DCIT CENTRAL CIRCLE , UTTAR PRADESH vs. MIRHA EXPORTS PRIVATE LTD., DELHI

First we take cross-appeals filed by the Revenue in ITA No. 2. 873/Del/2022 and the assessee in for AY 2012-13.

[Revenue’s appeal] [Assessee’s appeal] [Assessment Year 2012-13] 3. Both the appeals have common issues; therefore, they are taken together for consideration.

5. Against the said order, an appeal was filed wherein Ld. CIT(A) has allowed substantial relief to the assessee and confirmed the disallowance of INR 3,92,862/- made u/s 40(a)(ia) of the Act.

[Assessment Year 2012-13] (Assessee’s Appeal)

7. The assessee has raised following grounds of appeal:- 1. “That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the validity of the impugned Assessment Order and ignoring the facts that no DIN was mentioned on the impugned assessment order is invalid in the eyes of law and is liable to be quashed.

2. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the validity of the impugned Assessment Order in spite of the facts that the assessment should have been framed under section 153C of the Income Tax Act, 1961 instead of section 143(3) of the Income Tax Act, 1961, therefore the impugned assessment order is illegal, unsustainable in law and liable to be quashed.

3. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the validity of the impugned Assessment Order despite the facts that the order under section 127 of the Income Tax Act, 1961 dated 13.07.2016 was passed without following the laid down the procedure as contemplated under section 127 of the Income Tax Act, 1961, therefore, the said order under section 127 of the Income Tax Act, 1961 is illegal, unsustainable in law and consequently the impugned reassessment order is also illegal, void ab- initio and liable to be quashed.

4. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the validity of the impugned reassessment Order ignoring the facts that the Ld. A.O. recorded reasons on surmises conjectures on borrowed satisfaction and on mere change of opinion therefore the initiation of proceedings under section 147 is illegal and unsustainable in law and consequently the impugned reassessment order is void ab initio and liable to be quashed.

5. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the validity of the impugned reassessment Order ignoring the facts that there is no averment in the reasons recorded that the income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment therefore the initiation of proceedings u/s 147 is illegal and unsustainable in law and consequently the impugned reassessment order is void ab initio and liable to be quashed.

6. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the validity of the impugned reassessment Order ignoring the facts that there is no live link between the reasons recorded and the material available with the Ld. A.O. at the relevant time therefore the Ld. A.O. could not ber said to have reason to believe for initiation the proceedings u/s 147 of the Income Tax Act, 1961 and consequently the impugned reassessment order is illegal void ab initio and liable to be quashed.

7. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the validity of the impugned reassessment Order ignoring the facts that the sanction purportedly obtained under section 151 of the Income Tax Act, 1961 is mechanical and non-est in the eyes of law therefore consequently impugned reassessment order is illegal and void ab initio and liable to be quashed.

8. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the addition/disallowance of Rs.3,92,862/- under section 40(a)(ia) of the Income Tax Act, 1961 made by the A.O. in the income of the appellant company, therefore, the disallowance is unsustainable in law and liable to be deleted.

9. That the impugned assessment order is without lawful jurisdiction, void ab-initio and liable to be quashed.

11. That the Additions/Disallowances sustained by the Ld. C.I.T.(A)-4, Kanpur made by the A.O. in the income of the appellant company is contrary to the principles of natural justice and equity and deserves to be deleted.

12. That any other relief or reliefs as your honour may deem fit in the facts and circumstances of the case be granted.”

In Ground of appeal No.1 raised by the assessee is not pressed 8. hence, dismissed.

10. Ld.AR for the assessee submits that sole basis for re-opening the assessment is Special Audit Report in the case of the assessee which is evident from the copy of the reasons recoded wherein AO has clearly stated that based on the Special Audit Report, it was found that certain payments were made on which no TDS was deducted u/s 194C/194J of the Act. Ld. AR submits that all the necessary details have already been examined during regular assessment proceedings and the order was passed u/s 143(3) of the Act. Ld. AR further submits that other issues on which satisfaction of escapement of income was recorded, no adverse inference was drawn after verification of the facts submitted by the assessee. Ld. AR submits that regarding non-payment of TDS on various expenses, in the original assessment proceedings carried out u/s 143(3) of the Act after inquiries and investigation, a sum of INR 2.20 lacs was disallowed by invoking the provision of Section 40(a)(ia) of the Act.

