2016 (8) TMI 420 - AT - Income Tax

Allowability of various expenses claimed by the appellant against the professional receipts - Held that - Nature of the expenses such as depreciation, interest on car loan, audit fee etc. once purchase of assets in the nature of computer, car, books etc. and the utilization thereof for the purposes of earning professional income has been accepted, where is the question of disallowing 40% of the depreciation claim or interest on car loan. Similarly, once the books of accounts have been audited and audit fee is payable, there is no basis for disallowing 40% of the audit fees. Similarly the duty of the appellant require lot of research and analysis of time bound delivery on study material and guidance note and all these works requires involvement of staff and related office space. Even though the appellant has access to the infrastructure and office space at the Institute, the appellant has submitted that he has maintained office and hired staff at his own cost to assist him in discharge of his consulting engagement which cannot be refuted in absence of any contrary evidence on record. In our view, the expenses incurred on space for ₹ 7000/- per month and on staff ₹ 30,000/- per month and other related travel and other expenses appears to be reasonable. Further, the ld. CIT(A) has not specified any specific transactions or the expenses which the appellant has claimed and the same has not found favour with the ld. CIT(A). In our view, it is clear case of adhoc disallowance of expenses which cannot be sustained in the eye of law. We accordingly delete the disallowance of 40% of the expenses of ₹ 5,28,250/- claimed by the appellant hence ground of the assessee s appeal is allowed. Unexpalined source of cash - Held that - On perusal of the capital account which is available on record, it is noted that the appellant has an opening balance of 11,34,013 and introduced fresh capital of ₹ 2,52,609/- during the year under consideration in his professional consultancy business. The appellant introduced a sum of ₹ 7,05,500/- in his profession on various dates and he has withdrawn a sum of ₹ 4,52,891 from his capital account on various dates. Thus the net capital amounting to ₹ 2,52,609/- was introduced in the profession consultancy activities. In our view, the addition, if at all, is required to be made should therefore be restricted to ₹ 2,52,609 as the appellant has demonstrated the clear linkage between the deposits and the withdrawals of the same amount in his capital account. Further, regarding the source of ₹ 252,609/- introduced in the profession, a perusal of estimated personal state of affairs shows the appellant had cash in hand of ₹ 6,30,581 at the beginning of the year which is sufficient to demonstrate the deposit of ₹ 252,609 as fresh capital in his consultancy activities. In light of above and given the past professional earnings and household withdrawals and availability of cash standard of living. In the light of above, we are of the view that the appellant has adequately demonstrated the source of cash deposits and the explanations are found to be reasonable and supported by the professional and personal statement of accounts and we hereby delete the amount of ₹ 7,05,500/- treated by the AO as undisclosed income of the appellant. Hence the ground of the appellant is allowed.

Summary

Issues Involved:
1. Disallowance of 40% of the total expenses claimed.
2. Addition of ?7,05,500 by treating cash introduced in business as undisclosed income.
3. Non-allowance of telescoping for expenses disallowed against addition for alleged unexplained investment in business.

Detailed Analysis:

1. Disallowance of 40% of the Total Expenses Claimed:
The assessee claimed various expenses totaling ?10,70,610 against receipts of ?21,42,500. The AO disallowed the entire expenses, but the CIT(A) restricted the disallowance to 40%, allowing the remaining 60%. The assessee argued that the income was declared under "Income from Business & Profession" and not "Salary," and thus expenses should be allowed. The assessee’s books of accounts were produced, and expenses were supported by bills and vouchers, although employees and original bills were not produced due to lack of effective opportunity. The CIT(A) acknowledged the necessity of expenses but made an ad-hoc disallowance of 40%. The Tribunal found merit in the assessee’s contention that specific expenses such as depreciation, interest on car loan, and audit fees should not be disallowed without specific reasons. The Tribunal concluded that the ad-hoc disallowance was not justified and deleted the disallowance of ?5,28,250.

2. Addition of ?7,05,500 by Treating Cash Introduced in Business as Undisclosed Income:
The AO required the assessee to explain the source of ?7,05,500 introduced in the cash book on different dates. The assessee claimed that the net investment was only ?2,52,609. The Tribunal noted that the assessee maintained separate financial statements for consultancy activities and had an opening balance of ?11,34,013, with fresh capital introduced amounting to ?2,52,609. The Tribunal found that the assessee had adequately demonstrated the source of the cash deposits and that the explanations were reasonable and supported by the professional and personal statement of accounts. Consequently, the Tribunal deleted the addition of ?7,05,500 treated as undisclosed income.

3. Non-Allowance of Telescoping for Expenses Disallowed Against Addition for Alleged Unexplained Investment in Business:
Given the Tribunal's decision on the second issue, this ground was deemed unnecessary to examine and was dismissed.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal deleting the disallowance of 40% of the expenses and the addition of ?7,05,500 as undisclosed income. The order was pronounced in the open court on 29/06/2016.