2022 (9) TMI 97 - AT - Income Tax

Addition of excessive employee benefit expenses - assessee had not furnished the requisite details to the AO - CIT-A deleted the addition - HELD THAT - It is the prerogative of the assessee to increase or decrease the salary of the employees. Nothing has been brought on record by the revenue suggesting that the salary was not paid by the assessee in the course of the business. Moving further, the amount of salary is generally fixed in nature, meaning thereby, it cannot be linked with the turnover of the assessee company. The amount of salary cannot increase and decrease in proportion to the turnover of the assessee. Thus, to our understanding, the reasoning given by the AO for making the disallowance of the salary that the salary of the assessee has increased whereas the turnover of the assessee has decreased does not seem to be tenable. Likewise, there was not filed any audited financial statements by the assessee in the earlier assessment years cannot be a ground for making the disallowance. It is for the reason that if the assessee has not filed the audited financial statements, there are separate proceedings provided under the provisions of the Act which has to be initiated against the assessee. There is no whisper in the assessment order whether such proceedings have been initiated against the assessee. So on this reasoning as well, there cannot be any disallowance of the expenses as made by the AO. Disallowance has been made by the AO on adhoc basis being 40% of the amount of salary though there is no provision under the Act for making the adhoc disallowance until and unless some evidences is available on record, suggesting that the employee salaries paid by the assessee is excessive and unreasonable in comparison to the prevailing market practice. In view of the above, we do not find any infirmity in the order of the learned CIT-A and therefore, we decline to interfere in his order. Thus, the ground of appeal of the revenue is hereby dismissed. Addition of unexplained loan and advances - claim that the advances were in nature of trade advance was not supported by the corroborative material - whether the loans and advances given in the course of the business can be treated as income under the provisions of law? - HELD THAT - There is no provision under the Act suggesting to make the addition of the amount advances to the parties as income of the assessee. It is for the reason that the advances given by the assessee has not been claimed as deduction against the income. In the later years, when these advances are adjusted against any expenses, the question may arise in that relevant year whether such deduction by way of expenses is eligible against the income shown by the assessee. Even in that year, question of treating the advance as income of the assessee would not arise. There can be a dispute with respect to the claim made by the assessee against such advances. In other words, the advances given by the assessee per se cannot be treated as income of the assessee. We find from the submission of the assessee made before the learned CIT-A that these advances were made in the course of the business which were adjusted in the later years - assessee has filed the copies of the ledger of the parties along with the payment vouchers the genuineness of these documents were nowhere doubted by the authorities below. Even at the time of hearing, the learned DR appearing on behalf of the Revenue has not brought anything on record contrary to the finding of the learned CIT-A. Hence we do not find any infirmity in the order of the learned CIT-A and therefore we uphold the same. Thus the ground of appeal of the revenue is hereby dismissed. Difference in the opening stock and closing stock - AO during the assessment proceedings observed that the assessee has shown opening stock whereas as no return and tax audit report furnished for the last 2 immediate preceding assessment years - HELD THAT - Admittedly, the assessee has not filed the return of income of the immediate preceding assessment years but non-filing of the income tax return cannot be a ground to disturb the opening stock of the current year until and unless some material is brought on record suggesting that the closing stock of the immediate previous is not genuine. It is also important to note that the assessee has made subsequent sales out of the opening stock which were not disturbed by the revenue authorities. The sale is possible by the assessee only out of the purchases or out of the stock held in opening stock, but the revenue has not disturbed the quantity of the items in which he is dealing. In view of the above and after considering the facts in totality, we are not inclined to uphold the addition made by the AO with respect to the opening value of stock. Difference found in the valuation of closing stock - On perusal of the sales register filed by the assessee we note that the assessee has sold different products are different rate. Most of the products were sold at a price less than 180 except on 3 of the occasions the price was charged by the assessee ₹ 412 of its product. Thus from these details, it is transpired that the assessee has not taken any price in the valuation of the closing stock based on artificial figure. Thus, details filed by the assessee for valuing the closing stock cannot be rejected in arbitrary manner. Thus in view of the above and after considering the facts in totality, we do not find any infirmity in the order of the learned CIT(A). Hence the ground of appeal of the revenue is hereby dismissed. Unexplained cash in hand shown as on 31-3-2016 in the audited financial statements - CIT-A deleted the addition - HELD THAT - The cash in hand as on 31st of March 2016 is the net effect of cash receipts and payments made in the year under consideration. The receipt of cash arises from multiple sources such as sales realization, withdrawal from the bank, receipt of money in cash from any other source - payment of cash represent certain transactions such as deposit in the bank, payment against the purchases/expenses, loans and advances in cash etc. As such, the closing balance of cash cannot be questioned or disturbed without bringing any tangible material on record qua the cash transactions carried out by the assessee in the year under consideration. In the case on hand, the closing balance has been doubted by the AO without disturbing the cash transactions carried out by the assessee in the year under consideration. Thus, we do not find any infirmity in the order of the learned CIT-A. Accordingly, we uphold the same. Hence the ground of appeal of the revenue is by dismissed.

