2019 (6) TMI 1497 - AT - Income Tax

Disallowance of expenditure - Addition of 1/3rd of the expenditure claimed under the heads purchases, salaries and administrative expenses - CIT-A allowed telescoping of ₹ 30 lakhs offered by the assessee against the disallowance of expenditure made by him - HELD THAT - As purchases are of vegetables for the daily requirement of the assessee company and as rightly pointed out by assessee, it is not possible to maintain vouchers and bills for each of the purchases such as vegetables, fruits etc. However, inflation of purchases or expenditure cannot be ruled out as assessee itself had agreed for the disallowance on estimation basis at 10% of the turnover. Therefore, disallowance of 10% of the purchases on account of possibility of inflation is to be confirmed. As regards salaries are concerned assessee company being registered with ESI, cannot inflate the expenditure on account of salaries because number of employees and the salaries claimed by the assessee have to tally with the ESI returns filed by the assessee. Therefore, AO is directed to verify the same and if the claim made by the assessee on number of employees to whom salary is allegedly paid is matching with the number of employees mentioned in ESI return, no disallowance is to be made. As regards other administrative expenses all such expenses cannot be disallowed @ 10% without pointing out the defects in the books of the assessee, but, inflation of the expenses also cannot be ruled out. Therefore direct the AO to restrict the disallowance only to 5% of the administrative expenses - Appeal of the assessee is partly allowed.

Summary

Issues:
- Disallowance of expenses claimed by the assessee
- Reliability of books of account maintained by the assessee
- Assessment of total income by the Assessing Officer
- Appeal before the CIT(A) and subsequent appeal before the ITAT

Analysis:
1. The case involved an appeal by the assessee for the Assessment Year 2008-09 against the order of CIT(A) - 1, Guntur. The assessee, a company engaged in running hotels, had additional income of ?30,00,000 due to a search and seizure operation under the IT Act. The Assessing Officer (AO) observed discrepancies in the disclosed sales, administrative expenses, and turnover for the relevant years, leading to a rejection of the books of account and an estimation of net income at 10% of the gross turnover.

2. The CIT(A) granted partial relief by restricting the disallowance of expenditure to 1/3rd of the claimed amounts under specific heads. The assessee appealed to the ITAT, challenging the CIT(A)'s order on various grounds, including alleged violations of the law and errors in directing the AO to disallow specific expenses.

3. The assessee argued that the expenses, such as purchases, salaries, and administrative costs, were genuine and necessary for business operations. The counsel contended that the purchases, mainly from vegetable markets, were essential for the restaurant's food preparation and were mostly made from small vendors, justifying the absence of detailed vouchers. The counsel also defended the salaries and other administrative expenses as legitimate and supported by ESI records.

4. The ITAT analyzed the expenses in question and upheld a 10% disallowance on purchases due to the possibility of inflation. However, for salaries, the ITAT directed the AO to verify the ESI records to ensure the legitimacy of the claimed expenses. Regarding other administrative expenses, the ITAT found insufficient evidence provided to support the disallowance and restricted the disallowance to 5% of the total administrative expenses.

5. The ITAT's decision partially allowed the assessee's appeal, emphasizing the need for proper verification and documentation to substantiate expenses claimed. The judgment highlighted the importance of maintaining accurate records and complying with regulatory requirements to avoid disallowances and ensure the reliability of financial statements.

This detailed analysis of the judgment provides insights into the issues raised, arguments presented, and the ITAT's decision, offering a comprehensive understanding of the legal proceedings and outcomes.