2022 (2) TMI 1191 - AT - Income Tax

Disallowance of wages and salary expenses - Gross profit/Net profit ratio of the assessee had declined in comparison to preceding year; and that the vouchers in support of the salary and wages expenses did not contain the requisite details - HELD THAT - Admittedly, the Gross profit/Net profit ratio of the assessee had declined as in comparison to the preceding years - perusal of the details culled out by the AO, therein, at the very face of it does not instill any confidence as regards the view taken by him that the assessee had inflated certain expenses for suppressing his income - though there can be multiple reasons for fluctuation in the Gross profit/Net profit ratio and fall in the same, but the said fact on a standalone basis can by no means justifiably lead to the conclusion that the assessee had inflated expenses for facilitating suppression of his business income. In case the assessee's claim for deduction of expenses is not supported by the requisite documentary evidences, then, the same would be liable to be disallowed by the A.O. However, we cannot remain oblivious of the fact that the Assessing Officer before drawing adverse inferences as regards the assessee's claim of expenses is obligated to specifically point out those expenses which as per him are not supported by the requisite corroborating documentary evidences. AO in the case before us had though pointed out that vouchers produced by the assessee did not contain requisite details, i.e., working hours, duration of work, bifurcation of skilled/semi-skilled labour etc., but then, we cannot be oblivion of the fact that there is no whisper of any single instance of expenditure in the body of the assessment order which as per the AO could not be verified. In our considered view, a generalized observation as regards the non-verification of the assessee's claim for deduction of any expenditure cannot, on the said standalone basis, justify the disallowance of the said expenditure - AO had not uttered a word as regards the basis for determination of the ad-hoc disallowance of the salary and wages expenses at ₹ 2.50 lac. Backed by our aforesaid observations, we not being able to persuade ourselves to subscribe to the ad-hoc disallowance of ₹ 2.50 lac(out of salary and wages expenses), thus, vacate the same. We, thus, in terms of our aforesaid observations set-aside the order of the CIT(Appeals) and vacate the disallowance of ₹ 2.5 lac (supra) made by the Assessing Officer. The Ground of appeal No. 1 is allowed.

Summary

Issues:
1. Disallowance of expenses by the Assessing Officer.
2. Rejection of detailed statements of facts by CIT(Appeals).
3. Lack of proper documentation for expenses.

Analysis:

Issue 1: Disallowance of expenses by the Assessing Officer
The Assessing Officer made an ad-hoc disallowance of ?2.50 lakh from the wages and salary expenses claimed by the assessee due to a decline in the Gross profit/Net profit ratio. However, the Tribunal found that the decline in profit ratio alone does not justify the conclusion that the assessee inflated expenses to suppress income. The assessee explained the decline was due to market competition, which the Assessing Officer summarily rejected without substantial evidence to refute it. The Tribunal held that the Assessing Officer's inference was unjustified, and the disallowance was vacated.

Issue 2: Rejection of detailed statements of facts by CIT(Appeals)
The CIT(Appeals) confirmed the disallowance without considering the detailed statements and explanations provided by the assessee. The Tribunal observed that the rejection of the detailed facts without proper justification was erroneous. The Tribunal overturned the decision of the CIT(Appeals) and allowed the appeal on this ground.

Issue 3: Lack of proper documentation for expenses
The Assessing Officer raised concerns about the lack of detailed documentation, such as working hours and labor bifurcation, for the claimed wages and salary expenses. While acknowledging the necessity of supporting expenses with proper evidence, the Tribunal emphasized that a generalized observation without specific instances of unverifiable expenses does not warrant disallowance. Additionally, the Assessing Officer did not provide a basis for the ad-hoc disallowance of ?2.50 lakh. Consequently, the Tribunal vacated the disallowance and set aside the order of the CIT(Appeals) on this issue.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning the disallowance of expenses made by the Assessing Officer and the decision of the CIT(Appeals) based on insufficient reasoning and lack of concrete evidence to justify the disallowances.