Short Oveview Where addition was only on the basis of presumption and assumption that decrease in sales amounts to decrease in expenses hence merely on the basis of conjecture, the ad hoc addition cannot be made without any tangible reason to do so.

AO made disallowance of Rs. 3,73,50,300 on ad hoc basis on account of various expenses incurred during the year. AO disallowed expenses on the assumption that expenses increased/decreased in proportion to sales. AO had observed in his order that sales figure had been reduced by 5.62% i.e., from Rs. 3,20,49,20,000 in financial year 2014-15 to Rs. 3,02,90,97,000 in financial year 2015-16. On the same basis, the AO compared expense of financial year 2015-16 vis-a-vis the financial year 2014-15. The reasons for the increase in the expenses as pointed out by the AO were arbitrary and unjustified having regard to the business of the assessee. AO as well as the CIT(A) did not point out any specific expenses which do not clarify the expressions under section 37(1). AO made the disallowance in the absence of any tangible material on record.

In is held that It was pertinent to note that books of account produced by the assessee during the course of assessment proceeding were never doubted and were not rejected. Addition was only on the basis of presumption and assumption that decrease in sales amounts to decrease in expenses. The ledger accounts were very much produced before the AO and the same was before the CIT(A). Merely on the basis of conjecture, the ad hoc addition cannot be made without any tangible reason to do so.

Decision: In assessee’s favour.

Referred: Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC) : 1954 TaxPub(DT) 123 (SC), Lalchand Bhagat Ambica Ram v. CIT (1959) 37 ITR 288 (SC) : 1959 TaxPub(DT) 181 (SC), CIT v. Ms. Shehnaz Hussain (2004) 267 ITR 572 (Del) : 2004 TaxPub(DT) 0798 (Del-HC), J.J. Enterprises v. CIT (2002) 254 ITR 216 (SC) : 2002 TaxPub(DT) 676 (SC), Vichitra Constructions (P) Ltd. v. Asstt. CIT (ITA No. 5047/Del/2015, dt. 27-5-2019) : 2019 TaxPub(DT) 4798 (Del-Trib).

IN THE ITAT, DELHI BENCH

N.K. BILLAIYA, A.M. & SUCHITRA KAMBLE, J.M.

Prayag Polytech (P) Ltd. v. Addl. CIT

I.T.A No. 6625/Del/2019

7 November, 2019

Applicant by: Ved Jain, Advocate, Himanshu Agarwal, C.A.

Respondent by: Surendra Pal, Sr. Departmental Representative

ORDER

Suchitra Kamble, J.M.

This appeal is filed by the assessee against the Order, dated 10-7-2019 passed by Commissioner (Appeals)-38, New Delhi for assessment year 2016-17.

2. The grounds of appeal are as under :–
3. “On the facts and circumstances of the case, the order passed by the learned Commissioner (Appeals) is bad both in the eyes of law and on facts.
4. (i) On the facts and circumstances of the case, the learned Commissioner (Appeals) is erred both on facts and in law in confirming disallowance of Rs. 3,73,50,300 made by the assessing officer on account of following expenses treating the same as unexplained :–

Sr. No.	Particulars	Claimed	Allowed	Disallowance
1.	Wages	5,13,89,000	4,16,52,450	97,36,550
2.	Machinery repair and maintenance	1,26,71,000	66,08,700	60,62,300
3.	Building repair	35,28,000	19,37,250	15,90,750
4.	Job work charges	9,09,40,000	7,98,46,200	1,10,93,800
5.	Workers welfare	19,13,000	14,12,250	5,00,750
6.	Commission and Brokerage	2,00,07,000	1,59,76,800	40,30,200
7.	Discount on sales	2,81,35,000	2,49,90,000	31,45,000
8.	Vehicle repair and maintenance	46,57,000	34,66,050	11,90,950
	TOTAL	21,32,40,000	17,58,89,700	3,73,50,300

(ii) That the above disallowances have been confirmed despite the fact these expenses have been incurred wholly and exclusively for the purpose of the business of the assessee.

(iii) That the above disallowances have been confirmed despite the fact that the disallowances have been made by the assessing officer by grossly indulging into surmises and conjectures without there being any basis for the same.

3. (i) On the facts and circumstances of the case, the learned Commissioner (Appeals) is erred both on facts and in law in confirming the addition of Rs. 1,06,20,125 on account of advances from customers treating the same as unexplained liability.

