2017 (9) TMI 1162 - HC - Income Tax

Addition on account of fall in net profit to turnover ratio - ITAT deleted the addition - Held that - The ITAT observed that the lower net profit rate of 24.80% has been accepted by the AO for the earlier AY, i.e. 2008-09. However, the Assessee s line of business was not consistent over the years. The ITAT was of the view that, without rejecting the accounts of the Assessee, making an addition merely on the basis of fall of the net profit ratio was not warranted. The view of the ITAT does not suffer from any infirmity. No substantial question of law arises. Disallowance u/s 40(a)(ia) - reimbursement of expenses paid to the employees/vendors on behalf of the Assessee - ITAT held that the CIT (A) exceeded his powers in issuing a notice of enhancement and making the above disallowance - Held that - CIT (A) issued notice for enhancement of the disallowance but, in that process, entered into the question whether the expense in question was eligible for deduction at all in the first place. As rightly pointed out by the ITAT, this was beyond the scope of inquiry before the CIT (A). There was also no factual basis for the CIT (A) to doubt the reimbursement of the employees expenses. In the circumstances, the impugned order of ITAT holding that the CIT (A) travelled beyond the scope of the appellate proceedings in disallowing the above expenses does not suffer from perversity. The Court is, therefore, not inclined to frame a question of law on this issue as well. Revenue appeal dismissed.

Summary

Issues:
1. Deletion of addition on account of fall in net profit to turnover ratio.
2. Disallowance under Section 40 (a) (ia) of the Income Tax Act, 1961.

Analysis:

Issue 1: Deletion of addition on account of fall in net profit to turnover ratio
The Revenue appealed against the ITAT's order regarding the addition made by the AO on the basis of a lower net profit to turnover ratio for the AY 2010-11. The ITAT noted that the lower net profit rate had been accepted by the AO for the earlier AY, 2008-09, but highlighted that the Assessee's business line was not consistent over the years. The ITAT opined that making an addition based solely on the fall in net profit ratio without rejecting the Assessee's accounts was unwarranted. The High Court concurred with the ITAT, stating that the view taken was plausible and did not exhibit any infirmity. It was held that no substantial question of law arose in this regard.

Issue 2: Disallowance under Section 40 (a) (ia) of the Income Tax Act, 1961
The second and third questions revolved around the disallowance under Section 40 (a) (ia) of the Income Tax Act, 1961, concerning reimbursement of expenses paid to employees/vendors on behalf of the Assessee amounting to ?1,20,49,546/-. The ITAT found that the CIT (A) exceeded his jurisdiction by issuing a notice of enhancement and making the disallowance. The High Court agreed with the ITAT, noting that the CIT (A) had overstepped his authority by delving into the eligibility of the expenses for deduction, which was beyond the scope of the inquiry. Moreover, there was no factual basis for the CIT (A) to doubt the reimbursement of employees' expenses. Consequently, the High Court upheld the ITAT's decision that the CIT (A) had gone beyond the appellate proceedings' scope and dismissed the appeal without framing a question of law on this issue.

In conclusion, the High Court upheld the ITAT's decision on both issues, emphasizing that the views taken were reasonable and did not warrant interference.