2017 (3) TMI 316 - AT - Income Tax

Addition in respect of custom formality and custom expenses - Held that - We find that during the survey proceedings, the director of the company had admitted that company would surrender the entire expenditure claimed under the head custom expenses and custom formalities, that on 31/03/2007 he filed an affidavit and partially retracted his statement, that the FAA restricted the disallowance at the rate of 25% of the expenditure as against the 100% disallowance made by the AO. We find that the FAA had given a categorical finding of fact that in some cases the assessee had raised the bills against such expenditure in the names of the customers and had offered such receipts in its return of income. If any income has been offered for taxation corresponding expenditure has to be allowed, is the cardinal principle of tax-jurisprudence. The FAA has restricted the disallowance to 25% as against the 100% disallowance made by the AO. We find that similar issue was decided by the Tribunal in the case of APL India Private Ltd. (2005 (5) TMI 288 - ITAT MADRAS-D) and held that in the case of clearing and forwarding agents the disallowance should not exceed 25%. - Decided against revenue.

Summary

Issues:
1. Addition in respect of custom formality and custom expenses.

Analysis:
The case involves a dispute regarding the addition of expenses claimed under custom formality and custom expenses by an assessee-company engaged in the business of custom house agent, freight forwarders, and clearing and forwarding agents. The Assessing Officer (AO) completed the assessment, determining the income of the company at a higher amount than declared in its return. The primary issue in the appeal was the deletion of the addition made by the AO in respect of custom formality and custom expenses. The AO disallowed the entire expenditure claimed by the company, amounting to &8377; 46.59 lakhs, as it was not supported by sufficient documentary evidence. However, the director of the company later stated that only 25% of the expenses were offered for taxation, claiming the balance as genuine business expenses.

The First Appellate Authority (FAA) considered the submissions made by the assessee and relied on the decision of the Tribunal in a similar case. The FAA found that the expenses were necessary for the business operations of the company, particularly in the context of clearing and forwarding activities. The FAA held that the disallowance of the entire expenditure by the AO was not justified, considering the nature of the business and the lack of third-party affirmations. Referring to the Tribunal's decision in a previous case, the FAA concluded that the expenses were allowable as a deduction under section 37 of the Act and restricted the disallowance to 25% of the expenditure offered by the assessee.

The Appellate Tribunal, after hearing the arguments from both sides, upheld the FAA's decision. The Tribunal noted that the director of the company had initially admitted to surrendering the entire expenditure during the survey proceedings but later partially retracted the statement. The Tribunal agreed with the FAA's findings that some of the expenses had corresponding receipts offered for taxation and that the disallowance should not exceed 25% based on the precedent set by a previous case involving similar issues. Therefore, the Tribunal confirmed the FAA's order and dismissed the appeal filed by the AO, deciding the effective ground of appeal against the AO.

In conclusion, the Tribunal's decision was based on the principles of tax jurisprudence and the specific circumstances of the case, ultimately leading to the dismissal of the AO's appeal and upholding the FAA's order regarding the disputed custom formality and custom expenses.