2024 (1) TMI 609 - AT - Income Tax

Disallowance on account of non-maintenance of proper Bills and Vouchers - HELD THAT - Learned tax authorities without actually pointing out any deficiency in the books of account have inferred that the expenses are excessive and unreasonable so as to disallow to the extent of 30%. The order of learned tax authorities does not indicate if the financials of the assessee were otherwise questioned on any account. The assessee has shown revenue from operation as on 31.03.2017 at Rs. 576,98,65,384. The same has been accepted by the Revenue and even when the scrutiny was taken up, for analyzing low income in comparison to high loans etc. and high revenue from operations, but except for observing that there was non-maintenance of proper bills and vouchers to disallow expenses @ 30% on ad hoc basis, no other conclusion was drawn with regard to profit calculation reflected in the financials. The orders of learned tax authorities make it apparent that on observing that the expenses have been booked under various heads are not supported with proper bills and vouchers and vouchers are not signed by receivers, bills are not in proper format, ad hoc disallowance was made. Tax Authorities were supposed to consider the nature of the business of the assessee being in distribution business of very competitive project like mobile phones through distributors in the States of Bihar, Jharkhand and Uttrakhand and on that account if certain expenditures, on day to day basis for running the distributorship and employees network were not in proper vouchers formats or signed, that alone cannot be a justification for disallowance on ad hoc basis to extent of 30%. The prayer of learned DR that issue should be restored to AO is also not considerable as it is not established that assessee is relying anything which was not otherwise before the learned tax authorities below. All that is established is that without pointing out anything specific defect on wholesome basis certain part of the expenses has been discarded on estimate basis. Same is not sustainable under the law. Assessee appeal allowed.

Summary

Issues Involved:
1. Low income in comparison to high loans/advances/investment in shares.
2. High revenue from operations and no scrutiny in preceding 5 assessment years.
3. Large refund claimed out of advance tax.
4. Large value claim of refund.

Summary:

Issue 1: Low Income vs. High Loans/Advances/Investment in Shares
The assessee, a private limited company engaged in the distributorship of OPPO Mobiles India Private Ltd, had its return of income at a loss selected for scrutiny. The AO observed that the assessee did not maintain proper bills and vouchers for various expenses, leading to a disallowance of 30% of the total expenses claimed. The AO cited several case laws to support the disallowance, concluding that the expenses were excessive, unreasonable, and included personal expenses.

Issue 2: High Revenue from Operations and No Scrutiny in Preceding 5 Assessment Years
The assessee's high revenue from operations was scrutinized, but the AO's primary concern was the non-maintenance of proper bills and vouchers. The AO disallowed 30% of the expenses on an ad hoc basis, stating that the expenses were not wholly and exclusively for business purposes as per Section 37(1) of the Income Tax Act, 1961. The CIT(A) upheld the AO's decision, noting that the expenses were mostly in cash and not adequately supported by proper bills and vouchers.

Issue 3: Large Refund Claimed Out of Advance Tax
The assessee argued that the expenditures were as per the Auditor's financial account and that all relevant ledgers, bills, and vouchers were produced before the tax authorities. The AR pointed out that the CIT(A) made a sweeping observation that 90% of the expenditures were incurred in cash, but the actual cash expenses were only 36% of the total expenses. The AR also argued that the advance to staff was adjusted against actual expenditures supported by bills and vouchers.

Issue 4: Large Value Claim of Refund
The DR supported the AO's decision, suggesting that the expenses were more in the nature of personal expenditure. The DR also suggested restoring the matter to the AO for verification of the vouchers. However, the Tribunal noted that the tax authorities did not point out any specific deficiencies in the books of account and inferred that the expenses were excessive and unreasonable without proper justification. The Tribunal observed that the nature of the assessee's business required certain day-to-day expenditures that might not always be in proper voucher formats or signed.

Conclusion:
The Tribunal allowed the assessee's appeal, stating that the tax authorities' ad hoc disallowance of 30% of the expenses was not sustainable under the law. The disallowance made by the AO was deleted, and the appeal was allowed. The order was pronounced in open court on 11/01/2024.