2019 (5) TMI 416 - AT - Income Tax

Disallowance of expenditure of transportation and handling charges for fresh fruit bunches for the A.Y. 2013-14 and disallowed 80% of the expenditure for the A.Y.2014-15 which indicates that FFB expenditure - HELD THAT - Nature of expenditure incurred by the assessee is that of loading, unloading charges at collection centers, transportation expenses from collection center to manufacturing unit, further loading and unloading charges from manufacturing centre to the empty bunches clearance centre and the identical expenditure of transportation from manufacturing unit to dumping location and unloading charges at the dumping location. These activities are necessary for any manufacturing of palm oil. Expenditure incurred relating to the FFBs appears to be inevitable and the business cannot run without incurring such expenses. From going through the P L account, it reveals that the assessee did not debit any other expenditure relating to the collection of fresh fruit bunches and clearance of empty bunches under any other head and there is no dispute on this issue. The assessee has adopted the method of contractual payments instead of factual and actual expenditure and the modus operandi adopted by the assessee for booking the above expenditure is not in order as rightly observed by the Ld.CIT(A). After going through the note, we agree with the observation of the Ld.CIT(A) that without carrying on the above activities and incurring the expenditure, the company cannot run it s basic operations and make finished product. It is basic requirement for the company to collect the fresh fruit bunches of palm from collection centers to the manufacturing unit and clear the empty bunches as per the pollution control norms. The AO did not make any personal inspection to estimate the probable / reasonable expenditure to be incurred on said activities of the company. AO also did not reject the books of accounts when he suspected the genuineness of expenditure. The assessee has submitted the comparative chart of the expenditure incurred in the earlier years and on comparative study, the expenditure allowed by the CIT(A) appears to be reasonable. Though the identical expenditure was debited in the earlier years, the AO did not make any disallowance. DR or the AO did not place any evidence to show that the process explained by the assessee in the note is faulty or the expenditure allowed by the CIT(A) is unreasonable and or excessive. Therefore, considering the facts and merits of the case, we are of the considered opinion that disallowance of expenditure to the extent of 30% appears to be reasonable. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeals of the revenue as well as the assessee. Addition was made on agreed basis - ground regarding that the assessee had agreed for the disallowance of expenditure - HELD THAT - In assessment the assessee had agreed for the disallowance due to paucity of time and subject to not to initiate the penalty proceedings. The assessing officer did not accept the conditional offer made by the assessee and proceeded to complete the assessment and initiated the penalty proceedings u/s 271(1)(c). Once the AO rejects the conditional offer, the same loses its character of binding nature and is no longer valid. Hence the revenue s appeal on this ground untenable, hence, dismissed.

Issues Involved:
1. Condonation of delay in filing appeals.
2. Disallowance of Fresh Fruit Bunching (FFB) expenses for A.Y. 2013-14 and A.Y. 2014-15.
3. Reasonableness of the disallowance percentage.
4. Conditional offer made by the assessee during assessment proceedings.
5. Addition of ?21,000/- pertaining to donations.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing Appeals:
The Assessing Officer (AO) filed appeals with a delay of 31 days, accompanied by a petition explaining the reasons for the delay. The assessee's representative did not object to the condonation of delay. After hearing both parties, the delay was condoned, and the appeal was admitted.

2. Disallowance of Fresh Fruit Bunching (FFB) Expenses:
For A.Y. 2013-14, the assessee declared a loss of ?1,18,01,012/-. During scrutiny, the AO found that the assessee had debited ?3,28,27,958/- towards FFB expenses. The AO issued summons to subcontractors who were either employees or relatives of employees of the assessee company. Upon verification, it was found that these subcontractors did not maintain any books of accounts or produce any bills or vouchers. The AO disallowed the entire expenditure of ?2,46,45,671/- for A.Y. 2013-14 and 80% of ?3,17,99,320/- for A.Y. 2014-15, citing non-genuine claims.

3. Reasonableness of the Disallowance Percentage:
The CIT(A) reviewed the process of collection, handling, and transportation of FFBs and concluded that the expenditure was inevitable for the business operations. However, the CIT(A) found the modus operandi for booking the expenditure to be improper and held that disallowance of 30% of the expenses was reasonable. The CIT(A) directed the AO to restrict the disallowance to 30% for both A.Y. 2013-14 and A.Y. 2014-15, allowing relief of 70%.

4. Conditional Offer Made by the Assessee:
During assessment proceedings, the assessee conditionally accepted the addition of expenditure, subject to the non-initiation of penalty proceedings under Section 271(1)(C). The AO rejected this conditional offer and proceeded with the assessment, initiating penalty proceedings. The tribunal held that once the AO rejects the conditional offer, it loses its binding nature and is no longer valid.

5. Addition of ?21,000/- Pertaining to Donations:
For A.Y. 2013-14, the AO added ?21,000/- for donations, which was not allowable as an expenditure. The CIT(A) confirmed this addition, and during the appeal hearing, the assessee did not contest this issue. Therefore, this ground of appeal was dismissed as not pressed.

Conclusion:
The tribunal upheld the CIT(A)'s order, finding the 30% disallowance of FFB expenses reasonable and dismissing the appeals of both the revenue and the assessee. The tribunal also dismissed the cross objections filed by the assessee as infructuous. The appeal regarding the addition of ?21,000/- for donations was dismissed as not pressed. The order was pronounced in the open court on 30th April 2019.

← Previous Next →