2016 (6) TMI 39 - AT - Income Tax

Disallowance of the legal expenses - Held that - AO has disallowed the legal expenses only on the ground that these expenses were not related to the business activities of the assessee. The bills and vouchers produced in the paper book depicts that the assessee have been taking legal advisers from advocates and consultants. Considering the kind of activity carried on by the assessee there is a need for day-to-day consultation with advocates and consultants in respect of the sale of plant and machinery. The authorities below have contended that certain bills pertains the previous year relevant to the assessment year under consideration, the same has been received in the current assessment year. Merely because the assessee has received the bill in the current assessment year the same cannot be disallowed for the reason that it is an ongoing pendency in the legal profession that a memo of appeal is raced by the professional consultant for any work carried out by them during the year. Such situations cannot be categorized and disallowed under prior period expenses. Since the bills have been received in the year under consideration the liability for payment of these expenses also gets crystallized during the year under consideration. - Decided in favour of assessee Addition in respect of unaccounted sale - Held that - AO proceeded to make addition on the sale amount received from other parties, on the basis, as the assessee had taken 75% of sale amount in black from M/s.Sai Trading Co. as M/s.Laxmi Steels. The assessing officer has not recovered any documents/records which could support the additions made by the Ld. AO on the sale amount from other parties. It is very much apparent from the assessment order that the assessing officer has made this addition of surplus unaccounted sale on a mere guesswork. This being the position and respectfully following the ratio laid down in the case of the Dhakeshwary cotton Mills Ltd., (1954 (10) TMI 12 - SUPREME Court) and Kulwant Rai (2007 (2) TMI 185 - DELHI High Court ) we delete the addition made by the assessing officer on account of unaccounted sales. - Decided in favour of assessee

Summary

Issues:
1. Disallowance of legal expenses
2. Addition of unaccounted sale
3. Justification of lower authorities' orders

Analysis:

Issue 1: Disallowance of Legal Expenses
The assessee appealed against the disallowance of legal expenses amounting to ?6,91,171 by the Ld. CIT(A). The assessing officer had disallowed the claim on the grounds that the expenses were related to the assessee's sister concern. The Ld.AR argued that the expenses were for professional charges paid to lawyers and consultants for business activities and ongoing litigation. The Ld. AR provided bills and vouchers to support the claim. The ITAT found that the assessing officer did not question the genuineness of the expenses. The ITAT concluded that the legal expenses were related to the business activities of the assessee, and bills received during the year crystallized the liability for payment. Therefore, the ITAT allowed this ground of appeal.

Issue 2: Addition of Unaccounted Sale
The appeal also contested the addition of ?1,56,24,699 for unaccounted sale proceeds. The Ld.AR argued that the assessing officer's addition was arbitrary and hypothetical, based on guesswork. The ITAT noted that the addition lacked cogent material and was made on surmises. Citing legal precedents, the ITAT emphasized that assessments cannot rely on imagination or guesswork. The ITAT found that the assessing officer's reasoning was not supported by seized material or concrete evidence. Therefore, the ITAT deleted the addition of unaccounted sales, following established legal principles.

Issue 3: Justification of Lower Authorities' Orders
The ITAT reviewed the orders of the lower authorities and the arguments presented by both sides. It concluded that the additions made by the assessing officer lacked a proper basis and were not supported by substantial evidence. Relying on legal precedents, the ITAT determined that the additions were arbitrary and not in accordance with established legal principles. Consequently, the ITAT allowed the grounds raised by the assessee and ruled in favor of the appellant.

In conclusion, the ITAT allowed the appeal, finding in favor of the assessee on both the disallowance of legal expenses and the addition of unaccounted sale proceeds. The judgment emphasized the importance of concrete evidence and adherence to legal principles in making tax assessments.