Summary

Issues Involved:
1. Deletion of addition of employee benefit expenses.
2. Deletion of addition of loans and advances.
3. Deletion of addition related to stock valuation.
4. Deletion of addition of unexplained cash.
5. Non-compliance of the assessee during assessment proceedings.

Detailed Analysis:

1. Deletion of Addition of Employee Benefit Expenses:
The Revenue contended that the CIT(A) erred in deleting the disallowance of excessive employee benefit expenses amounting to Rs. 6,12,140/-. The AO had disallowed 40% of these expenses on an ad-hoc basis due to a significant increase in employee benefit expenses despite a decrease in turnover, and the absence of supporting material like the list of employees and monthly salary details. The CIT(A) allowed the appeal, giving the benefit of doubt as the assessee provided details of employees. The Tribunal upheld the CIT(A)'s decision, stating that the revenue cannot dictate the quantum of salary paid by the assessee. The Tribunal found no provision under the Act for ad-hoc disallowance and noted that the AO's reasoning was not tenable as salary expenses are generally fixed and do not correlate directly with turnover.

2. Deletion of Addition of Loans and Advances:
The Revenue challenged the deletion of Rs. 17,02,736/- added by the AO as unexplained loans and advances. The AO had disallowed the advances due to lack of contra confirmation, PAN, and complete addresses. The CIT(A) allowed the appeal, giving the benefit of doubt as the assessee provided reasonable details for further verification. The Tribunal upheld the CIT(A)'s decision, stating that there is no provision under the Act to treat advances as income. The Tribunal noted that the advances were made in the course of business and were adjusted in later years, and the genuineness of the documents provided was not doubted by the authorities.

3. Deletion of Addition Related to Stock Valuation:
The Revenue contested the deletion of Rs. 6,29,89,149/- and Rs. 2,23,50,000/- related to differences in stock valuation. The AO had disallowed the opening stock and revalued the closing stock based on average purchase price, citing the absence of returns and audit reports for previous years. The CIT(A) deleted the additions, giving the benefit of doubt as the assessee provided explanations and tax audit reports. The Tribunal upheld the CIT(A)'s decision, noting that non-filing of returns for previous years cannot justify disturbing the opening stock. The Tribunal emphasized that the closing stock of one year becomes the opening stock of the next, and the AO's approach lacked consistency and proper direction for subsequent years.

4. Deletion of Addition of Unexplained Cash:
The Revenue argued against the deletion of Rs. 18,81,497/- added by the AO as unexplained cash. The AO had treated the cash in hand as unexplained due to lack of documentary evidence. The CIT(A) allowed the appeal, giving the benefit of doubt as the assessee's financial statements were audited. The Tribunal upheld the CIT(A)'s decision, stating that cash in hand per se does not represent income and cannot be questioned without tangible evidence of cash transactions. The Tribunal found no infirmity in the CIT(A)'s order as the AO did not disturb the cash transactions carried out by the assessee during the year.

5. Non-Compliance of the Assessee During Assessment Proceedings:
The Revenue also raised the issue of the assessee's non-compliance during assessment proceedings, arguing that the CIT(A) granted the benefit of doubt without sufficient evidence. However, the Tribunal found that the CIT(A) had considered the assessee's explanations and provided reasonable grounds for the decisions made. The Tribunal dismissed the Revenue's appeal, finding no merit in the arguments presented.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The Tribunal found that the AO's disallowances and additions lacked proper justification and were not supported by provisions under the Income Tax Act. The Tribunal emphasized the importance of consistent and evidence-based assessments, affirming the CIT(A)'s benefit of doubt given to the assessee in the absence of contrary evidence from the Revenue.