2024 (1) TMI 1185 - AT - Income Tax

Rejection of books of accounts - estimation of income of the assessee by applying 10% to the gross turnover of the assessee - disallowance of staff welfare expenses, interest expenses and on the disallowance of travelling expenses by CIT - HELD THAT - On travelling expenses, the assessee had time and again reiterated that the AO had examined only 0.6% of the total expenses, and found them to be unverifiable. But that the ld.CIT(A) without giving any reason for not agreeing with the assessee s contention, went on to summarily hold that 20% of the expenses are to be disallowed, that too without giving any opportunity of hearing to the assessee before doing so. Similarly, the staff welfare expenses were also disallowed to the tune of 10% of the same, without even giving an opportunity to the assessee or confronting the same to the assessee. In the same manner, CIT(A) has made disallowance of interest expenses on WIP without confronting the same to the assessee. Clearly, the order passed by the CIT(A) is in gross violation of the principles of natural justice and the additions made by him are not sustainable for this reason alone. Powers of CIT(A) - Whether disallowance of staff welfare expenses and interest expenses was beyond the power of the CIT(A)? - Though section 251 of the Act gives power to the ld.CIT(A) to expand scope of the assessment made, but the Hon ble Supreme Court in various decisions has held that the scope cannot be expanded to discover new source of income. Once an assessment comes before the first appellate authority, his competence is not restricted to examining those aspects of the assessment which are complained of by the assessee, but ranges over the whole assessment and it is open to him to correct the Assessing Officer not only with regard to matter raised in appeal but also with regard to all matters considered by the AO . He can revise every process which led to the ultimate computation or assessment. But this power cannot extend to the Ld.CIT(A) discovering new sources of income. The Hon ble apex court laid down this law in CIT vs Shapoorji Pallonji Mistry 1962 (2) TMI 12 - SUPREME COURT which was followed in the case of Union Tyres 1999 (9) TMI 81 - DELHI HIGH COURT and Scindia Steam Navigation Co. Ltd. 1970 (3) TMI 34 - BOMBAY HIGH COURT We hold, that the disallowance made with respect to the staff welfare expenses and interest expenses, is not sustainable in law being beyond power of the CIT(A). The same is directed to be deleted. Decided in favour of assessee.

Summary

Issues Involved:
The judgment involves issues related to the jurisdiction of the Commissioner of Income Tax (Appeals) in making specific disallowances, the application of gross profit rate, and the violation of principles of natural justice in making disallowances without giving the assessee an opportunity to explain.

Issue 1: Jurisdiction of Commissioner of Income Tax (Appeals)
The appellant contested that the Commissioner Appeals exceeded jurisdiction by discovering a new source of income, unexplained investments, which was not part of the original assessment. They argued that failure to prove the sources of investment would result in additions under a different provision of law, not relevant to disallowance of interest income, travelling expenses, and staff welfare expenses. The appellant cited judgments by the Hon'ble Delhi Court and Hon'ble Supreme Court to support their argument that any addition on account of unexplained investments constitutes a new source of income beyond the original assessment scope.

Issue 2: Disallowances by Commissioner of Income Tax (Appeals)
The Commissioner Appeals disallowed 20% of travelling expenses, interest on borrowed funds, and staff welfare expenses on an ad-hoc basis. The appellant challenged these disallowances, stating that they were made without proper evidence or opportunity for explanation. The appellant argued that the disallowances were beyond the Commissioner Appeals' power, citing legal precedents that the scope of the assessment cannot be expanded to discover new sources of income.

Issue 3: Violation of Principles of Natural Justice
The appellant contended that the disallowances made by the Commissioner Appeals were in violation of the principles of natural justice. They argued that the disallowances of staff welfare expenses and interest expenses were made without giving the appellant a chance to respond or without being confronted during the proceedings. The appellant emphasized that the Commissioner Appeals' actions were not sustainable under the law due to this violation.

Separate Judgment by the Tribunal:
The Tribunal held that the disallowances made by the Commissioner Appeals were beyond their jurisdiction and in violation of the principles of natural justice. They emphasized that the Commissioner Appeals cannot discover new sources of income and directed all disallowances to be deleted. The appeal of the assessee was allowed, and the order was pronounced in the Court on 24th January 2024 at Ahmedabad.