(ii) That the above addition has been confirmed rejecting the detailed submissions and explanations alongwith the evidences brought on record by the assessee in this regard.

4. (i) On the facts and circumstances of the case, the learned Commissioner (Appeals) is erred both on facts and in law in confirming the disallowance of Rs. 5,67,633 made by the assessing officer on account of excess interest paid on loan.

(ii) That the above disallowance has been confirmed rejecting the detailed submissions alongwith the explanations made by the assessee in this regard.

5. (i) On the facts and circumstances of the case, the learned Commissioner (Appeals) is erred both on facts and in law in confirming the disallowance of Rs. 5,13,810 on account of Diwali expenses incurred by the assessee.

(ii) That the above disallowances have been confirmed despite the fact these expenses have been incurred wholly and exclusively for the purpose of the business of the assessee.

6. The appellant craves leave to add, amend or alter any of the grounds of appeal.”
7. The assessee company is in the business of manufacturing of color Master Batches (plastic granules). It is a manufactures, exporters and suppliers of roto foam master batch, color master batches, polymer processing aid master batches, carbon black master batches, additive master batches, prafil compound, pracolcolour, black master batches, roto foam powder, white master batches. The assessee company e-filed its return of income for assessment year 2016-17 on 16-10-2016 declaring income of Rs. 7,91,86,890. The case was selected for scrutiny and statutory notices under section 143(2) of the Income Tax Act, 1961 were issued on 17-7-2017 and 26-9-2017 which were properly served.

Thereafter, notices under section 142(1) of the Income Tax Act, 1961 were issued on 12-1-2018, 14-9-2018, 19-11-2018 and 13-12-2018 which were properly served. In response to the notices, advocate of the assessee attended and filed the replies from time to time. The assessing officer made addition on account of excess interest loan at Rs. 5,67,633, addition on account of unexplained expenses amounting to Rs. 3,73,50,300, addition on account of unexplained Diwali expenses amounting to Rs. 5,13,810 and addition on account of unexplained liability amounting to Rs. 1,06,20,125.

4. Being aggrieved by the assessment order, assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals) dismissed the appeal of the assessee.
5. The learned Authorised Representative submitted that ground no.1 and 6 are general in nature, therefore, Ground Nos. 1 and 6 are dismissed.
6. As regards Ground no.2, relating to the disallowance of Rs. 3,73,50,300 on ad-hoc basis on account of various expenses incurred during the year, the learned Authorised Representative submitted that the assessing officer disallowed expenses on the assumption that expenses increased/decreased in proportion to sales. The learned Authorised Representative further submitted that the assessing officer has observed in his order that sales figure has been reduced by 5.62% i.e. from Rs. 3,20,49,20,000 in financial year 2014-15 to Rs. 3,02,90,97,000 in financial year 2015-16. On the same basis, the assessing officer compared expense of financial year 2015-16vis-a-vis the financial year 2014-15.

The learned Authorised Representative submitted that the assessing officer held in the assessment order that while the sales have declined, there is an abnormal increase in the expenses and, thus, disallowed the expenditure which is in excess of 1.05% in comparison to financial year 2014-15. At the outset, the learned Authorised Representative further submitted that the assessing officer has not rejected books of accounts produced by the assessee. These books are audited and no irregularity has been observed by the assessing officer. The learned Authorised Representative further submitted that the assessing officer has neither questioned/doubted the ledger account produced by the assessee, nor he found any irregularity in the details and expenses filed. It is, thus, evident that there is no dispute about genuineness and admissibility of claim of expenses made by the assessee. The learned Authorised Representative submitted that these expenses are incurred wholly and exclusively for the business under section 37(1) of the Act. The reasons for the increase in the expenses as pointed out by the assessing officer are arbitrary and unjustified having regard to the business of the assessee. The assessing officer as well as the Commissioner (Appeals) did not pointed out any specific expenses which do not clarify the expressions under section 37(1) of the Act. Thus, the assessing officer admitted that the payments were made for such expenses. It is evident that the assessing officer made the disallowance in the absence of any tangible material on record. Thus, the learned Authorised Representative submitted that this addition be deleted. The learned Authorised Representative relied upon the following decisions :–

(a) Dhakeswari Cotton Mills Ltd. v. CIT, West Bengal, (1954) 26 ITR 775 (SC) : 1954 TaxPub(DT) 0123 (SC).

(b) Lalchand Bhagat Ambica Ram v. CIT (1959) 37 ITR 288 (SC) : 1959 TaxPub(DT) 0181 (SC).

