2024 (10) TMI 643 - AT - Income Tax

Ad hoc disallowance of 10% out of repairs and maintenance expenses of plant and machinery, travelling and conveyance expenses, telephone expenses, repairs and maintenance of vehicles and security service charges - CIT(A) made enhancement towards reimbursement received from Oman Branch - HELD THAT - We find a sum has no effect on the computation of taxable income at all. Expenditure is debited in the branch books and income to the very same extent has been credited in head office books. On consolidation of branch financials with head office financials, the same gets knocked out. This was duly explained by the assessee before the CIT(A) and also by way of a certificate from Chartered Accountant. The said certificate is enclosed. Hence, the addition made by the ld CIT(A) by way of enhancement is absolutely without any basis and not understanding the basic financials of the assessee company. Ground No. 2 raised by the assessee is hereby allowed. Ad hoc disallowances of expenditure - Admittedly, the ld AO had sought for other details only on 26.12.2017. The assessment finally stood completed on 28.12.2017. It is a fact that the assessee work sites are located at 20 locations and spread over all over the country and also in abroad. It would be practically impossible to collect all the details and submitted the same before the ld AO within 2 days and assessee further collected the details and submitted the same to the extent of 80% of the expenditure before the ld CIT(A) in the form of additional evidences. CIT(A) had not given any finding with regard to those additional evidence and merely sustained the disallowances on the ground that assessee had agreed for the same in the assessment proceedings forgetting the circumstances under which the assessee had agreed for the same. Considering the principle that there is no estoppels against the statute and income is to be determined based on the provisions of the Act and not by concession given by the parties, we deem it fit and appropriate to restore this issue to the file of the ld AO for de novo adjudication in accordance with law. The assessee is at liberty to furnish further evidences, if any, in support of its contentions. Accordingly, ground No. 1 is allowed for statistical purposes. Penalty proceedings u/s 271(1)(c) on the aforesaid quantum order - In view of the decision rendered above on the quantum appeal, the levy of penalty would have no legs to stand. Penalty on ad hoc disallowance of expenses - The law is very well settled that there cannot be any levy of penalty on an estimated addition on ad hoc disallowances of expenses. See HARPARSHAD AND COMPANY LTD. 2010 (8) TMI 75 - DELHI HIGH COURT and SAMUNDER BHAN SADH 1990 (11) TMI 129 - ALLAHABAD HIGH COURT - Decided in favour of assessee.

Summary

Issues:
1. Ad hoc disallowance of expenses
2. Enhancement of income on account of reimbursement received from Oman Branch
3. Penalty proceedings u/s 271(1)(c) of the Act

Ad hoc disallowance of expenses:
The appeal involved a dispute regarding the ad hoc disallowance of 10% of various expenses by the Assessing Officer, which the assessee had agreed to due to time constraints. The Commissioner of Income Tax (Appeals) partially upheld the disallowance, excluding a specific amount disallowed under section 40(a)(ia) of the Act. The Tribunal found that the assessee had provided site-wise details of the expenses and had submitted a certificate from the Statutory Auditors to support its claim. The Tribunal concluded that the ad hoc disallowance should be reconsidered by the Assessing Officer, allowing the assessee to submit further evidence. The Tribunal allowed the appeal on this issue for statistical purposes.

Enhancement of income on account of reimbursement received from Oman Branch:
The Commissioner of Income Tax (Appeals) had enhanced the income of the assessee by a specific amount received from the Oman Branch, disregarding the fact that this amount had already been accounted for in the head office books. The Tribunal noted that the reimbursement amount had no effect on the taxable income as it was offset in the consolidation of financial statements. The Tribunal found the enhancement made by the Commissioner to be baseless and lacking understanding of the company's financials. Consequently, the Tribunal allowed the appeal on this issue.

Penalty proceedings u/s 271(1)(c) of the Act:
The Tribunal addressed the penalty proceedings under section 271(1)(c) of the Act in relation to the quantum order. Given the decisions in established case law, the Tribunal concluded that penalty cannot be levied on estimated additions resulting from ad hoc disallowances of expenses. Citing relevant case law, the Tribunal allowed the grounds raised by the assessee in relation to penalty proceedings. Ultimately, the Tribunal allowed the appeal of the assessee in both matters for statistical purposes.

In conclusion, the Tribunal directed a reassessment of the ad hoc disallowance of expenses, overturned the enhancement of income on reimbursement from the Oman Branch, and disallowed the penalty proceedings related to the ad hoc disallowances. The appeals were allowed for statistical purposes, providing relief to the assessee on all issues raised.