival submissions and also perused the material on record. The only grievance of the assessee is that the Ld. CIT(A) has wrongly confirmed the addition of 10% of the total expenses claimed on account of marketing and sales and administrative expenses. We notice that the AO has made addition of 10% of expenses on the ground that the assessee has made some of the payments in cash therefore the total quantum of expenses claimed cannot be verified. On the other hand the Ld. CIT(A) has restricted the addition to only those expenses which were partly paid in cash and partly paid by cheques. However, neither the AO not the Ld. CIT(A) has pointed out any cogent reason for making disallowance in question. In the case of Mukesh Kumar Mahwah vs. ITO(supra) the Lucknow Bench of the ITAT has deleted the ad hoc disallowance confirmed by the CIT(A) holding as under:
Having carefully examined the orders of the lower authorities in the light of the rival submissions, we are of the view that the ad hoc disallowance is not permissible under the law and if the Assessing officer is not satisfied with a particular expenses, he may make necessary verification and also to point out defects in the books of account , but ad hoc disallowance should not be made by making general observations.
In the present case also the AO has made disallowance of 10% without conducting any verification or pointing out any cogent reason, in our considered view, the Ld. CIT(A) ought to have deleted the addition. Hence, respectfully following the decision rendered by the Lucknow Bench of the ITAT rendered in the aforesaid case, we allow the appeal of the assessee.