2019 (10) TMI 659 - AT - Income Tax

Disallowance of expenses paid in cash - expenditure not open to verification - ad-hoc addition - HELD THAT - Assessing Officer has passed order u/s 143(3) of the Act and has made the disallowance on ad hoc basis without pointing out any defect in the books of account of the assessee. He simply held that the expenses paid in cash were completely not open to verification and therefore, to cover up the possible leakage, 1/5th of the expenses have been disallowed. Such a disallowance is not warranted under the law as the Assessing Officer has to point out the specific voucher or expenses which he deems to be fit for disallowance. Addition on account of advertisement expenses - HELD THAT - AO issued notices to 11 parties to whom the assessee had claimed to have paid advertisement expenses and such notices had returned back. AO has held that the bills produced by the assessee were not genuine as the notices had returned back. AO has further held that the notices were returned back with the remark that the address is not correct. However, find that assessee was not confronted with the fact of returning back of notices. Remit the issue back to the Assessing Officer who should redecide the issue after confronting the assessee and after hearing the assessee. As a result, this issue is allowed for statistical purposes. Disallowance out of interest expenses - HELD THAT - Assessee had paid interest @18% to relatives as well as to non relatives. There is bound to be difference between the interest charged by the bank and the interest charged by private lender as for obtaining loans from bank, the assessee needs to maintain margin also and there are other expenses charged by bank in the form of bank charges, penalty etc. Therefore, the basis for disallowance made by the AO and confirmed by CIT(A) is not correct. It is not in dispute that assessee had made payments of interest after deducting tax at source and it is also not the case of the authorities below that loans were not utilized for the business purposes. Under these facts, see no reason in sustaining the disallowance. Accordingly, the order of learned CIT(A) is reversed and this ground of assessee is allowed.

Summary

Issues:
1. Delay in filing the appeal and condonation of delay.
2. Ad hoc disallowances made by the Assessing Officer.
3. Addition on account of advertisement expenses.
4. Disallowance of interest expenses.

Analysis:

1. Delay in filing the appeal and condonation of delay:
The appeal filed by the assessee was delayed by 721 days. The reason cited for the delay was that the assessee was wrongly advised to file a petition under section 264 of the Act, causing the delay in filing the appeal. The delay was condoned after finding a plausible cause for the delay, and the appeal was directed to be heard on merits.

2. Ad hoc disallowances made by the Assessing Officer:
The Assessing Officer had made ad hoc disallowances during the assessment proceedings without pinpointing any defect in the books of account or vouchers. The disallowances were made to cover up possible leakage without specific justification. The Tribunal held that such ad hoc disallowances are not warranted under the law and pointed out that the Assessing Officer must specify the vouchers or expenses for disallowance. Citing a previous case, the Tribunal decided in favor of the assessee and deleted the additions made on an ad hoc basis.

3. Addition on account of advertisement expenses:
The Assessing Officer disallowed advertisement expenses based on returned notices to parties to whom the expenses were claimed to be paid. However, the assessee was not confronted with the fact that the notices had returned. The Tribunal remitted the issue back to the Assessing Officer for redetermination after providing the assessee with an opportunity to be heard, allowing the issue for statistical purposes.

4. Disallowance of interest expenses:
The Assessing Officer disallowed interest expenses paid by the assessee to relatives and non-relatives, reducing the interest rate from 18% to 15%. The Tribunal found the basis for disallowance incorrect, noting the differences in interest rates between private lenders and banks. It was established that the loans were utilized for business purposes, and the disallowance was reversed, allowing the ground of the assessee.

In conclusion, the appeal of the assessee was partly allowed for statistical purposes, with the Tribunal ruling in favor of the assessee on the issues of ad hoc disallowances and disallowance of interest expenses.