SREEDHARALA JOGARAO & SONS,VISAKHAPATNAM vs. THE ASSISTANT COMMISSIONR OF INCOME TAX, CIRCLE-1(1), VISAKHAPATNAM

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ITA 120/VIZ/2023Status: DisposedITAT Visakhapatnam10 January 2024AY 2016-17Bench: SHRI DUVVURU RL REDDY, HON’BLE (Judicial Member), SHRI S BALAKRISHNAN, HON’BLE (Accountant Member)6 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the specific disallowances made under Section 40A(3) and for prior period expenses were beyond the scope of a rectification order under Section 154, as the AO had already considered these expenses and made an ad-hoc disallowance in the original assessment.

What were the facts?

The assessee, a partnership firm, had expenses disallowed on an ad-hoc basis during scrutiny assessment. Subsequently, the AO made further specific disallowances under Section 40A(3) and for prior period expenses through a rectification order.

What were the issues?

Whether specific disallowances under Section 40A(3) and for prior period expenses can be made through a rectification order when an ad-hoc disallowance was already made in the original assessment.

Which sections of the Income-tax Act were involved?

Section 154,Section 143(3),Section 40A(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM

Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE

Hearing: 07/12/2023

PER S. BALAKRISHNAN, Accountant Member :

1.

This appeal filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CIT(A)-NFAC] in DIN & Order No. ITBA/NFAC/S/250/2022-23/1050512950(1), dated 8/3/2023

2 arising out of the order passed U/s. 154 r.w.s. 143(3) of the Income Tax Act, 1961 [the Act] for the AY 2016-17.

2.

Briefly stated the facts of the case are that the assessee is a partnership firm deriving income from trading in Rice, Dal, Oil, Sugar and other commodities on wholesale basis. The assessee filed its return of income on 25/09/2016 admitting a total income of Rs. 56,73,270/- for the AY 2016-17. The scrutiny assessment U/s. 143(3) of the Act was completed by the Ld.AO on 23/12/2018 wherein the Ld. AO disallowed certain expenses amounting to Rs.10,91,105/- on ad-hoc basis. Thereafter, the Ld. AO by invoking the provisions of section 154 of the Act passed a rectification order U/s. 154 r.w.s 143(3) of the Act on 13/1/2022 by determining the total income at Rs. 71,42,057/- thereby making an addition of Rs. 2,94,503/- towards disallowance of freight charges U/s. 40A(3) of the Act and Rs. 83,184/- towards disallowance of prior period expenses.

Aggrieved by the above additions, the assessee filed an appeal before the Ld. CIT(A)-NFAC.

3. On appeal, the Ld. CIT(A)-NFAC considering the submissions made by the assessee, upheld the order of the Ld. AO by dismissing the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A)-NFAC, the assessee is in appeal before us by raising the following grounds:

“1. The order of the Ld. CIT(A) is contrary to the facts and also the law applicable to the facts of the case.

2. The Ld. CIT(A) ought to have held that the addition of Rs. 2,94,503/- made towards disallowance of freight charges U/s. 40A(3) of the Act and addition of Rs. 83,184/- made towards disallowance of prior period expenses are outside the scope of rectification U/s. 154 of the Act.

3.

The Ld. CIT(A) ought to have held that the above additions of Rs. 2,94,503/- and Rs. 83,184/- are not justified even on merits. Any other grounds may be urged at the time of hearing.” 4.

4.

Grounds No. 1 & 4 are general in nature and therefore they need no adjudication.

5.

Grounds No. 2 & 3 refer to disallowance of freight charges U/s. 40A(3) and disallowance of prior period expenses wherein the scope of rectification U/s. 154 of the Act was challenged by the assessee. Before us, the Ld. AR argued that the Ld. AO has made a suo motto order U/s. 154 of the Act. The Ld. AR referred to para 5.1 of the original assessment order wherein the Ld. AO has referred to the expenses incurred in cash and supported by self-made vouchers. The Ld. AO considered the expenses incurred towards freight charges Rs. 90,87,953/- and labour charges Rs. 18,23,096/- aggregating to Rs. 1,09,11,049/- and 4 has made an ad-hoc disallowance of 10% amounting to Rs.

10,91,105/- citing that these expenses are unverifiable in nature and could not be substantiated by the assessee. The Ld. AR therefore pleaded that when the ad-hoc disallowance of 10% of the total expenses claimed by the assessee has been disallowed by the Ld. AO, which was not disputed by the assessee, no further specific disallowance can be made against any other provisions of the Act. The Ld. AR therefore pleaded that the Ld. AO ought to have considered the disallowances arising out of section 40A(3) and prior period expenses and therefore prayed that the rectification order of the Ld. AO be set-aside.

6.

Per contra, the Ld. Departmental Representative relied on the order of the Ld. Revenue Authorities and argued in support of their decision.

7.

We have heard both the sides and perused the material available on record as well as the orders of the Ld. Revenue Authorities. Admittedly, the Ld. AO in his original assessment order dated 23/12/2018 passed U/s. 143(3) of the Act has disallowed a sum of Rs. 10,91,105/- on an ad-hoc basis considering that the assessee has mostly incurred these expenses in cash and has produced only self-made vouchers. Further, we

5 find that the Ld. AO, on examining the Tax Audit Report filed by the assessee, made further disallowance of Rs. 3,77,687/- by considering the amount of Rs.2,94,503/- as disallowance U/s. 40A(3) and Rs. 83,184/- as disallowance of prior period expenses. The contention of the Ld. AR is that these expenses incurred by way of cash and prior period expenses have already been produced before the Ld. AO wherein it is deemed that the Ld. AO after considering the same has made an ad-hoc disallowance of 10% on the total expenses claimed by the assessee. We are of the opinion that when an ad-hoc disallowance of 10% has been made by the Ld. AO, no further specific disallowance can be made under any other provisions of the Act. We therefore find merit in the argument of the Ld. AR on this issue of disallowance U/s. 40A(3) and prior period expenses are beyond the scope of rectification U/s. 154 of the Act when the Ld.AO has thoughtfully considered these expenses and has made an ad-hoc disallowance of 10% while framing the original assessment. We therefore direct the Ld. AO to delete the additions made in the rectification order passed U/s. 154 of the Act. Thus, all the grounds raised by the assessee are allowed.

8.

In the result, appeal of the assessee is allowed.

Pronounced in the open Court on 10th January, 2024.

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