(c) CIT v. Ms. Shehnaz Hussain (2004) 267 ITR 572 (Del) : 2004 TaxPub(DT) 0798 (Del-HC).

(d) J. J. Enterprises v. CIT (2002) 254 ITR 216 (SC) : 2002 TaxPub(DT) 0676 (SC).

(e) Vichitra Constructions (P) Ltd. v. ACIT (ITA No. 5047/Del/2015, dated 27-5-2019) : 2019 TaxPub(DT) 4798 (Del-Trib).

7. The learned Departmental Representative submitted that the assessing officer as well as the Commissioner (Appeals) has rightly disallowed these expenses as the assessee could not prove the genuineness of the expenditure. Thus, the learned Departmental Representative relied upon the assessment order and the order of the Commissioner (Appeals).
8. We have heard both the parties and perused all the relevant materials available on record. It is pertinent to note that the books of accounts produced by the assessee during the course of assessment proceeding were never doubted and were not rejected. The addition is only on the basis of presumption and assumption that decrease in sales amounts to decrease in expenses. The ledger accounts were very much produced before the assessing officer and the same was before the Commissioner (Appeals). Merely on the basis of conjecture, the ad-hoc addition cannot be made without any tangible reason to do so.

Therefore, Ground no.2 is allowed.

9. As regard Ground No. 3, relating addition of Rs. 1,06,20,125 on account of advances from the customers, the learned Authorised Representative submitted that the assessee duly filed the details of advances received from customers alongwith the details of current liabilities. The documents were not doubted. The learned Authorised Representative further submitted that these advances have been cleared in the subsequent years. The sales invoices have been raised in the subsequent years and copies of ledger accounts for three financial years i.e. 2014-15, 2015-16 & 2016-17 were submitted before the authorities and the assessee demonstrated that these are regular advances. The learned Authorised Representative submitted that theses parties are regular customers and the assessee has supplied the goods to those parties in the normal course of business and these advances have been adjusted against such supply of goods in the subsequent year. Thus, there cannot be addition holding the same advances as unexplained. The learned Authorised Representative relied upon the decision of Tribunal in case ofACIT v. Montage Enterprises (P) Ltd. (ITA No. 4014/Del/2011, dated 14-1-2019) : 2019 TaxPub(DT) 1340 (Del-Trib). The learned Authorised Representative further submitted that this addition made is on the basis of arbitrariness and by indulging into surmises without providing any cogent reasons.
10. The learned Departmental Representative submitted that the assessee could not prove the transaction under section 68 and hence, in absence of identity, genuineness and credit worthiness of the customers who have given advances, this addition was rightly done by the assessing officer. The learned Departmental Representative relied upon the assessment order and the order of the Commissioner (Appeals).
11. We have heard both the parties and perused all the relevant materials available on records. The assessee has produced relevant documents before the assessing officer but the assessing officer has not taken any cognizance of these documents. In fact, the assessee duly filed the details of advances received from customers alongwith the details of current liabilities and also the sales invoices raised in the subsequent years and the record shows that these advances have been cleared in the subsequent years. Thus, the genuineness, creditworthiness and identity of the customers in fact was proved by the assessee. Therefore, this disallowance was not proper on part of the assessing officer as well as the Commissioner (Appeals). Hence, Ground No. 3 is allowed.
12. As regards Ground No. 4, relating to disallowance of Rs. 5,67,633 on the account of excess interest paid on loan, the learned Authorised Representative submitted that these parties are not related as per section 40A(2) of the Income Tax Act. To demonstrate the same, the assessee pointed out related party disclosure mentioned in Note 35 of the Balance Sheet. The learned Authorised Representative further pointed out that the assessee also does not appear in the list of related party disclosure of M/s. KLJ Resources Ltd. and M/s. Prayag Polymers (P) Ltd. The learned Authorised Representative further submitted that the assessing officer did not question the genuineness of the loan and also did not alleged that the expense are not incurred for business purpose. The expenditure recorded in the books of the assessee were offered to Tax as income as interest received by KLJ Resources Ltd. and Prayag Polymers (P) Ltd. Hence, the learned Authorised Representative submitted that the effect of disallowance would be tax neutral, and lead to double taxation of the same income. The learned Authorised Representative further pointed out that the fair market value has to be determined having regards to the terms of the contract, which are decided keeping in view the business expediency. The learned Authorised Representative further submitted that the additions made by the assessing officer are merely on the surmises and conjecture without considering the business expediency behind such expenses. The learned Authorised Representative relied upon the following decisions :–

(a) S.A. Builders Ltd. v. CIT (Appeals), Civil Appeal No. 5811 of 2005 with 5812 of 2006, (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 0833 (SC).

