2019 (1) TMI 1519 - AT - Income Tax

Adhoc disallowance of direct expenses - discounts to sales - basis for disallowing the claim of the assessee - Held that - CIT(A) has agreed that in the earlier years, discount on sales was reduced from the sale figure and only net sale was shown in the P&L A/c and whereas in the impugned assessment year, gross sales figure has been shown in the receipts side of P&L A/c and the discounts were shown as direct expenses in the payment side of the P&L A/c. When the CIT(A) has accepted this explanation, there is no basis for disallowing the claim of the assessee. There is not finding that the discounts given were more than the previous year as a percentage of sales. When the percentage of discounts to sales is consistent over the years then the ad-hoc disallowance is bad in law. Just because there are certain difficulty in verification of bills, the discounts cannot be restricted to the absolute figure of what amount was allowed in the immediately previous year. The discount in question is linked to the sales and is business expenditure. We see no reason why the discount should be restricted by the CIT(A) while agreeing with the contention of the assessee. The adhoc disallowance made by the AO, in our view is factually and legally not sustainable. We allow Ground of the assessee and direct the AO to grant deduction of the balance amount of discount claimed by the assessee. Disallowance of collection charges - Held that - The grant of disallowance cannot be sustained. No disallowance can be made on the ground that verification of documents/evidences is time consuming. Admittedly the assessee has produced bills and vouchers as desired by the AO in the remand proceedings, when this fact is not denied, the disallowance cannot be sustained, thus, Ground of assessee is allowed.

Summary

Issues:
1. Adhoc disallowance of direct expenses by AO based on abnormal increase in expenditure and lack of evidence.
2. Adhoc disallowance of collection charges by AO on the ground of abnormal increase without objective verification.

Adhoc Disallowance of Direct Expenses:
The assessee, a company engaged in sales and services of vehicles, spare parts, and accessories, filed its income tax return for AY 2008-09 showing a loss. The AO disallowed direct expenses and collection charges on an adhoc basis due to abnormal increase and lack of evidence. The CIT(A) agreed with the assessee that there was no abnormal increase in direct expenses and it was a method of accounting. The discounts given as sales were shown as direct expenses, which the CIT(A) reduced to the extent of discounts claimed in earlier years. The ITAT held that the adhoc disallowance by the AO was not sustainable as the discounts were linked to sales and consistent over the years. The ITAT allowed the appeal and directed the AO to grant deduction for the balance amount of discount claimed by the assessee.

Adhoc Disallowance of Collection Charges:
The AO made an adhoc disallowance of collection charges, which the CIT(A) confirmed based on the expectation that charges should fall with a decrease in business volume. However, the ITAT found that no disallowance can be made solely on the ground of time-consuming verification. The assessee had provided bills and vouchers as requested by the AO during remand proceedings. As the disallowance was not supported by valid reasons, the ITAT allowed this ground of appeal. Consequently, the ITAT allowed the appeal of the assessee against the adhoc disallowance of collection charges.

In conclusion, the ITAT Kolkata allowed the appeal of the assessee against the adhoc disallowance of direct expenses and collection charges for AY 2008-09. The ITAT held that the disallowances made by the AO were not sustainable as there was no abnormal increase in expenses and the verification process should not be a basis for disallowance without valid reasons.