M/s. Shri Sai Works, V. Income-tax Officer,

ITA 1082/PUN/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2701 (ITAT-PUNE)
• Duration Of Justice: 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 12-01-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 07-08-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIDYA SAGAR R PATIL
• Assessee Lawyers: IRWIN LASRADO
• Keywords: Gift; Business expenditure; Bad and doubtful debts
• Section: 40A(3); 143(3)

Judgement Text

] ]] ] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , !', $ % BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM ITA NO.1082/PN/2015 ASSESSMENT YEAR : 2010-11 M/S SHRI SAI WORKS, 01, RADHASHREE SOCIETY, VEER SAVARKAR ROAD, DOMBIVALI (EAST). PAN : ABBFS0588D . APPELLANT VS. THE INCOME TAX OFFICER, WARD 3(3), KALYAN. . RESPONDENT / APPELLANT BY : SHRI IRWIN LASRADO / RESPONDENT BY : SHRI VIDYASAGAR R. PATIL, JCIT / DATE OF HEARING : 12.01.2016 / DATE OF PRONOUNCEMENT: 19.02.2016 & / ORDER PER PRADIP KUMAR KEDIA, AM : THE PRESENT APPEAL PREFERRED BY THE ASSESSEE IS AGA INST THE ORDER OF CIT(A)-I, THANE DATED 28.05.2015 RELATING TO ASSESS MENT YEAR 2010-11 PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (I N SHORT THE ACT). 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE COMMISSIONER OF INCOME-TAX (APPEALS)-I [THE CIT (A )] HAS ERRED IN NOT GRANTING RELIEF FROM THE AD HOC ADDITION OF RS.1,00,000/- MA DE BY THE ASSESSING OFFICER BY MAKING ESTIMATED DISALLOWANCES OUT OF EXPENSES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE COMMISSIONER OF INCOME-TAX (APPEALS)-I [THE CIT (A )] HAS ERRED IN ENHANCING THE ASSESSMENT BY DISALLOWING EXPENSES OVER AND ABOVE T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE COMMISSIONER OF INCOME-TAX (APPEALS)-I [THE CIT (A )'] HAS ERRED IN PLACING 2 ITA NO.1082/PN/2015 RELIANCE UPON THE LETTER FROM THE PARTNER OF THE AP PELLANT FIRM FOR ENHANCING THE ASSESSMENT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE COMMISSIONER OF INCOME-TAX (APPEALS)-I [THE CIT (A )'] HAS ERRED IN INFERRING THAT THE APPELLANT HAD ACTED IN CONTRAVENTION OF THE PRO VISIONS OF THE SECTION 40A(3) OF THE ACT THOUGH HE DID NOT FIND ANY SPECIFIC INCIDEN CE. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE COMMISSIONER OF INCOME-TAX (APPEALS)-I [THE CIT (A )'] HAS ERRED IN REJECTING THE BOOKS OF ACCOUNTS THOUGH THEY WERE SUPPORTED BY TAX AUDIT REPORT AS REQUIRED U/S 44AB OF THE I T ACT 1961, UNDER THE PROVISIONS OF S ECTION 145(3) OF THE I T ACT ONLY BECAUSE IN HIS OPINION FEW VOUCHERS WERE NOT VERIFI ABLE. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE COMMISSIONER OF INCOME-TAX (APPEALS)-I ['THE CIT (A )'] HAS ERRED IN MAKING ADHOC DISALLOWANCE OF RS.1,98,002/ BEING 50% OF EXPENSES AS FOLLOWS: (I) TEA REFRESHMENT EXPENSES RS.1,88,545; 50% = 94 ,272/- (II) ENTERTAINMENT EXPENSES RS.1,24,600; 50% = 6 2,300/- (III) SOCIETY MAINTENANCE RS.66,570; 50% = 33,28 5/- (IV) GIFT EXPENSES RS.16,290; 50% = 8,145/- TOTAL DISALLOWANCE 1,98,002/- 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE COMMISSIONER OF INCOME-TAX (APPEALS)-I [THE CIT(A) ] HAS ERRED IN MAKING ADHOC DISALLOWANCE OF RS.2,12,286/- BEING 100% OF EXPENSE S AS FOLLOWS: (I) FOREIGN EXPENSES RS.76,705 (II) RLY. STAFF PAYMENT RS.86,202 (III) COMMISSION EXPENSES RS.20,000 (IV) BAD DEBTS RS.29,379 TOTAL DISALLOWANCE RS.2,12,286/- 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE COMMISSIONER OF INCOME-TAX (APPEALS)-I [THE CIT(A) ] HAS ERRED IN MAKING TWICE THE DISALLOWANCE OF AN AMOUNT OF RS.86,202/- TWICE SINCE THE SAME IS INCLUDED IN DISALLOWANCE OF ENTERTAINMENT EXPENSES AS PER GROUN D NO.7 ABOVE. THE APPELLANT CRAVES LEAVE TO, ADD, AMEND, ALTER OR MODIFY THE GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. 3. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE HAS F ILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.2,44,960/-. THE ASSES SEE IS A PARTNERSHIP FIRM UNDERTAKING ALL TYPES OF ENGINEERING AND ELECTRICAL CONTRACTS, LABOUR CONTRACTS MAINLY FROM CENTRAL & WESTERN RAILWAY AND SALE OF E NGINEERING AND ELECTRICAL ITEMS. AS PER THE ASSESSMENT ORDER, THE ASSESSEE M AINTAINS BOOKS OF ACCOUNT VIZ. CASH BOOK, LEDGER PURCHASE REGISTER, BANK BOOK , ETC.. AS PER PARA NO.2 OF THE ASSESSMENT ORDER, THE PARTNER OF THE ASSESSEE F IRM ATTENDED BEFORE THE 3 ITA NO.1082/PN/2015 ASSESSING OFFICER AND FURNISHED THE RELEVANT INFORM ATION AS CALLED FOR AND ALSO FILED WRITTEN SUBMISSIONS, ETC.. THE ASSESSING OFF ICER NOTED THAT TOTAL TURNOVER OF THE ASSESSEE FIRM IS RS.2,07,79,427/- AND GROSS PROFIT DECLARED THEREON STANDS AT RS.45,42,756/- WHICH WORKS OUT TO 21.86% AS COMPARED AGAINST LAST YEARS TURNOVER OF RS.1,24,04,184/- AND GROSS PROFI T THEREON AT RS.33,31,698/- WHICH WORKS OUT TO RS.26.85%. THE ASSESSEE FIRM DE CLARED NET PROFIT OF RS.10,28,824/- BEFORE REMUNERATION AND INTEREST TO PARTNERS WHICH WORKED OUT TO 4.95% AS COMPARED AGAINST CORRESPONDING NET PROF IT OF RS.6,79,145/- BEFORE REMUNERATION AND INTEREST TO PARTNERS IN THE LAST Y EAR WHICH WORKED OUT TO 5.48%. AS A SEQUEL TO THE FALL IN G.P., THE ASSESS ING OFFICER WAS NOT SATISFIED WITH THE CORRECTNESS OF THE VARIOUS EXPENSES DEBITE D TO THE PROFIT & LOSS ACCOUNT AND OBSERVED THAT