2023 (6) TMI 1265 - AT - Income Tax

Disallowance being 10% of office expenses - HELD THAT - As we note that ITAT Ahmedabad in the assessee s own case for assessment year 2007- 08 2010 (7) TMI 1222 - ITAT AHMEDABAD allowed the appeal of the assessee on this identical issue as held no quantum of amount is specified as to how which expenditure was not supported by any bills/vouchers. AO has also not pointed out as to which of the expenditure was inadmissible in nature. It, therefore, appears that the AO has made ad hoc addition of 15% out of the total expenditure. - Decided in favour of assessee. Disallowance of Attimari Coolie expenses - CIT(Appeals) held that considering the fact that the entire expenditure has been made in cash, the genuineness of expense cannot be verified, accordingly disallowed 25% of such expenses u/s 37 - HELD THAT - As decided in assessee own case 2018 (7) TMI 2312 - ITAT MUMBAI as held as the assessee filed ledger account of Attimari Coolie Expenses and also vouchers for payment of such charges on sample basis.Going by the decision of G.G. Joshi 1993 (9) TMI 39 - GUJARAT HIGH COURT and findings of CIT(A), we find no infirmity in the order of CIT(A). Hence, this issue of Revenue s appeal is dismissed. Inclusion of excise duty component in the closing stock of consumables - HELD THAT - As excise law, an assessee incurs liability to pay excise duty only upon both events taking place, namely, manufacture of excisable goods and removal of excisable goods and for purpose of Income-tax Act, position in law is not different. Therefore, excise duty cannot be included in value of closing stock of finished goods at end of accounting period. In view of the above decisions including one rendered by the jurisdictional Gujarat High Court in the case of Narmada Chematur Petrochemicals 2010 (4) TMI 1198 - GUJARAT HIGH COURT ground number 4 of the assessee s appeal is allowed. Disallowance out of consultancy expenses by treating the expenses as capital in nature - HELD THAT - The assessee has produced copy of the contract with M/s B.J. Services for our perusal as wellwhich indicates that these expenses have been incurred for carrying out high pressure pneumatic testing of piping system by use of liquid / gaseous nitrogen and the same have been incurred during the course of business of the assessee. As in the appellate order, Ld. CIT(A) has not given any specific reason why these expenses are required to be capitalized by the assessee, incurred during the course of execution of contract of the assessee with M/s Toyo Engineering. Therefore, services are revenue in nature - CIT(A) also required the assessee to capitalize some other expenses viz. management consultancy for software development and management consultancy fee for finance matters etc., however no specific reason has been assigned why the above expenses were required to be capitalized by the assessee. We are of the considered view that the expenses are revenue in nature and in the light of above discussion, ground Number 5 of the assessee s appeal is allowed. Penalty u/s 271(1)(c) - ITAT has restricted the disallowance to 25% of the expenses on estimated basis - HELD THAT - In the case of Vision Research Management (P.) Ltd 2014 (11) TMI 1228 - ITAT LUCKNOW ITAT held that imposition of penalty upon assessee u/s 271(1)(c) on basis of ad hoc and estimated disallowance/addition, without bringing any clinching material suggesting concealment of income or furnishing of inaccurate particulars of income, was not justified. Again, in the case of Gurunanak Oil Agency 2013 (3) TMI 718 - ITAT JODHPUR held that where additions were based on estimated disallowance of expenses, penalty under section 271(1)(c) could not be imposed. In view of the above, we are of the considered view that this is not a fit case of imposition of penalty. Decided in favour of assessee.

Issues Involved:
1. Disallowance of 10% of office expenses.
2. Disallowance of 25% of Attimari Coolie expenses.
3. Applicability of provisions of section 40A(3) of the Act to payments.
4. Inclusion of excise duty component in the closing stock of consumables.
5. Disallowance of consultancy expenses by treating them as capital in nature.
6. Penalty proceedings under section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

Issue 1: Disallowance of 10% of Office Expenses
The assessee contested the disallowance of Rs. 2,82,584/- being 10% of office expenses. The counsel for the assessee cited a previous ruling by ITAT Ahmedabad for the assessment year 2007-08, where a similar disallowance was overturned due to lack of evidence from the AO regarding unsupported expenses. The ITAT allowed the appeal, referencing the prior decision where the departmental appeal was dismissed due to the absence of material evidence by the AO. Consequently, ground number 1 of the assessee's appeal was allowed.

Issue 2: Disallowance of 25% of Attimari Coolie Expenses
The assessee's claim of Rs. 4,73,245/- for Attimari Coolie expenses saw a 25% disallowance amounting to Rs. 1,18,311/- due to lack of supporting evidence. The counsel for the assessee referred to a previous ITAT ruling where a similar disallowance was restricted to 25%. The ITAT confirmed that the disallowance was reasonable given the cash nature of the transactions and upheld the 25% disallowance. Thus, ground number 2 was dismissed as not pressed.

Issue 3: Applicability of Section 40A(3)
Since ground number 2 was not pressed, the related ground number 3 regarding the applicability of section 40A(3) to Attimari Coolie expenses was also dismissed as not pressed.

Issue 4: Inclusion of Excise Duty Component in Closing Stock
The CIT(A) enhanced the assessment by including the excise duty component of Rs. 4,89,852/- in the closing stock of consumables. The ITAT referenced multiple decisions, including those by the Supreme Court and Gujarat High Court, which held that excise duty should be excluded from the closing stock valuation. Based on these precedents, the ITAT allowed ground number 4 of the assessee's appeal.

Issue 5: Disallowance of Consultancy Expenses as Capital in Nature
The CIT(A) reclassified certain consultancy expenses as capital in nature, amounting to Rs. 1,07,54,021/-. The ITAT reviewed the agreements and invoices related to the consultancy services and found them to be revenue in nature, incurred during the course of business with the intent to expand. The ITAT cited various rulings, including those by the Delhi High Court and Karnataka High Court, which supported the revenue nature of similar expenses. Consequently, ground number 5 of the assessee's appeal was allowed.

Issue 6: Penalty Proceedings under Section 271(1)(c)
The appeal against the penalty confirmed by CIT(A) was considered in light of the quantum proceedings. Given that some grounds were allowed and others not pressed, the ITAT referred to precedents where penalties based on estimated disallowances were deemed unjustified. Citing cases like Vision Research & Management (P.) Ltd and Gurunanak Oil Agency, the ITAT concluded that the imposition of penalty was not warranted. Therefore, the appeal regarding penalty proceedings was allowed.

Conclusion:
The assessee's appeal concerning quantum proceedings was partly allowed, and the appeal concerning penalty proceedings was fully allowed. The order was pronounced in the open court on 15-02-2023.

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