(b) CIT v. Panipat Woollen & General Mills Co. Ltd. (1976) 103 ITR 66 (SC) : 1976 TaxPub(DT) 0652 (SC).

(c) CIT v. Walchand & Co. (P) Ltd. (1967) 65 ITR 381 (SC) : 1967 TaxPub(DT) 0323 (SC).

(d) CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del. HC) : 2012 TaxPub(DT) 2071 (Del-HC)

(e) Upper India Publishing House (P) Ltd., (1979) 117 ITR 569 (SC) : 1979 TaxPub(DT) 0844 (SC).

(f) Motilal Laxmichand Sanghavi v. ACIT in [ITA No. 3110/Mum/2018, dated 26-7-2019] : 2019 TaxPub(DT) 6611 (Mum-Trib).

(g) Harparshad and Company (P) Ltd. v. ACIT in ITA No. 1128/Del/2017, dated 14-10-2019] : 2019 TaxPub(DT) 6962 (Del-Trib).

The learned Authorised Representative further submitted that without prejudice to the earlier submissions it should be considered that the assessing officer has complied with conditions stipulated in section 40A(2) i.e. (i) the payment in respect of which deduction has been claimed must have been made to a related party and

(ii) such payment must be excessive and unreasonable having regard to the market rate.

13. The learned Departmental Representative relied upon the assessment order and order of the Commissioner (Appeals).
14. We have heard both the parties and perused all the materials available on records. The expenses were recorded in the books of accounts of the assessee and were offered to tax as income as interest received by M/s. KLJ Resources Ltd. and Prayag Polymers (P) Ltd. The assessee does not appear in the list of related party disclosure of M/s. KLJ Resources Ltd. and Prayag Polymers (P) Ltd. It is interesting to note that the assessing officer neither questioned genuineness of loan nor alleged that the expenses are not incurred for business purpose. In fact, from the perusal of documents it can be seen that these expenses were incurred for business purpose only. Therefore, Ground No. 4 is allowed.
15. As regards Ground No. 5, relating to disallowance of Rs. 5,13,810 on the account of Diwali expenses, the learned Authorised Representative submitted that the assessing officer wrongly assumed that the payment was made to M/s. MMTC Ltd. is for purchase of gold items. However, it was made for purchase of low value silver coins that are generally distributed among the staff members on the occasion of Diwali. The learned Authorised Representative submitted that the assessee during the course of assessment proceeding submitted the copy of ledger account as well as copy of confirmations from employees alongwith copy of invoice from MMTC in the name of the assessee company. The learned Authorised Representative submitted that it is a settled principle of law that the assessing officer cannot question the expenditure which is incurred for the business expediency. The learned Authorised Representative relied upon the decision of the Tribunal in case ofShri Manoj Kumar, (Prop. Shivam Corporate and Management Services) v. ITO (ITA No. 2350/Del/2016), dated 21-3-2018) : 2018 TaxPub(DT) 1883 (Del-Trib).
16. The learned Departmental Representative relied upon the order of the Commissioner (Appeals) and the assessment order.
17. We have heard both the parties, perused the relevant materials available on record. It is pertinent to note that these expenses were documentarily proved before the assessing officer, which was not questioned at the time of assessment proceedings by the Revenue authorities. Thus, these expenses are genuine and were properly claimed by the assessee. The assessing officer as well as the Commissioner (Appeals) has not taken the cognizance of the documents. Hence, Ground No. 5 is allowed.
18. In the result, appeal of the assessee is allowed.

***********************************************

Income Tax Act on Your Mobile Now Android Application For Income Tax Act – 1961 with Cost Inflation Index and other tools on Mobile now at following link:

https://play.google.com/store/apps/details?id=com.thetaxtalk&hl

***********************************************

Whatsapp Group at

1. https://chat.whatsapp.com/D1W23x7GQL9HOg46zV8eS8

 

2. https://chat.whatsapp.com/E7RGPv3coZ8InNp9bfc3a2

 

***********************************************
For Tax & Corporate Law Updates on Mobile, we have created Telegram and Whatsapp Group with following Link: Telegram Group at –

https://t.me/joinchat/IJKacBcf0iWGoIpf8ah-HA