PART OF THE EXPENSES WERE INCURRED IN CASH ON THE BASIS OF SELF-MADE VOUCHERS WITHOUT SUPPORTING EVID ENCES SUCH AS THIRD PARTY CONFIRMATIONS. THE AUTHENTICITY AND GENUINENESS OF SUCH EXPENSES WERE NOT PROVED WITH RESPECT TO THE NEED OF BUSINESS EXPENDI TURE. THEREFORE, THE ASSESSING OFFICER RESORTED TO AN AD-HOC DISALLOWANC E OF RS.1,00,000/- OUT OF VARIOUS EXPENSES DEBITED TO PROFIT & LOSS ACCOUNT W ITH A VIEW TO COVER UP NON-VERIFIABLE AND PERSONAL ELEMENT OF EXPENSES AND ALL OTHER POSSIBLE DEFICIENCIES. 4. AGAINST THE IMPUGNED ASSESSMENT ORDER, THE ASSES SEE PREFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) PERUSED THE DETAILS OF VARIOUS EXPENDITURES INCURRED AND OBSERVED THAT THE ASSESSEE FIRM HAS INTER-ALIA DEBITED AN AMOUNT OF RS.29,379/- AGAINST BAD DEBTS, RS.20,000/- AGAIN ST COMMISSION EXPENSES, RS.76,705/- AGAINST FOREIGN EXPENSES, RS.16,290/- A GAINST GIFT EXPENSES, RS.47,462/- AGAINST LODGING AND BOARDING EXPENSES, RS.66,570/- AGAINST SOCIETY MAINTENANCE, RS.1,88,545/- AS TEA AND REFRESHMENT A ND RS.1,24,600/- AGAINST ENTERTAINMENT EXPENSES. THE CIT(A) OBSERVED THAT T HE ASSESSEE COULD NOT PRODUCE VERIFIABLE VOUCHERS IN RESPECT OF MOST OF E XPENDITURES. THE ASSESSEE FIRM HAS SHOWN AN AMOUNT OF RS.3,66,774/- AS PAYABL E EXPENSES OUTSTANDING AT THE END OF THE YEAR UNDER THE HEAD OTHER PROVISION AND ALSO RS.1,00,000/- UNDER THE HEAD ACCOUNT PAYABLES. THE CIT(A) FURT HER NOTED THE COMMENTS OF THE TAX AUDITORS. AS PER THE AUDIT REPORT IN COLUM N NO.(H) IT IS OBSERVED BY 4 ITA NO.1082/PN/2015 AUDITORS THAT DUE TO VOLUMINOUS PAYMENTS IT IS NOT POSSIBLE TO CONDUCT 100% CHECKING IN RESPECT OF CASH EXPENDITURES IN TERMS O F SECTION 40A(3) OF THE ACT READ WITH RULE 6DD OF THE INCOME TAX RULES, 1962. TAKING INTO ACCOUNT OF VARIOUS FACTS NOTED ABOVE, THE CIT(A) OBSERVED THAT THE ASSESSEE COULD NOT EXPLAIN THE PURPOSE/BUSINESS NEED OF FOREIGN TRAVEL LING EXPENSES AMOUNTING TO RS.76,705/- ALONG WITH SUPPORTING DOCUMENTARY EVIDE NCE. AS REGARD ENTERTAINMENT OF EXPENSES OF RS.1,24,600/-, THE CIT (A) OBSERVED THAT THE ASSESSEE COULD FURNISH DETAILS OF EXPENSES AMOUNTIN G TO RS.86,202/- AND THAT AMOUNT IN ANY CASE IS STATED TO HAVE BEEN PAID TO R AILWAY STAFF WHO ARE NOT ON THE PAY-ROLL OF THE ASSESSEE. THE CIT(A) FURTHER O BSERVED THAT THE ASSESSEE COULD NOT ESTABLISH GENUINENESS AND BUSINESS NEEDS OF THE EXPENSES OF RS.66,570/- AGAINST SOCIETY MAINTENANCE, RS.29,379/ - AGAINST BAD DEBTS AND RS.20,000/- AGAINST COMMISSION EXPENSES. HE ACCORD INGLY DISALLOWED FOREIGN TRAVEL EXPENSES OF RS.76,705/- PAYMENT TO RAILWAY S TAFF OF RS.86,202/- (OUT OF ENTERTAINMENT