2016 (6) TMI 686 - AT - Income Tax

Addition on account of freight expenditure - sales have increased by 100% such expenses have increased only by 40% and these expenses are directly linked with turnover of sales and purchases - Held that - As the disallowance not specific and Ld. AO has not pointed out a single instances of the expenditure, which are not, supported by the vouchers and bils. Further, the estimated amount of disallowance by applying the percentage is also not proper. Therefore, we confirm the order of the Ld. CIT(A) in deleting the disallowance on account of freight and cartage expenses. - Decided in favour of assessee Disallowance of tools and consumables expenses - Held that - You cannot be stock of the material when it was purchased on need basis. Further in previous year also there is no opening stock therefore it cannot be said that explanation of the assessee is not proper. In any way the closing stock of this year becomes opening stock of next year and therefore at the most there would be shifting of profit from one year to another year and tax rates being same for both the years the issue would be tax neutral. Furthermore reading purchases of fuel it was not the case of ld AO that the bils of the material are not available or material has not been procured. Stating that purchases have been made in cash cannot be the basis for making disallowance . For cash purchases exceeding specified monetary limit is disallowable u/s 40 A (3) of the act. No such disallowance has been made by the ld AO. In view of this , We do not find any infirmity in the order of the Ld. CIT(A) hence, we confirm the order of Ld. CIT(A) in deleting the disallowance on account of expenses of tools and fuel expenses. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of disallowance of expenses under the heads of Freight Outward and Cartage, Tools and Consumables, and Fuel.
2. Acceptance of additional evidence by CIT(A) without giving the AO an opportunity to review.
3. Non-inclusion of unutilized materials in the closing stock.

Detailed Analysis:

1. Deletion of Disallowance of Expenses:

The primary issue revolves around the disallowance of expenses by the Assessing Officer (AO) under three heads: Freight Outward and Cartage, Tools and Consumables, and Fuel. The AO disallowed 10% of these expenses due to the perceived lack of proper vouchers and a significant increase in expenses compared to the previous year. However, the CIT(A) deleted these disallowances, noting that the sales had increased by 100%, while the expenses had only increased by 40%. The CIT(A) found that the expenses were directly linked to the turnover and that the AO had not pointed out any specific defects in the bills submitted by the assessee. The Tribunal upheld the CIT(A)'s decision, stating that the AO's disallowance was arbitrary and not supported by concrete evidence.

2. Acceptance of Additional Evidence:

The AO contended that the CIT(A) had erred by accepting additional evidence without giving the AO an opportunity to review and comment on it. However, the Tribunal did not find merit in this argument, as the CIT(A) had based the deletion of disallowance on the evidence already available and the logical correlation between increased sales and increased expenses.

3. Non-inclusion of Unutilized Materials in Closing Stock:

The AO disallowed expenses related to Tools and Consumables and Fuel, arguing that materials purchased in March were not fully utilized by the end of the financial year and should have been included in the closing stock. The CIT(A) rejected this view, stating that the assessee procured materials on a need basis and did not maintain a separate store for such items. The Tribunal agreed with the CIT(A), noting that the practice of procuring materials as needed was consistent with previous years and that any unutilized stock would affect the next year's expenses, making the issue tax-neutral. The Tribunal also pointed out that the AO did not provide specific instances where the expenses were not properly vouched.

Conclusion:

The Tribunal dismissed the revenue's appeal, confirming the CIT(A)'s deletion of the disallowances. The Tribunal found that the AO's disallowances were based on arbitrary percentages and not on specific defects in the assessee's documentation. The Tribunal emphasized the importance of concrete evidence and proper inquiry by the AO before making disallowances. The decision highlights the need for tax authorities to substantiate their claims with specific and detailed evidence rather than relying on general assumptions and arbitrary percentages.