2022 (8) TMI 1217 - AT - Income Tax

Disallowance of 10% of expenses on account of speed money paid to dock labourers - assessee has submitted that all the bills and vouchers were furnished by the assessee before the Assessing Officer and further that the books of accounts of the assessee have not been rejected that even the ld. CIT(A) has also accepted this fact that in the line of business of the assessee, the certain additional payments are required to be made to the dock labourers for speedy work - HELD THAT - Taking into consideration the facts and circumstances of the case, 10% of the total expenditure claimed in each assessment year would make a reasonable disallowance. Assessee has agreed in the open court for disallowance of 10% of the total expenses on account of speed money paid to dock labourers in each of the assessment year. We accordingly restrict the disallowance to the 10% of the total expenditure claimed in each of the assessment years of the total expenditure paid as speed money to dock labourers. However, it is made clear that out above order will not affect the disallowance made by the Assessing Officer in respect of illegal speed money paid to certain officers/authorities which has been agreed to by the assessee even before the CIT(A). However, it is also made clear that our above order will not be taken as precedent for any other assessment year.

Summary

Issues involved:
- Time-barred assessment order under section 153A
- Disallowance of expenses without show cause notice
- Disallowance of payments to dock labourers and union leaders
- Estimation of speed money quantum
- Application of total income ratio to speed money
- Allowability of speed money as business expenditure

Analysis:
1. Time-barred assessment order under section 153A:
The appeals were filed against separate orders of the Commissioner of Income Tax (Appeals), Kolkata, for different assessment years. The common issue of time-barred assessment order under section 153A was raised, leading to the appeals being heard together and disposed of with a common order.

2. Disallowance of expenses without show cause notice:
The appellant contested the disallowance of expenses without a show cause notice, arguing that the Commissioner of Income Tax (Appeals) erred in enhancing the disallowance without offering an opportunity to represent the matter. The issue raised concerns procedural fairness in the assessment process.

3. Disallowance of payments to dock labourers and union leaders:
The dispute centered around the disallowance of payments made to dock labourers and union leaders, totaling Rs. 29,69,823, as the Assessing Officer deemed them illegal expenses not allowable under section 37 of the Income Tax Act, 1961. The appellant argued that these payments were essential for efficient business operations and relied on legal precedents to support their case.

4. Estimation of speed money quantum:
The Commissioner of Income Tax (Appeals) raised concerns about the lack of verifiable documents establishing the actual amount of speed money paid. He noted the difficulty in verifying cash payments posted through self-made vouchers, leading to uncertainties regarding the nature and quantum of the expenses claimed under 'Miscellaneous and Incidental Charges.'

5. Application of total income ratio to speed money:
The Commissioner of Income Tax (Appeals) used the assessment year 2005-06 as a base year to calculate the allowable expenditure for each assessment year by applying a fixed percentage of total declared income. This approach aimed to standardize the disallowance of speed money payments across different years based on past practices.

6. Allowability of speed money as business expenditure:
The core issue revolved around the allowability of speed money as a legitimate business expenditure. While acknowledging the necessity of such payments in the appellant's line of business, the Commissioner of Income Tax (Appeals) expressed concerns about the lack of verifiable documentation and potential misuse of funds, leading to an enhanced disallowance compared to the Assessing Officer's decision.

In conclusion, the Appellate Tribunal partially allowed the appeals, restricting the disallowance of speed money payments to dock labourers to 10% of the total expenditure claimed in each assessment year. The decision emphasized the need for verifiable documentation and reasonable disallowances while recognizing the business necessity of such payments.