EXPENSES), SOCIETY MAINTENANCE OF RS. 66,570/- COMMISSION EXPENSES OF RS.20,000/- AND BAD DEBTS OF RS.29,379/ -. IN ADDITION, HE FURTHER HELD THAT THE EXPENDITURES DEBITED UNDER THE HEAD TEA AND REFRESHMENT OF RS.1,88,545/-, ENTERTAINMENT OF RS.1,24,600/- AND G IFT EXPENSES OF RS.16,290/- ARE NOT FULLY VERIFIABLE. AS MOST OF THE EXPENDITU RES ARE INCURRED IN CASH AND IN THE NATURE OF PERSONAL EXPENSES AND ACCORDINGLY DIS ALLOWED 60% OF THE AFORESAID REFRESHMENT, ENTERTAINMENT EXPENSES, ETC. WHICH WORKED OUT TO RS.1,97,661/-. HE ACCORDINGLY ENHANCED THE TOTAL D ISALLOWANCE TO RS.4,09,947/- AS AGAINST RS.1,00,000/- MADE BY THE ASSESSING OFFICER. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 6. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESS EE ADVERTED OUR ATTENTION TO THE PAPER BOOK FILED WHEREIN THE LEDGE R EXTRACTS OF VARIOUS EXPENSES INCURRED ALONG WITH CERTAIN VOUCHERS/BILLS WERE ENCLOSED FOR PROPER APPRECIATION OF FACTS. HE SUBMITTED THAT THE EXPEN SES INCURRED IN CASH ARE VERY PETTY IN NATURE AND INCURRED AS PER THE BUSINESS NE ED OF THE ASSESSEE. HE SUBMITTED THAT THE PETTY EXPENSES ARE JUST AND REAS ONABLE HAVING REGARD TO THE 5 ITA NO.1082/PN/2015 NATURE OF THE BUSINESS OF THE ASSESSEE. AS REGARD SOCIETY MAINTENANCE EXPENSES, THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ADVERTED OUR ATTENTION TO THE LEDGER ACCOUNT OF THE ASSESSEE AND SUBMITTED THAT THE BILLS RECEIVED FROM THE SOCIETY WOULD SHOW THAT THE EXPEN SES HAVE BEEN INCURRED TO REIMBURSE THE SOCIETY CHARGES FOR ITS OFFICE/SHOP P REMISES. AS REGARD GIFT EXPENSES, THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ADVERTED OUR ATTENTION TO CERTAIN BILLS ENCLOSED AT PAGE NO.110 TO 117 OF THE PAPER BOOK AND SUBMITTED THAT THE EXPENSES INCURRED ARE VERY SMALL IN NATURE AND INCURRED IN THE ORDINARY COURSE OF BUSINESS FOR MAINTAINING AND PRESERVING CONDUCIVE ENVIRONMENT FOR SMOOTH FUNCTIONING. HOWEVER, AS RE GARD FOREIGN TRAVEL EXPENSES OF RS.76,705/-, THE LD. AUTHORIZED REPRESE NTATIVE FOR THE ASSESSEE DREW BLANK AND COULD NOT OFFER COGENT EXPLANATION T OWARDS THE PURPOSE OF THE FOREIGN TRAVELLING. AS REGARD BAD DEBTS AND COMMIS SION EXPENSES, HE SUBMITTED THAT THE OLD TRADE BALANCES BROUGHT FORWA RD HAVE BEEN WRITTEN-OFF DURING THE YEAR WHICH COMPRISES OF VERY SMALL AMOUN TS AND COMMISSION EXPENSES HAVE BEEN INCURRED FOR PAYMENT TO FOUR PAR TIES OF RS.5,000/- EACH FOR WHICH THE PAYMENT HAS BEEN MADE BY THE CHEQUE. 7. THE LD. DEPARTMENTAL REPRESENTATIVE ON BEHALF OF THE REVENUE, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE CIT(A). 