2015 (12) TMI 1542 - AT - Income Tax

Addition on account of Freight Expenses, Packing Expenses, Power & consumption Expenses, Machinery Expenses and Tools & Consumable Expenses - Held that - For freight assessee submitted before AO detailed copy of account showing that assessee engaged M/ Swift freight movers as freight forwarders for export shipment and all payments were made by cheques and further Tax deduction at source was also made by appellant. Therefore in our opinion the above facts read together gives complete picture of the freight expenses and to whom it is paid and whether he is assessed to tax and whether such expenses are in relation to export sales. This would have open floodgates of information for the AO to determine whether expenditure incurred by assessee are wholly and exclusively for the business or not. But no such efforts were made. Therefore statement of AO that there is no documentary evidence is produced by assessee before him is a hollow statement. Further the assessment proceedings started with the first notice u/s 143(2) on 18.09.2008 and assessment continued and concluded on 18.12.2009 i.e. almost 14 months , this time period shows that AO has ample time to exercise all the power vested up on him by the Act and gather adequate evidence to make concrete disallowance, if at all any. The powers bestowed up on assessing officer are very wide and most effective which were used very sparsely in this case. Therefore there is no basis, except statistics, for making contested disallowance in the hands of assessee. In our view this is not sufficient to uphold disallowances. In this back drop, ad hoc disallowance made by AO cannot be sustained and CIT (A) has rightly deleted the same. Therefore we confirm the order of CIT (A) and dismiss the appeal of revenue.

Summary

Issues:
- Disallowance of expenses made by AO
- Justification for disproportionate increase in expenses
- Ad hoc disallowance of expenses
- Adequacy of evidence for expenses

Analysis:
1. The appeal pertains to the disallowance of expenses by the Assessing Officer (AO) for the assessment year 2007-08. The AO made ad hoc disallowances on various expense heads such as Freight Expenses, Packing Expenses, Power & Consumption Expenses, Machinery Expenses, and Tools & Consumable Expenses, totaling Rs. 1,85,76,401, due to a perceived disproportionate increase compared to sales.

2. The Assessee, engaged in iron and steel forging, provided explanations for the expense increases during the assessment proceedings. The AO, despite receiving explanations and some supporting documents, made ad hoc disallowances. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, emphasizing that complete details were furnished, and disproportionate increase alone is not a valid ground for disallowance.

3. The Revenue, dissatisfied with the CIT(A)'s decision, contended that the AO's ad hoc disallowances were justified due to the disproportionate expense increase. The Revenue argued that the CIT(A) erred in deleting the additions without adequate inquiry into the expenses.

4. The Assessee's representative argued that all expenses were supported by proper documentation and were essential for business purposes. They highlighted that high-value bills and ledger accounts were submitted, refuting the AO's ad hoc disallowances. The representative cited legal precedents to support their stance against ad hoc disallowances.

5. The Tribunal analyzed the contentions and found that the AO did not provide reasons for rejecting the Assessee's explanations or conduct a detailed inquiry into the expenses. The Tribunal noted the increase in sales and the Assessee's responses regarding expense justifications. The Tribunal criticized the AO for not thoroughly verifying the Assessee's submissions and for resorting to ad hoc disallowances without concrete evidence.

6. Ultimately, the Tribunal upheld the CIT(A)'s decision to delete the disallowances, emphasizing that the AO's actions lacked sufficient basis beyond statistical comparisons. The Tribunal dismissed the Revenue's appeal, affirming that the ad hoc disallowances were not sustainable in the absence of concrete evidence or detailed inquiry by the AO.

In conclusion, the Tribunal dismissed the Revenue's appeal, supporting the CIT(A)'s decision to delete the ad hoc disallowances of expenses, as the AO failed to conduct a thorough inquiry and provide valid reasons for the disallowances.