2019 (11) TMI 652 - AT - Income Tax

Disallowance on ad-hoc basis on account of various expenses incurred during the year - HELD THAT - It is pertinent to note that the books of accounts produced by the assessee during the course of assessment proceeding were never doubted and were not rejected. The addition is only on the basis of presumption and assumption that decrease in sales amounts to decrease in expenses. The ledger accounts were very much produced before the Assessing Officer and the same was before the CIT(A). Merely on the basis of conjecture, the ad-hoc addition cannot be made without any tangible reason to do so. Addition on account of advances from the customers - HELD THAT - The assessee has produced relevant documents before the Assessing Officer but the Assessing Officer has not taken any cognizance of these documents. In fact, the assessee duly filed the details of advances received from customers alongwith the details of current liabilities and also the sales invoices raised in the subsequent years and the record shows that these advances have been cleared in the subsequent years. Thus, the genuineness, creditworthiness and identity of the customers in fact was proved by the assessee. Therefore, this disallowance was not proper on part of the Assessing Officer as well as the CIT(A). Disallowance on the account of excess interest paid on loan - HELD THAT - The expenses were recorded in the books of accounts of the assessee and were offered to tax as income as interest received by M/s. KLJ Resources Ltd. and Prayag Polymers Pvt. Ltd. The assessee does not appear in the list of related party disclosure of M/s. KLJ Resources Ltd. and Prayag Polymers Pvt. Ltd. It is interesting to note that the AO neither questioned genuineness of loan nor alleged that the expenses are not incurred for business purpose. In fact, from the perusal of documents it can be seen that these expenses were incurred for business purpose only. Therefore, Ground No.4 is allowed. Disallowance on the account of Diwali expenses - HELD THAT - It is pertinent to note that these expenses were documentarily proved before the Assessing Officer, which was not questioned at the time of assessment proceedings by the Revenue authorities. Thus, these expenses are genuine and were properly claimed by the assessee. The Assessing Officer as well as the CIT(A) has not taken the cognizance of the documents. Hence, Ground No.5 is allowed.

Summary

Issues Involved:
1. Legality and factual correctness of the CIT(A) order.
2. Disallowance of ?3,73,50,300/- on account of unexplained expenses.
3. Addition of ?1,06,20,125/- on account of advances from customers.
4. Disallowance of ?5,67,633/- on account of excess interest paid on loan.
5. Disallowance of ?5,13,810/- on account of Diwali expenses.

Detailed Analysis:

1. Legality and Factual Correctness of the CIT(A) Order:
The assessee challenged the order dated 10/07/2019 passed by the Commissioner of Income Tax (Appeals)-38, New Delhi, for the Assessment Year 2016-17, asserting that the order was "bad both in the eyes of law and on facts."

2. Disallowance of ?3,73,50,300/- on Account of Unexplained Expenses:
The assessee contended that the Assessing Officer (AO) disallowed expenses based on the assumption that expenses should proportionately decrease with sales. The AO observed a decline in sales by 5.62% from ?3,20,49,20,000/- in F.Y. 2014-15 to ?3,02,90,97,000/- in F.Y. 2015-16 and disallowed the expenditure exceeding 1.05% of the previous year's expenses. The assessee argued that the AO did not reject the audited books of accounts nor found any irregularity in the ledger accounts. The expenses were claimed under Section 37(1) of the Income Tax Act, 1961, as wholly and exclusively for business purposes. The Tribunal noted that the addition was based on "presumption and assumption" without tangible material and allowed Ground No. 2 in favor of the assessee.

3. Addition of ?1,06,20,125/- on Account of Advances from Customers:
The assessee provided details of advances received from customers, which were cleared in subsequent years with corresponding sales invoices. The AO did not consider these documents, leading to the addition. The Tribunal found that the assessee proved the genuineness, creditworthiness, and identity of the customers, and thus, the addition was unwarranted. Ground No. 3 was allowed.

4. Disallowance of ?5,67,633/- on Account of Excess Interest Paid on Loan:
The assessee argued that the parties involved were not related as per Section 40A(2) of the Income Tax Act, 1961, and the interest payments were genuine business expenses. The AO did not question the genuineness of the loan or the business purpose of the expenses. The Tribunal noted that the expenses were recorded in the assessee's books and offered to tax, thus the disallowance was unjustified. Ground No. 4 was allowed.

5. Disallowance of ?5,13,810/- on Account of Diwali Expenses:
The AO assumed the payment to MMTC Ltd was for gold items, but the assessee clarified it was for low-value silver coins distributed among staff during Diwali. The assessee provided ledger accounts, employee confirmations, and MMTC invoices. The Tribunal found these expenses were genuine and incurred for business purposes, and the AO and CIT(A) did not properly consider the documents. Ground No. 5 was allowed.

Conclusion:
The Tribunal allowed the appeal, overturning the disallowances and additions made by the AO and upheld by the CIT(A), finding them to be based on assumptions and without proper consideration of the evidence provided by the assessee. The order was pronounced in the Open Court on 7th November 2019.