12. Heard the contentions of both parties and perused the material available on record. It is seen that all these legal issues raised by the assessee before us in these Grounds of appeal were also taken before ld. CIT(A) who after considering the submissions made by the assessee, dismissed them by observing in para 6.3 to 6.4 of the order as under:-

6.3. “The Grounds of appeal no. (i) to (v) and additional grounds no. (ii) challenges the legality of initiation of proceedings under section 147 of the Income Tax Act, 1961. However from the records it has been verified that the AO has recorded reasons for initiating income escaping assessment proceedings u/s 147 of IT Act on the basis of information available with him and accordingly sanction under section 151 of the Income Tax Act, 1961 has been granted by Pr. CIT(Central), Kanpur in accordance with law. Thereafter notice u/s 148 of IT Act has been issued and the income escaping assessment proceedings have been completed u/s 147 of IT Act by following all the provisions of law and the order has been passed u/s 147/143(3) of IT Act on 18.10.2019. Under these circumstances, I hold that the proceedings under section 147 of the Income Tax Act, 1961 have been correctly initiated and completed as per law hence these Grounds of appeal are summarily dismissed. 6.4. In the additional ground of appeal no. (i), the appellant has objected the order passed u/s 127 of the IT Act dt. 13.07.2016. In this regard, it is observed that from the facts of the case as brought out by the appellant itself, it has been found that all the procedures as laid down by law appear to have been followed. Further since no appeal lies against the same in this office, hence this ground of appeal is hereby summarily dismissed.”

13. Before us, Ld.AR for the assessee reiterated the same arguments as were made before the ld. CIT(A) and failed to controvert the findings of Ld.CIT(A). In view of these facts we find no infirmity in the order passed by ld. CIT(A) on these issues, which is hereby uphold. Accordingly, Grounds of appeal Nos. 2 to 7 and 9 to 11 raised by the assessee are dismissed.

No.8 raised by the assessee is regarding disallowance of INR 3,92,862/- made by the AO u/s 40(a)(ia) of the Act for non-deduction of tax at source.

15. Heard the contentions of both parties and perused the material available on record. From the perusal of assessment order passed u/s 143(3) placed at Pages 35 to 37 of the Paper Book, it is seen that the disallowance of INR 2.20 lacs was made on account of non- deduction of TDS on taxi hire charges. Further disallowance was made u/s 40(a)(ia) of the Act in the order passed u/s 147 of the Act for non-deduction of tax at source u/s 194J of INR 1,91,933/- towards consultancy charges and u/s 194C of INR 1,67,000/- for transportation charges and of INR 6,83,044/- for generator repair and maintenance expenses. It is also a fact that these payments were pointed out by the special Auditor as payments on which no TDS was made. As observed above, disallowance u/s 40(a)(ia) of Rs. 2.20 lacs was already made for non-compliance of provisions of section 194C therefore, to this extent no further disallowance could be made. Accordingly, we direct the Ao to reduce the amount already considered and disallowed u/s 40(a)(ia) of the Act in the order passed u/s 143(3) and remaining disallowance is hereby confirmed.

16. Further claim of the assessee is that in many cases the recipient had included this amount in their income and paid the taxes thereon, therefore, no disallowance could be made u/s 40(a)(ia) of the Act. Since, no evidence is filed before us in support of this claim, therefore, the same cannot be accepted at this stage. Regarding other claim of the assessee of making disallowance @ 30% of the default amount u/s 40(a)(ia) of the Act, we find that the amendment has Page | 9 come into statute by Finance Act, 2014 and applicable from 01.04.2015 therefore, this amendment is not applicable to the year before us. This view is supported by the judgement of Hon’ble Supreme Court in the case of Shree Choudhary Transport Company vs ITO [2020] 426 ITR 289 (SC) wherein Hon’ble Supreme Court has held that such amendment is prospective in nature and cannot be applied prior to AY 2015-16.

17. In view of the above, we hereby confirmed the disallowance of INR 1,72,862/- (3,92,862-2,20,000) u/s 40(a)(ia) of the Act. The Ground of appeal No.8 raised by the assessee is partly allowed.

[Assessment Year 2012-13] (Revenue’s Appeal) 19. The Revenue has raised following grounds of appeal:- 1. “On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by Assessing Officer of Rs. 2,82,38,711/- on account of disallowance of cash payment u/s 40A(3) of the IT Act. 1961 without considering the facts that bills and vouchers regarding purchase of meat/live stock as produced by the assessee during assessment proceedings are not proper as no signature was made on some vouchers further, in the instant case the alleged suppliers from whom it received raw material/meat/live stock are not producers and working like traders/brokers. Further, as per Circular Nos 04/2006 dated 29.03.2006, benefit of rule 6DD of Income Tax Rules, 1962 shall only be available to make cash payment to the producer of live stock, meat. Therefore, in the present case, the assessee was not fulfilling all the requisite conditions of Rule 6DD (e)(ii) of Income Tax Rules, 1962. Reliance is also placed on Ideal Tannery vs CIT (1979) 117 ITR

34. (All) Hence, the disallowance of part of purchases to avoid leakage of revenue is justified.

2. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition matte by Assessing Officer of Rs. 5,91,620/- on account of disallowance of business promotion expenses without considering the facts as brought out in the assessment order. It is categorically mentioned in the assessment order that some vouchers are self made and the payment was also made in cash and therefore, genuineness of these expenses could not be established.

3. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by Assessing Officer of Rs 1,00,000/- on account of disallowance of tour & travelling expenses without considering the facts as brought out in the assessment order. It is categorically mentioned in the assessment order that some vouchers are self made and the payment was also made in cash and therefore, genuineness of these expenses could not be established.

4. That the appellant craves leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

21. Heard the contentions of both parties and perused the material available on record. It is seen from the observations made in para 14 of the assessment order that the AO has not invoked the provisions of section 40A(3) of the Act as the assessee has not made any payment in violation to this section. However, for the reason that in some purchases vouchers, no signatures of the recipients were available on verification of the bills and vouchers, AO has made adhoc disallowance of INR 2,82,38,711/- being 5% of the cash purchases of INR 56,47,74,231/-. From the perusal of the order of Ld. CIT(A), we find that Ld. CIT(A) appreciated the facts that once the AO has not invoked the provisions of section 40A(3) of the Act and found that all the payments made in cash are in accordance and within the limits specified u/s 40A(3) of the Act, without specifying any instance or without bringing on record any vouchers where signatures of the recipients were missing, no adhoc disallowance could be made. Ld.CIT(A) has deleted the disallowance by making following observations in para 6.6 & 6.7 of impugned order:

6.6 “In the Ground of appeal no. (vii), the appellant has challenged the addition of Rs. 2,82,38.711/- being 5% of the cash payment of Rs. 56,47,74,231/-. In this regards the AO observes that on perusal of statement on records, it is found that the assessee has made payment through RTGS as well as cash to the persons from whom purchase is made. He states that it is not understandable as to why cash was paid to them in spite of the fact that they have maintained bank A/c. However, the assessee stated that the cash payment was made strictly on the insistence of the suppliers. The AO further states that on verification of some vouchers it is found that no signature was made. However the did not communicate these discrepancies to the appellant and made adhoc disallowance @5% of the total cash payment of Rs 56,47,74,231/-. However from the assessment order it is clear that the AO was convinced that the assessee has satisfied the relevant conditions of Rule 6DD of the Income Tax Rules 1962, still the AO disallowed a sum of Rs. 2,82,38,711/- being 5% of the Cash Purchases. The Ld AR of the appellant further argued that the AO made this disallowance on adhoc basis just to cover up possible leakages without pinpointing specific defects. I agree with the submissions of the appellant that no disallowance can be made on adhoc basis without pointing out specific defects, Various case laws relied upon by the appellant fully support this view. Under these circumstances, the addition of Rs 2.82.38,711/-deserves to be deleted. 6.7 Looking to the facts and circumstances of the case it is observed that no adhoc disallowance or any disallowance u/s 40A(3) of IT Act should be made when the appellant was fulfilling all the requisite conditions of Income-tax Rule 6DD(e) (ii) of IT rules 1962. Therefore this adhoc disallowance of Rs 2,82,38,711/- is hereby deleted. And hence the grounds of appeal relating to this disallowance are hereby allowed.”

22. Before us, the Revenue has failed to controvert the findings of Ld. CIT(A) by bringing on record any contrary material. It is further seen that in the re-assessment order, the AO has failed to specify any single payment in cash which was not incurred for the purpose of business or for which the material was not purchased. The AO has accepted the trading results declared by the assessee and also the no reason is given as to why 5% of the total cash purchases could be disallowed. Assessee disclosed all the details of the payments made and further in the special audit report no instance of payment in violation to section 40A(3) was pointed out which has been considered and for which any disallowance was made by the AO.. Disallowing out of expenses was mere ad-hoc disallowance, not based on finding of bogus expenses claimed. Expenses were not fully verifiable due to nature of payments made and as observed above the trading results were accepted.

23. It is further seen that no incriminating paper was found as a result of search with respect to the cash purchases made nor any satisfaction of escapement of income of such cash purchases was reached in the reasons recorded for reopening the assessment. The payments to few individuals were doubted however, no adverse inference was taken on such payments by the AO after making verification of the records. In view of these facts, we find no error in the order of ld. CIT(A) in deleting the adhoc made and accordingly, we uphold the order of Ld. CIT(A). Therefore, Ground of appeal No.1 raised by the Revenue is dismissed.

