2017 (1) TMI 563 - AT - Income Tax

Disallowance excess payment made u/s 40 A(2)(b) - payment to the specified person - excessive and unreasonable expenditure - Held that - We have gone through the submission of both the sides and find that the assessee has made payment excess by 3% to the three above stated related parties because of sourcing of double filter edible oil. We observed that it is clear that double filter oil is more costly than the filter oil and it also fetch more price in the market than the filtered oil. We find that learned CIT appeal has justified his decision keeping in view the nature of business, volume and quality of products involved. In view of above facts and findings, we do not find any reason to interfere in the finding of the learned Commissioner of Income Tax (appeal). Disallowance out of Kharagat expenses - Held that - We noticed that the assessing officer had disallowed 10% of the Kaharjat expenses incurred in cash of ₹ 2, 72,8,756 - incurred in cash on the ground that most of the expenses were incurred in cash and the vouchers not contained the detail of rate of payment and the destination where the oil was delivered. We find that the assessing officer had not pointed out any specific defects and the disallowance was made on general assumption that expenses were incurred in cash and the vouchers not contained the detail of rate of payment and the destination where the oil was delivered for want of proper maintenance of vouchers. Looking to the volume of expenditure incurred in cash and the facts reported by the Ld. CIT(A), we uphold the decision of the ld. CIT(A) to restrict the disallowance to the extent of being 3% of the Khargat expenses incurred in cash. Shortage in loose ground nut oil and cotton seeds oil - Held that - We noticed that the assessee s claim of shortage of oil in percentage term comes to 0.19% to 0.23% which was not unusual. We observed that the shortage in oil had been taken place in the process of transforming the oil from the tankers to storage tanks and therefore into the packing material such as bottles, jars tins and pouches. We find that the assessing officer had disallowed the shortage in oil without any supporting material just on the basis of presumption and guess work. In view of the above stated facts and findings, we considered that the Ld. Commissioner of Income Tax(A) is justified in allowing the claim of the assessee.

Summary

Issues Involved:
1. Disallowance of ?2,19,919 under Section 40A(2)(b) of the Income Tax Act.
2. Disallowance out of 'Kharajat Expenses.'
3. Disallowance due to shortage in groundnut oil and cottonseed oil.

Issue-wise Detailed Analysis:

1. Disallowance of ?2,19,919 under Section 40A(2)(b) of the Income Tax Act:
During the assessment proceedings, the Assessing Officer (AO) observed that the assessee made payments to related parties at higher prices, invoking Section 40A(2)(b) of the Income Tax Act. The AO disallowed ?2,19,919 as excessive payment. The assessee explained that higher prices were due to the need for double-filtered oil, which costs more. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's explanation, noting that the payments were only 2-3% higher and justified due to the quality requirements for maintaining the brand image. The CIT(A) found the AO's comparison with non-specified persons inappropriate, as the payments were not abnormally excessive. The Tribunal upheld the CIT(A)'s decision, agreeing that the higher payments were justified by the nature of the business and the quality of products involved.

2. Disallowance out of 'Kharajat Expenses':
The AO noticed that the assessee incurred significant 'Kharajat Expenses' in cash, with vouchers lacking details like payment rates and delivery destinations. The AO disallowed 10% of these expenses. The assessee argued that the expenses were genuine and requested a 1% disallowance. The CIT(A) restricted the disallowance to 3%, noting that the AO's disallowance was arbitrary and not based on specific defects. The Tribunal upheld the CIT(A)'s decision, finding that the AO's disallowance was based on general assumptions without pointing out specific defects in the vouchers.

3. Disallowance due to shortage in groundnut oil and cottonseed oil:
The AO disallowed ?28,39,945 due to an observed shortage of 54,670 kgs of oil, allowing only a minimal shortage. The CIT(A) deleted the addition, noting that the AO's disallowance was arbitrary and not based on any independent inquiry or evidence of bogus claims. The CIT(A) found the shortage claimed by the assessee (0.19% to 0.23%) to be reasonable given the nature of the business. The Tribunal agreed, noting that the AO's disallowance was based on presumption and guesswork without supporting material. The Tribunal upheld the CIT(A)'s decision, finding the shortage claim justified by the process of oil transformation and packing.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all three issues. The Tribunal found that the CIT(A) had appropriately justified the disallowances and deletions based on the nature of the business, quality of products, and the absence of specific defects or supporting material for the AO's disallowances. The order was pronounced in the open court on 02-01-2017.