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND MATERIAL PLACED ON RECORD. AS NOTED ABOVE, THE ASSESSING OFFICER R ESORTED TO AD-HOC DISALLOWANCE OF RS.1,00,000/- WHICH HAS BEEN ENHANC ED BY THE CIT(A) TO RS.4,09,947/-. WE FIND THAT THE ASSESSEE HAS MAINT AINED BOOKS OF ACCOUNT WHICH WERE AUDITED. THE LEDGER EXTRACTS AND SUPPOR TING VOUCHERS WERE STATED TO BE PRODUCED BEFORE THE AUTHORITIES BELOW. IN OU R VIEW, THE REASONINGS GIVEN BY THE CIT(A) FOR ENHANCEMENT ARE VERY GENERAL IN N ATURE AND FAILS THE TEST OF THE OBJECTIVITY EXCEPT THE DISALLOWANCE TOWARDS FOR EIGN TRAVELLING DISALLOWANCE OF RS.76,705/-. WE FIND ABSENCE OF UNFLINCHING JUST IFICATION FROM THE CIT(A) WHILE MAKING FRESH ESTIMATIONS OF DISALLOWANCES RES ULTING IN ITS ENHANCEMENT. WE ARE OF THE VIEW THAT THE MERE FALL IN GROSS PROF IT RATIO OR NET PROFIT RATIO BY ITSELF WILL NOT ENTITLE THE REVENUE TO DRAW ADVERSE INTERFERENCE AGAINST THE 6 ITA NO.1082/PN/2015 ASSESSEE IN THE ABSENCE OF SPECIFIC DEFECTS. WE OBS ERVE THAT THE EXPENSES INCURRED UNDER THE HEAD ENTERTAINMENT EXPENSES, TEA REFRESHMENT, GIFT EXPENSES AND RAILWAY STAFF ENTERTAINMENT ETC. ARE SMALL AND MEAGER. PERUSAL OF LEDGER EXTRACTS BY US GIVES AN IMPRESSION THAT THESE HAVE BEEN INCURRED BROADLY TO MEET DAY TO DAY BUSINESS EXPENDITURE. HOWEVER, THE SOME PERSONAL ELEMENT IN SUCH EXPENSES CANNOT BE ENTIRELY RULED OUT. IN OUR VIEW, AN ESTIMATED DISALLOWANCE OF RS.50,000/- OUT OF EXPENSES HEAD NO TED ABOVE TO COVER UP EXPENSES TOWARDS NON BUSINESS PURPOSES WOULD MEET T HE ENDS OF JUSTICE. WE ARE OF THE VIEW THAT NO DISALLOWANCE IS WARRANTED O UT OF BAD DEBTS WRITTEN OFF AND COMMISSION EXPENSES. SIMILARLY SOCIETY EXPENSES INCURRED IS FOUND TO BE DULY CORROBORATED AND INCURRED FOR BUSINESS PURPOSE S. IN THE TOTALITY OF THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT EXCEPT FOR D ISALLOWANCE OF RS.76,705/- TOWARDS FOREIGN TRAVELLING EXPENSES AND OTHER DISAL LOWANCE OF RS.50,000/- AS NOTED ABOVE, THE BALANCE DISALLOWANCES LACK JUSTIFI CATION AND DESERVES TO BE CANCELLED. ACCORDINGLY, DISALLOWANCE OF EXPENSES T O THE EXTENT OF RS.1,26,705/- IS SUSTAINED AND BALANCE ADDITION OF RS.2,83,242/- STANDS DELETED. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED ON THIS 19 TH DAY OF FEBRUARY, 2016. SD/- SD/- ( SUSHMA CHOWLA ) ( PRADIP KUMAR KEDIA ) / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER PUNE ; DATED : 19 TH FEBRUARY, 2016. & ' ()* +*( / COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-I, THANE; 4) THE CIT-I, THANE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. &, / BY ORDER , ' # //TRUE COPY// $ %& # '( / SR. PRIVATE SECRETARY ) '* , / ITAT, PUNE