2024 (11) TMI 317 - AT - Income Tax

Ad hoc disallowance @ 10% of the personnel expenditure - HELD THAT -AO noticed from the Profit and Loss account statement that assessee has claimed expenditure of personnel expenditure, however he has mistook that assessee has claimed personal expenditure without providing any documentary evidences. Addition made by the AO is nothing but elementary mistake by presuming the expenses claimed by the assessee as personal expenditure instead of personnel expenditure. Since the assessee has brought to our notice details of payment of salaries and wages to various employees and even AO failed to ask for any details before making such ad hoc disallowances, we are inclined to delete the addition made by the AO which is a mistake apparent on record and clearly mistaken presumption. Decided in favour of assessee.

Summary

Issues:
1. Disallowance of personnel expenditure claimed as personal expenditure by the Assessing Officer.
2. Appeal against the order of the Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi.
3. Grounds of appeal raised by the assessee challenging the ad-hoc disallowance of personnel expenditure.

Analysis:
1. The appeal was filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi for the Assessment Year 2018-19. The Assessing Officer disallowed the personnel expenditure claimed by the assessee as personal expenditure under section 37 of the Income-tax Act @ 10% without asking for relevant details or providing reasons for the disallowance. The assessee contended that the expenses were directly related to the business and should not have been disallowed. The Ld. CIT (A) remanded the matter to the Assessing Officer, who submitted a remand report. The assessee argued that no evidences were asked for during the assessment proceedings, and ad hoc disallowances cannot be made. However, the Ld. CIT (A) dismissed the appeal, leading to the appeal before the ITAT Delhi.

2. The grounds of appeal raised by the assessee challenged the legality and arbitrariness of the Ld. CIT (A)'s order. The assessee argued that the expenses claimed under the head of "personnel expenses" were directly related to the business and should not have been disallowed under section 37 of the Act. The assessee contended that the ad-hoc disallowance of personnel expenditure at a rate of 10% was illegal and arbitrary. Furthermore, it was argued that the disallowance was made without any query raised by the Assessing Officer, rendering it unsustainable in law. The assessee also claimed that the Ld. CIT (A) passed a non-speaking order solely relying on the remand report without considering the merits of the case, violating the principles of natural justice.

3. During the proceedings, the Ld. AR highlighted that the expenses claimed were actually "personnel expenditure" and not "personal expenditure" as presumed by the Assessing Officer. The AR presented evidence from the profit and loss account and notes to accounts, clarifying the nature of the expenses claimed. It was pointed out that the Assessing Officer made an ad hoc disallowance without requesting documentary evidence or providing a reason for the disallowance. The AR argued that the addition should be deleted based on the incorrect presumption made by the Assessing Officer. After considering the submissions and material on record, the ITAT Delhi observed that the Assessing Officer's disallowance was based on a mistaken presumption of personal expenditure instead of personnel expenditure. The ITAT noted that the assessee had provided details of salary payments and wages to employees, which were not requested by the Assessing Officer before making the disallowance. Therefore, the ITAT allowed the grounds taken by the assessee and deleted the addition made by the Assessing Officer.

In conclusion, the ITAT Delhi allowed the appeal of the assessee, ruling in favor of the assessee against the ad-hoc disallowance of personnel expenditure claimed as personal expenditure by the Assessing Officer.