K.G.N.ENTERPRISE,VERAVAL V. INCOME TAX OFFICER, VERAVAL

ITA 181/RJT/2025

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The case involves K.G.N. Enterprise, a partnership firm engaged in the retail and wholesale business of fish, which appealed against the orders of the Income Tax Officer (ITO) and the Commissioner of Income-tax (Appeals) [CIT(A)]. The dispute centered on the disallowance of salary expenses amounting to Rs. 6,52,511/- claimed by the firm for the Assessment Year 2019-20. The ITO had initially disallowed these expenses citing them as excessive relative to the firm's turnover and lacking proper documentation. The CIT(A) upheld this decision, leading to the firm's appeal to the Tribunal. The Tribunal, after reviewing the submissions and evidence, concluded that the disallowance was unjustified and reversed the lower authorities' decisions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 791611 (ITAT-RAJKOT)
• Duration Of Justice: 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2019-2020
• Appeal Filed On: 20-03-2025
• Other Referred Cases: Jet Airways (I) Limited vs. ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ABHIMANYU SINGH YADAV; LD.
• Assessee Lawyers: R.B. SHAH; LD
• Keywords: Business income; TDS; Source of fund; Reason to believe
• Section: 147

Judgement Text

"ITA No. 181/Rjt/2025 K.G.N. Enterprise vs. ITO 1 आयकरअपीलीयअिधकरण,राजकोटɊायपीठ,राजकोट। IN THE INCOME TAX APPELLATE TRIBUNAL, “SMC” RAJKOT BENCH, RAJKOT BEFORE DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER आयकरअपील सं. /ITA No.181/RJT/2025 िनधाŊरण वषŊ/Assessment Year : 2019-20 K.G.N. Enterprise Al Iraki Bageraza Lucky Colony, Ner Somnathtokish, Behind Amit Akela Clinic, Veraval, Gir Somnath, Gujarat - 362264 बनाम/ Vs Income Tax Officer Ward – 4, Range 201, Junagarh, Veraval ˕ायीलेखासं./जीआइआरसं./PAN/GIR No.:AATFK8798E (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) िनधाŊįरती की ओर से/Assessee by : Shri R. B. Shah, Ld. AR राजˢकी ओर से / Revenue by : Shri Abhimanyu Singh Yadav, Ld. Sr. DR सुनवाई की तारीख /Date of Hearing : 15/09/2025 घोषणा की तारीख /Date of Pronouncement : 09/12/2025 आदेश/Order Per, Dr. Arjun Lal Saini, A.M: Captioned appeal filed by the assessee, pertaining to Assessment Year 2019- 20, is directed against the order passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by National Faceless Appeal Centre (NFAC), Delhi/Commissioner of Income-tax (Appeals), dated 29.01.2025, which in turn arises out of an assessment order passed by Assessing Officer u/s. 147 r.w.s. 144B of the Act, on 24.01.2024. Printed from counselvise.com ITA No. 181/Rjt/2025 K.G.N. Enterprise vs. ITO 2 2. Grounds of appeal raised by the assessee are as follows: “1. Whether the learned CIT(Appeals) in the facts and circumstances of case erred in passing order u/s 250 of the Income Tax Act, 1961 thereby confirming the assessing officers order? 2. Whether the learned CIT(Appeals) in the facts and circumstances of case erred in disallowing the salary expense incurred by the Appellant which were actually genuine and bonafide and thereby confirming the assessing officer's order? 3. Whether the learned CIT(Appeals) in the facts and circumstances of case erred in confirming the penalty proceedings initiated against the Appellant?” 3. The facts of the case which can be stated quite shortly are as follows: The assessee -firm (M/s K.G.N Enterprises) had not filed the income tax return (ITR) for the assessment year (AY) 2019-20, u/s 139(1) of the Act. Specific information flagged as per Risk Management Strategy formulated by the CBDT through ITBA software under the head 'Non-filing of Returns - NMS cases. As per this specific information the assessee (PAN: AATFK8798E) had made transactions during the F.Y. 2018-19 relevant to the A.Y. 2019-20. The assessee- firm, has not filed its return of income for the A.Y. 2019-20, u/s 139(1) of the Act. The information has been received in the case of the assessee that the assessee, during the year under consideration, had received contractual receipts amounting to Rs. 11,87,999/- but had not filed the return of income for the year under consideration. Therefore, undeclared income from these receipts and non-filing of return of income, suggests, within the meaning of section 147 r.w.s 148 of the Act, that income chargeable to tax of Rs. 11,87,999/- has escaped assessment for the year under consideration. Therefore, the notice was issued by the assessing officer, asking the assessee to explain the contract receipts amounting to Rs. 11,87,999/-. Printed from counselvise.com ITA No. 181/Rjt/2025 K.G.N. Enterprise vs. ITO 3 4.During the assessment proceedings, in response to the notice of the assessing officer, the assessee furnished its reply, before the assessing officer, which is reproduced below: “Brief Details Regarding nature of business. We carry on the Retail and Wholesale business of Fish Sale and Purchase. Also deal in commission Business of Fish. Details Regarding Sources of Fund KGN Enterprises is a partnership Firm and thus the Source of Fund to carry on the Financial transactions is by Introduction of capital by Partners in part and as when the need arise. For details regarding the profit earned we hereby attach the Financial Statements and Audit Report for your ready reference of FY 2019-20(AY 2021-21). Because the turnover of FY 2018-19(AY2019-20) is also merged and shown in FY 2019-20 (AY 2020-21) the details of both the years are as follows:- 1. Total Turnover of FY 2018-19(AY2019-20) Rs. 14,55,987.00 2. Total Turnover of FY 2019-20(AY 2020-21) Rs. 18,30,521.00 Total turnover of Both the years Rs. 32,86,508/- Further Rs. 14,55,987/--Includes Commission Income of Rs. 11,87,999/- on which TDS is also deducted and balance Rs. 2,67,988/- on which TDS is not deducted. Hence, we have shown the Turnover of FY 2018-19 in FY 2019-20& we have not suppressed or no income has been escaped assessment. Thus, we hereby humbly request you to consider the above information and Pardon.