2016 (5) TMI 1391 - AT - Income Tax

Disallowance of cash expenses - addition u/s 40A - Held that - As looking to the nature of expenses incurred by the assessee, it is difficult to get a third party bill for most of the expenses and incurring of cash expenses in this line of activities seems to be quite inevitable. However, looking to the facts and circumstances and that some of the expenses cannot be put to full verification, therefore, in the interest of justice, we are reducing the disallowance of cash expenses to 5%. Accordingly, the disallowance on account of cash expenses would be 5% and thus the ground raised by the assessee is partly allowed.

Summary

Issues:
1. Disallowance of cash expenses amounting to 10% of total expenses.
2. Justification for incurring cash expenses in the business of production of commercial films.
3. Appeal against CIT(A)'s decision confirming the disallowance of expenses.
4. Presentation of detailed expenses breakdown by the assessee.
5. Ad-hoc disallowance and reduction of disallowance percentage by the ITAT.

Issue 1: Disallowance of Cash Expenses
The Assessing Officer (AO) noted cash expenses of ?1,40,36,506 debited by the assessee during the assessment proceedings. Subsequently, 10% of these expenses were disallowed due to lack of third-party bill support. The AO reasoned this disallowance in paragraphs 4.4 to 4.5 of the assessment report.

Issue 2: Justification for Cash Expenses
The assessee, engaged in commercial film production, explained to the AO the necessity of incurring cash expenses in this line of business. Despite submitting cash vouchers and justifying the nature of expenses, the AO found a significant portion of expenses unsupported by third-party bills, leading to the disallowance.

Issue 3: Appeal Against Disallowance
The assessee appealed to the CIT(A) against the disallowance. The CIT(A) upheld the disallowance, emphasizing that keeping expenses below ?20,000 to evade section 40A(b) indicated a deliberate attempt. The CIT(A) deemed the total cash expenses of 5.6% as unreasonably high for the business nature, affirming the AO's decision.

Issue 4: Detailed Expenses Breakdown
During the appeal before the ITAT, the assessee's counsel presented a detailed breakdown of expenses, including director fees, camera crew costs, setting expenses, equipment and costume hire charges, staff welfare expenses, location hire charges, production expenses, travel costs, and miscellaneous expenses for the assessment year 2009-10.

Issue 5: Ad-hoc Disallowance and ITAT's Decision
Upon reviewing the case and considering the challenges in obtaining third-party bills for certain expenses, the ITAT acknowledged the inevitability of cash expenses in the film production business. However, to ensure justice and verification, the ITAT reduced the disallowance percentage from 10% to 5%. Consequently, the ITAT partially allowed the assessee's appeal, modifying the disallowance on account of cash expenses to 5%.

The ITAT's decision in this case reflects a balanced approach, recognizing the challenges faced by the assessee in verifying cash expenses while also upholding the need for reasonable substantiation. The reduction in the disallowance percentage to 5% showcases a pragmatic resolution to address the unique circumstances of the business involved.