2014 (2) TMI 1163 - AT - Income Tax

Disallowance of expenses - Proof of expenses not submitted - Held that - As the assessee could not furnish bills and vouchers of expenses, the AO disallowed the same by observing that provisions were made for unascertained liabilities - As per the details of provisions so made in respect to of various expenditure, it appears that these expenditures were related to the business carried on by the assessee. However, since the assessee failed to submit bills/voucher of these expenditures as well as TDS, if any, deducted at source, the AO has disallowed the same by observing that these were unascertained liabilities. There is no dispute to the fact that expenditure can be allowed as deduction under Income Tax Act as provided under Sections 32 & 37 of the IT Act. Such expenditures are required to be proved as having been incurred wholly and exclusively for the purpose of business dully supported by bills and vouchers. Mere provision of expenses cannot be allowed unless same is ascertained and quantified with reference to the bills of expenses. Since assessee is required to follow mercantile system of accounting, only the expenditure accrued and pertaining to the year under consideration can be allowed. The AO has also disallowed 50% of expenditure on ad-hoc basis. These expenditures were in the nature of staff welfare, conveyance and travelling. The ad-hoc disallowance was made on the plea that there was substantial increase in the expenditure in the month of March, 2006 and assessee could not satisfactorily explain the reasons for increase. We found that before making ad-hoc disallowance of 50%, the AO has not pinpointed any of the expenditure which was not properly vouched or not supported by bills etc. It is also not in dispute that expenditures were incurred for the purpose of business. Genuineness of expenses were also not doubted. Keeping in view the totality of the facts and circumstances of the case, we direct the AO to restrict the disallowance of these expenditures to the extent of 20% in place of 50% disallowed by the AO. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance of Liabilities
2. Expenses disallowed u/s.37(1)
3. Levy of interest u/s.234B and 234D

Issue 1: Disallowance of Liabilities

The assessee appealed against the disallowance of liabilities amounting to Rs. 1,60,22,503 claimed as year-end provisions of various expenses. The AO disallowed these provisions as unascertained liabilities since proper bills and vouchers were not submitted. The CIT(A) upheld the disallowance. The ITAT found that the expenses were related to the business but disallowed them due to lack of supporting documents. The ITAT directed the AO to verify the actual incurring of expenses by examining bills, vouchers, and payment details. The ITAT emphasized the need for expenses to be proved as incurred exclusively for business purposes, as per Sections 32 and 37 of the IT Act. The issue was remanded back to the AO for fresh consideration based on the ITAT's observations.

Issue 2: Expenses disallowed u/s.37(1)

The AO ad-hocly disallowed 50% of expenses related to staff welfare, conveyance, and traveling due to a significant increase in March 2006 without proper explanation. The ITAT noted that the genuineness of expenses was not in doubt, and no specific expenses were found to be unsupported. The ITAT directed the AO to reduce the disallowance from 50% to 20% considering the business purpose of the expenses and lack of evidence of any irregularities. The ITAT's decision aimed to ensure a fair assessment of the expenses incurred by the assessee.

Issue 3: Levy of interest u/s.234B and 234D

The issue of interest levied under sections 234B and 234D was considered consequential and dismissed by the ITAT. The ITAT's decision on this issue was based on its findings regarding the primary issues of expense disallowance and liabilities. The dismissal of this issue indicated that the primary concerns addressed by the ITAT's judgment were resolved through the directions given to the AO for reevaluation.

In conclusion, the ITAT's judgment provided detailed considerations on the disallowance of liabilities, ad-hoc disallowance of expenses, and the levy of interest under sections 234B and 234D. The ITAT's decision aimed to ensure a fair assessment of the expenses incurred by the assessee and emphasized the importance of supporting documentation and proper verification by the tax authorities.