25. Heard the contentions of both parties and perused the material available on record. From the perusal of the assessment order, we find that AO has made the disallowance solely for the reason that personal nature of expenses cannot be ruled out and there were certain self-made vouchers prepared for payment of these expenses. Therefore, the genuineness of these expenses was not fully accepted by the AO. Ld. CIT(A) has deleted these disallowances by making following observations in para 6.8 & 6.9 of the order:-

6.8 “In the Ground of appeal no. (viii), the appellant challenges the adhoc disallowance of Rs. 5,91,620/- being 5% of business promotion expenses of Rs. 1,18,32,402/-. In this regard the AO observes that on perusal of expenses under the head business promotion expenses. It is found that the assessee has incurred expenses of Rs. 1,18,32,402/- during the year under consideration as against last year expenses of Rs.66,62,976/. This year the total sale was made at Rs. 504,57,85,607/-and in immediate preceding year, the total sale was at Rs.228,59,31,053/-. In the assessment proceeding, the appellant submitted that the business promotion expenses of Rs. 80,81,979/- were incurred through credit cards by the directors namely Mr. Shuab Ahmed Qureshi and Mr. Qaise Hussain Qureshi on travelling, lodging, boarding and entertainment of foreign customers. It was also clarified that these expenses are in nature of hotel expenses and token courtesy extended to the buyers in India and Abroad to maintain good business relation. It was further submitted that these expenses are incurred in strict confidence, by directors themselves to maintain secrecy of customers etc. both within and outside the Company. These expenses are below 0.16% of the turnover. However the AO concluded that the personal nature of expenses of directors cannot be ruled out and hence to cover up possible leakage disallowance @5% of such business promotion expenses was made. However the AR submits that all the expenses are genuine business expenses, these expenses are incurred through credit cards and the same are duly recorded in the books of accounts. which are audited and the trail of expenses is kept so that no personal/non business expense could be done by any director or employee of the company. Therefore no such disallowance should be made on adhoc basis without pointing out specific defects in these expenses and in the books of accounts at large. I have carefully perused the findings of the AO and the submission of the AR, various case laws relied upon by the AR fully support the submission of the appellant that no adhoc disallowance can be made when no specific defect could be found by the AO. Under these circumstances, the disallowance of Rs 5,91,620/- is hereby directed to be deleted. The Grounds of appeal relating to this disallowance are hereby allowed. 6.9 In the Ground of appeal no. (ix), the appellant challenges the adhoo disallowance of Rs. 1,00,000/- out of total claim of tour and travelling expenses of Rs 22,05,818/-The AO observes that last year expenses of Rs. 14.93.1217 were incurred under ther head of tour and travels expenses, however the same is increased to Rs. 22,05,818/-However the AR submitted that no specific defect could be pointed out by the AO and this disallowance has been made on purely on adhoc basis. The AR submits that turn over of this year has substantially increased in comparison to last year and it has become Rs 504,57.85.607/- as against the last years turn-over of Rs. 228,59,31,053/It has further been submitted that no expense under the head of tour and travel has been incurred other than business purpose and the AO could not disprove this premise and hence the disallowance on adhoc basis is uncalled for. I have carefully perused the findings of the AO and the submission of the AR, various case laws relied upon by the AR fully support the submission of the appellant that no adhoc disallowance can be made when no specific defect could be found by the AO. Under these circumstances, the disallowance of Rs. 1,00,000/- is hereby directed to be deleted. The Grounds of appeal relating to this disallowance are hereby allowed.”

(Assessee’s Appeal) [Assessment Year 2013-14] 28. Now we take cross-appeals filed by the Revenue in and the assessee in for AY 2013-14. Page | 16

1. “On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by Assessing Officer of Rs. 6,07,64,411/- on account of disallowance of cash payment u/s 40A(3) of the LT Act. 1961 without considering the facts that the assessee had not filed the complete addresses of the suppliers/sellers and therefore, the genuineness of the purchase cannot be verified. Further the conclusion of the Ld. CIT(A) that no adhoc disallowance or any disallowance u/s 40A(3) of IT Act should be made when appellant was fulfilling all the requisite conditions of Income Tax Rule 6DD(e)(ii), is also not acceptable as in the instant case some of the alleged suppliers from whom it received raw material/meat/live stock were not producers and working like traders/brokers. Also, the assessee could not produce confirmations of all the suppliers to verify that the cash purchases were genuine. Hence, the disallowance of part of purchase to avoid leakage of revenue is justified.

2. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by Assessing Officer of Rs. 8,43,877/ on account of disallowance of business promotion expenses without considering the facts as brought out in the assessment order. It is categorically mentioned in the assessment order that the assessee company has not produced bank account's statement, cheques details and any other documentary evidences in respect of these expenses like bills/vouchers during the assessment proceedings and therefore, genuineness of these expenses could not be established.

1. “That the reference for Special Audit under section 142(2A) of the Income Tax Act, 1961 was invalid, therefore, the initiation of proceedings under section 147 on the basis of Special Audit Report is unsustainable in law and consequently the impugned reassessment order is unsustainable in law and liable to be quashed.

2. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the validity of the impugned Assessment Order despite the facts that the order under section 127 of the Income Tax Act, 1961 dated 13.07.2016 was passed without following the laid down the procedure as contemplated under section 127 of the Income Tax Act, 1961, therefore, the said order under section 127 of the Income Tax Act, 1961 is illegal, unsustainable in law and ☐ consequently the impugned reassessment order is also illegal, void ab-initio and liable to be quashed.

3. That the Ld. Commissioner of Income Tax (Appeals)-4, Kanpur has erred in law and on facts in sustaining the addition/disallowance of Rs.4,38,480/- under section 40(a)(ia) of the Income Tax Act, 1961 made by the A.O. in the income of the appellant company, therefore, the disallowance is unsustainable in law and liable to be deleted.

4. That the impugned assessment order is without lawful jurisdiction, void ab-initio and liable to be quashed.

6. That the Additions/Disallowances sustained by the Ld. C.I.T.(A)-4, Kanpur made by the A.O. in the income of the appellant company is contrary to the principles of natural justice and equity and deserves to be deleted.

31. Before us, both parties have accepted that the facts involved in the issues raised in the cross-appeals filed by assessee and revenue are identical to the facts in above decided cross appeals for AY 2012- 13 in & 655/Del/2022, except for the amounts of additions/disallowances.

& 874/Del/2022 (Revenue’s Appeal)

& 658/Del/2022 (Assessee’s Appeal) [Assessment Years 2015-16 & 2016-17]

"11. A plain reading of the aforesaid provision evinces an uncontrived position of law that the approval under Section 153D of the Act has to be granted for "each assessment year" referred to in clause (b) of sub-section (1) of Section 153A of the Act. It is beneficial to refer to the decision of the High Court of Judicature at Allahabad in the case of PCIT v. Sapna Gupta [2022 SCC OnLine All 1294] which captures with precision the scope of the concerned provision and more significantly, the import of the phrase- "each assessment year" used in the language of Section 153D of the Act. The relevant paragraphs of the said decision are reproduced as under:- "13. It was held therein that if an approval has been granted by the Approving Authority in a mechanical manner without application of mind then the very purpose of obtaining approval under Section 153D of the Act and mandate of the enactment by the legislature will be defeated. For granting approval under Section 153D of the Act, the Approving Authority shall have to apply independent mind to the material on record for "each assessment year" in respect of "each assessee" separately. The words 'each assessment year' used in Section 153D and 153A have been considered to hold that effective and proper meaning has to be given so that underlying legislative intent as per scheme of assessment of Section 153A to 153D is fulfilled. It was held that the "approval" as contemplated under 153D of the Act, requires the approving authority, i.e. Joint Commissioner to verify the issues raised by the Assessing Officer in the draft assessment order and apply his mind to ascertain as to whether the required procedure has been followed by the Assessing Officer or not in framing the assessment. The approval, thus, cannot be a mere formality and, in any case, cannot be a mechanical exercise of power. *** 19. The careful and conjoint reading of Section 153A(1) and Section 153D leave no room for doubt that approval with respect to "each assessment year" is to be obtained by the Assessing Officer on the draft assessment order before passing the assessment order under Section 153A." [Emphasis supplied] 12. It is observed that the Court in the case of Sapna Gupta (supra) refused to interdict the order of the ITAT, which had held that the approval under Section 153D of the Act therein was granted without any independent application of mind. The Court took a view that the approving authority had wielded the power to accord approval mechanically, inasmuch as, it was humanly impossible for the said authority to have perused and appraised the records of 85 cases in a single day. It was explicitly held that the authority granting approval has to apply its mind for "each assessment year" for "each assessee" separately.

[Assessment Year 2017-18] [Revenue’s appeal] 51. Now we take up the appeal filed by the Revenue in for AY 2017-18.

Order pronounced in the open Court on 19.12.2025.