2021 (8) TMI 560 - AT - Income Tax

Addition of manufacturing, selling and administrative expenses on ad hoc basis - disallowance of 10% of expenses - HELD THAT - We note that the AO nowhere has given a finding of fact that assessee has not followed the method of accounting as mentioned u/s. 145(1) of the Act. It is also not the case of the AO that assessee has not computed the income in accordance with the accounting standard notified u/s. 145(2) - conditions for invoking section 145(3) of the Act (estimation) of income has not been fulfilled/satisfied. And since the AO has not disputed the correctness and completeness of the books of the assessee, the AO could not have estimated the income by ad hoc disallowance as done in this case. CIT(A) as well as the AO has said there was certain deficiency in verifying the expenses for non-production of supporting vouchers etc. According to us, if there is deficiency in the vouchers or the bills supporting the incurrence of an expenditure, at the most, the expenses to the extent which are not supported by the vouchers could be regarded to be non-genuine and can be disallowed by the AO. Since the AO or the Ld. CIT(A) has not rejected the books of account of the assessee they could not have estimated (ad hoc disallowance of 10%) the expenses claimed to have been incurred by the assessee. Moreover, the AO has made the ad hoc disallowance on the supposition that there might be personal expenditure - AO did not notice that the assessee is a company and not a Firm or proprietary concern etc. So, his reason for disallowance also fails - action of the AO as well as the Ld. CIT(A) making ad-hoc disallowance is per se arbitrary and whimsical, therefore, the action of the CIT(A) confirming the 10% disallowance in respect of delivery charges as well as miscellaneous charges are directed to be deleted. Therefore, the appeal of the assessee stands allowed.

Summary

Issues:
- Time-barred appeal by the assessee
- Ad hoc disallowance of expenses by the AO and confirmation by the Ld. CIT(A)

Analysis:

Issue 1: Time-barred appeal by the assessee
- The appeal by the assessee against the order of the Ld. CIT(A)-4, Kolkata for AY 2011-12 was time-barred by 19 days. The assessee filed a condonation petition for the delay, which was eventually condoned after hearing both sides. Consequently, the appeal was admitted for hearing.

Issue 2: Ad hoc disallowance of expenses by the AO and confirmation by the Ld. CIT(A)
- The AO made an ad hoc disallowance of ?31,50,424 out of manufacturing, selling, and administrative expenses on an ad hoc basis. This decision was based on the substantial growth in sales turnover and income from other sources compared to the preceding assessment year. The AO raised concerns about the sharp increase in expenses without proper explanation, suspecting personal expenses might be included.
- The Ld. CIT(A) partially allowed the appeal by deleting expenses related to commission charges but confirmed the ad hoc disallowance for delivery and miscellaneous charges. The Ld. CIT(A) upheld the disallowance of 10% of delivery charges and miscellaneous charges.
- The assessee contested this decision, arguing that the AO lacked the authority to make ad hoc disallowances without rejecting the books of account. The Ld. AR contended that the AO's action was not supported by law and should be deleted.
- The ITAT Kolkata found that the AO and Ld. CIT(A) erred in ordering ad hoc disallowance without complying with Sec. 145(3) of the Income-tax Act. Since the conditions for invoking section 145(3) were not met and the books of account were not disputed, the ad hoc disallowance was deemed arbitrary and whimsical. The ITAT directed the deletion of the 10% disallowance on delivery and miscellaneous charges, ultimately allowing the appeal of the assessee.

In conclusion, the ITAT Kolkata allowed the appeal of the assessee, overturning the ad hoc disallowance of expenses by the AO and confirmed by the Ld. CIT(A). The judgment emphasized the importance of complying with legal provisions and avoiding arbitrary decisions in tax assessments.