2024 (7) TMI 1472 - AT - Income Tax

Deductibility/legality of expenditure - assessee s claim for expenditure on repossession charges - assessee receives remuneration by way of commission from banks and financial institutions for repossessing assets pledged with them by the defaulting borrowers, enabling, either by way of disposal of those assets or otherwise, settlement of their dues. The assessee states of engaging influential people of the locality, without good social background though, to identify and repossess assets, using force where necessary - HELD THAT - We have, at this stage, two options, i.e., to restore the matter back to the AO for examining the deductibility of the expenditure from the standpoint of Explanation to sec.37(1), qua which there is no finding; there being no estopple against law. The second, which we would prefer, is to examine the expenditure from the limited standpoint of the reasonability of the disallowance. The Tribunal is to decide matters based on the material on record. While nothing has been produced before us, it is an admitted fact that the only material furnished is an unverifiable list of about 400 persons, stated to be influential persons of the locality, without as much as a proof of their identity. Why, for all one knows, these persons may not exist. Unless each of the said persons falls in a different locality, a person once identified for the purpose would normally be engaged for another property in the area/locality, while there is no repetition at all. No one goes searching for such persons, found satisfactory, all over again and, further, how many such influential people one could find in a locality, being, rather, a few for the entire area. This refrain by the Revenue is understandable and, thus, valid. The detail furnished is sketchy, and its non-verifiability, admitted. It is, as we see it, only a make-believe, with no evidentiary value, given only for the sake of it, presumably to pre-empt disallowance u/ss. 40(a)(ia) 40A(3). Limiting deduction to 50% of that claimed, is, under the circumstances, not unreasonable. As regards the charge of it being ad hoc, the same misses the point that it is only where not verifiable which in the instant case extends to the entire sum claimed, that that estimated as reasonable is saved, disallowing the balance. As explained in CIT v. Durga Prasad More 1971 (8) TMI 17 - SUPREME COURT science has yet not invented any instrument to measure the reliability of evidence, while here we find it to be not even qualifying as one. Estimation is integral to assessment, of which disallowance of expenditure is a part. Why, we see it all the time, as for personal purposes; again, in the absence of proper record. It is well-settled that it is permissible for the tax authorities to consider disallowing the sum estimated as incurred in excess (Swadeshi Cotton Mills Co. Ltd. 1966 (9) TMI 30 - SUPREME COURT ; Lakshmiratan Cotton Mills Co. Ltd 1968 (9) TMI 13 - SUPREME COURT ; Lachminarayan Madan Lal 1972 (9) TMI 4 - SUPREME COURT . Reference in this context may also be made to CIT v. Eastern Condiments P. Ltd. 2009 (10) TMI 452 - KERALA HIGH COURT ; Pr. CIT v. Rimjhim Ispat Ltd. 2016 (1) TMI 374 - ALLAHABAD HIGH COURT . The AO has, in the absence of any material, viz. property-wise details; basis for payment, itself unevidenced, estimated the expenditure liable for disallowance at 50%, which we find as reasonable. Appeal filed by the assessee is dismissed.

Summary

Issues:
Deductibility of expenditure on repossession charges under section 143(3) of the Income-tax Act, 1961 for assessment year 2009-10.

Analysis:
The judgment deals with an appeal against the disallowance of expenditure claimed under the account head 'repossession charges' by an assessee engaged in the collection agent business for banks and financial institutions. The Assessing Officer (AO) disallowed 50% of the claimed sum due to unverifiability, lack of repetitive payments, and absence of proper documentation. The Commissioner of Income-tax (Appeals) upheld the disallowance, questioning the high number of individuals engaged without repetition. The Tribunal analyzed the nature of the expenditure, legality, and deductibility in the context of the business operations. The Tribunal emphasized the need to examine if such expenditure was sanctioned by any agreement and if it violated any laws, specifically Section 37(1) of the Income-tax Act, 1961. The Tribunal referred to legal precedents to establish that certain expenditures are not deductible if they violate the law. The Tribunal highlighted the importance of producing material evidence to support expenditure claims and emphasized the need for verifiability. The Tribunal concluded that the disallowance of 50% of the claimed sum was reasonable given the lack of evidence and unverifiability. The Tribunal declined to interfere with the decision and dismissed the appeal.

In conclusion, the judgment thoroughly examines the deductibility of expenditure on repossession charges, emphasizing the legality and verifiability of such expenses. The Tribunal's decision is based on the lack of evidence and the reasonableness of the disallowance, highlighting the importance of proper documentation and adherence to legal provisions in claiming business expenses.