\" 5.However, the assessing officer rejected the contention of the assessee and held that the assessee has shown total sales of Rs. 14,55,987/- and claimed salary expenses at Rs. 7,67,086/-, which is voluminous keeping in view of the turnover/sales of the assessee and nature of business of the assessee. Clearly, in the light of facts and circumstances, such claim by assessee is a self-serving carefully fabricated afterthought story. This is more so when being a firm the assessee was under obligation to file income tax return (ITR) within due time. Hence, keeping in view of the above the facts and after allowing reasonable expenses of one account manager, one sales personal and one sweeper which comes to Rs. 1,14,575/- Printed from counselvise.com ITA No. 181/Rjt/2025 K.G.N. Enterprise vs. ITO 4 (44770+44100+25705), the balance expenses claimed at Rs. 6,52,511/-( Rs. 7,67,086- Rs. 1,14,575) was disallowed by the assessing officer. 6.Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the Ld. CIT(A) who has confirmed the action of the assessing officer. The ld. CIT(A) observed that in absence of the proper records and vouchers, the genuineness of the expenses claimed is doubted. In order to tap the possible leakages in the accounts of the assessee, under this head, a lumpsum disallowance of Rs.6,52,511/- was made and added back to the income returned. Under the circumstances, the ld. CIT(A) did not interfere with the decision of the Assessing officer and hence, the disallowance of Rs. 6,52,511/-was upheld by ld. CIT(A). 7. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal. 8. Learned Counsel for the assessee submitted that ad- hoc disallowance of Rs. 6,52,511/- out of total expenses Rs. 7,67,086/- is very harsh and heavy. In the assessee`s case no books of accounts were rejected by the assessing officer. The assessee has started new business and therefore, some more expenses are expected. The disallowance is not based on valid reasons that payment was made in cash and not verifiable from bank. No notices were issued by the assessing officer to the recipients of salary. Hence, the disallowance is purely based on surmise and presumption, therefore, such addition may be deleted. Printed from counselvise.com ITA No. 181/Rjt/2025 K.G.N. Enterprise vs. ITO 5 9. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. 10. I have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. I note that the only issue involved in this appeal is disallowance of Rs.6,52,511/-out of salary expenses, claimed by the assessee. I note that assessing officer has made disallowance of salary by considering and appreciating the incorrect facts. I also observe that the contention of the learned assessing officer while making disallowance and learned CIT(A) while confirming the disallowance in the impugned order are not sustainable, justified and correct. Per contra, I observe that the assessee has successfully established that the salary expense has been paid in lieu of services rendered by the recipient towards administrative and financial activities of the assessee. It is also the prerogative of the assessee to decide that how much salary is to be paid to a particular person which is useful for his business. 11. I also note that the assessing officer reopened the assessee’s case u/s.147/148 of the Act, to examine contractual receipts amounting to Rs. 11,87,999/-, however, the ultimate addition was made by the assessing officer on different issues, then, the issue raised in the reasons recorded. The reasons were recorded by the assessing officer stating that the assessee was in receipt of contractual receipts to the tune of Rs.11,87,989/-. However, addition was made by the assessing officer on different item, based on the ad hoc disallowance of salary to the tune of Rs.6,52,511/-. We note that assessing officer may assess or reassess the income in respect of any issue Printed from counselvise.com ITA No. 181/Rjt/2025 K.G.N. Enterprise vs. ITO 6 which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice; however, if after issuing a notice under section 148 of the Act, the assessing officer accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income, for that I rely on the judgment of Hon`ble Bombay High Court in the case of Jet Airways (I) limited 331 ITR 236 (Bom), wherein it was held as follow: “21. Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under s. 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the assessing officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Expln. 3 by the Finance Act (No. 2) of 2009. However, Expln. 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of s. 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Sec. 147 has this effect that the assessing officer has to assess or reassess the income (\"such income\") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under s. 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.” 12. I also note that in assessee’s case, assessee’s books of accounts were not rejected, besides the disallowance made by the assessing officer were not based on valid reasons and such disallowance is based on surmises and conjunctures, despite of submitting plethora of evidences, by the assessee, during the assessment proceedings. The assessing officer did not find any mistake and error and did not Printed from counselvise.com ITA No. 181/Rjt/2025 K.G.N. Enterprise vs. ITO 7 highlight any deficiency in the documents submitted by the assessee. Hence, I am not inclined to accept the contention of the Assessing Officer in any manner and hence the addition so made is deleted. Hence this ground of the assessee is allowed. 13.In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 09/12/2025. Sd/- (Dr. A.L. SAINI) लेखा सदèय/ACCOUNTANT MEMBER राजकोट /Rajkot Ǒदनांक/ Date: 09/12/2025 By order/आदेश से, सहायक पंजीकार / Sr.PS/ PS आयकर अपीलȣय अͬधकरण, राजकोट Printed from counselvise.com "