► Head notes :

Income Tax Act – Adhoc disallowance made out of various expenses, on the grounds that some of the vouchers were not properly supported or vouched in the books of accounts -  AO though did not specify these expenses in the order.

Varnasi ITAT – Once complete details along with bills and vouchers are submitted the onus cast on assessee is discharged – It is then on AO to point pout specific defects that renders the expense doubtful – In absence of any such spevific defects being bought out by AO – The adhoc disallowance made by AO cannot be upheld.

► Name of Judge : Shri Vijay Pal Rao JM Shri Ramit Kochar , AM

► Order:

Shri Ramit Kocha

This appeal, filed by assessee, being ITA No.01/VNS/2021, is directed against the appellate order dated 02.03.2020 passed by ld. Commissioner of Income-tax(Appeals), Allahabad (hereinafter called “the CIT(A)) in Appeal No. CIT(A), Allahabad /10275/2016-17 , for assessment year 2010-11, the appellate proceedings had arisen before Learned CIT(A) from assessment order dated 02.11.2016 passed by learned Assessing Officer (hereinafter called “the AO”) under Section 143(3) read with Section 254 of the Income-tax Act, 1961 (hereinafter called “the Act”). This is second round of litigation before Income-Tax Appellate Tribunal. We have heard both the parties in Open Court proceedings through physical hearing mode.

2. The grounds of appeal raised by assessee in memo of appeal filed with Income-Tax Appellate Tribunal, Varanasi (hereinafter called “the tribunal”), reads as under:

“1. Because the Ld. CIT (A) was not justified to conform the disallowance of material expanses made by the assessing officer an amount of Rs 215000.00 on lump-sump basis without any specific ground.

2. Because the Ld. CIT (A) was not justified to conform the following disallowance on lump-sump basis which has duly been made by the A O.

3. Because the appellant placed reliance on the following judgment. The department has not established in any case that the disallowance made by the assessing officer would be the real income of the assessee. The Hon'ble Allahabad high court in case of CIT Kanpur Vs Baburam Ajit Prasad ITR 106 (1977) 818 has already given the said opinion which is binding on the authority.

It is hereby noted that the Hon'ble ITAT Allahabad in the case of Kanha Banasapati Ltd. Vs Joint CIT Range -2 has given finding that the Add-hock disallowance out of expenses not specific disallowance items pointed out the Bogus observation that sum expenses not verifiable disallowance not justified. The disallowance of expenses is the deference of opinion and the ground that the sum voucher and expenses are not verified, no disallowance on lump-sump basis could be made. The Court has given finding that by making vague observation that some of the exps were not verifiable was not enough for making the disallowance while relying on the decision of Jodhpur Bench of the Tribunal in the case of Surface finishing Equipment 2SOT 233. Hence the aforesaid disallowance is liable to deleted.

In the case of U.P. TOBACCO PRODUCTS PVT. LTD. The Hon'ble ITAT Allahabad has given finding that disallowance out of expenses on basis of general observation without pointing out defects not justified.

In the case of CHANDRA CONFECTIONERY PVT. LTD. The Ld. ITAT Lucknow has given following observation:

The assessing officer making add-hock disallowance without assigning any reasons without pointing any defects not justified additions not sustainable.

The aforesaid case is covered by the order of Commissioner of Income Tax (A) Allahabad vide his order dated 17.02.2006 in the case of M/s J.P. Yadav, on the basis of aforesaid decision of the ITAT Allahabad & Lucknow bench has observed that the Add-hock disallowance out of expenses were not specified item pointed that the disallowance made are bogus and not justified.

4. Because the appellant crave for a right to raise any additional ground during the course of hearing of the case.

5. Because the order passed by the Ld. Assessing officer is erroneous, bad in law and on facts and is liable to be deleted.”

3. The brief facts of the case are that the assessee is engaged in Civil Engineering Work on contract basis . The assessee is also engaged in hiring of Plant and Machinery on rent. This is second round of litigation before tribunal. The assessee filed return of income , declaring income of Rs. 1,28,83,150/-. The assessment was framed by AO computing income of assessee at Rs. 3,41,37,730/- in the first round of litigation, vide assessment order dated 23rd March, 2013 passed by AO under Section 143(3) of the 1961 Act. The assessee filed first appeal before ld. CIT(A) in first round of litigation, and ld. CIT(A) granted part relief to the assessee. Thereafter, both the Department as well as assessee filed an appeal with Allahabad-tribunal , in the first round of litigation. The tribunal vide order dated 5th June, 2015 in the first round of litigation , set aside the assessment order to the file of AO for adjudication on various issues. In the second round of litigation, the AO issued statutory notices and details were called by AO from the assessee, during the course of assessment in second round of litigtion. The assessee filed details called for by AO and also produced books of accounts before the AO. The AO passed assessment order dated 2.11.2016 under Section 143(3) read with Section 254 of the Act in the second round of litigation, wherein certain additions were made by AO and the income of the assessee was assessed at Rs.1,43,55,100/- as against returned income of Rs. 1,28,83,150/- . The assessee being aggrieved by assessment order filed an appeal before ld. CIT(A) , in second round of litigation . The ld. CIT(A) granted certain relief’s to the assessee, as the appeal of the assessee was part allowed by ld. CIT(A) vide appellate order dated 02.03.2020 . We will deal with and restrict ourselves in this appeal with the issue’s raised by the assessee in the grounds of appeal before the tribunal against the additions which stood confirmed by ld. CIT(A) , in second round of litigation, as this is the appeal filed by the assessee before tribunal. It could not be shown to us by both the parties that Revenue has also come in appeal before tribunal against the relief granted by ld. CIT(A) to the assessee , in this second round of litigation. Effectively, there are two grievances of the assessee, firstly that ld. CIT(A) upheld the addition of Rs. 2,15,000/- by disallowing Material expenses claimed by assessee as business expenses , and secondly ld. CIT(A) upheld disallowance of certain expenses claimed by the assessee viz. staff welfare expenses to the tune of Rs. 6930/-, Repair and Maintenance Expenses of Rs. 28,000/- , Telephones and Mobile Expenses to the tune of Rs. 18,500/- and Travelling and Conveyance Expenses to the tune of Rs. 22,010/- .

4a. The AO observed in its assessment order dated 02.11.2016 that the assessee has filed replies along with copy of account of direct expenses as well indirect expenses and copy of challan paid, copy of service tax with copy of account , copy of account of labour charges and material expenses with bills and vouchers for verification. The AO observed that books of accounts were produced by the assessee, which were test checked by the AO. The first issue agitated by assessee in this appeal concerns with disallowance of Rs. 2,15,000/- on account Material expenses which could not be verified by the AO . The AO observed that the   assessee has claimed “Material Expenses” to the tune of Rs. 7,26,25,516/- . The assessee produced complete bills and vouchers and books of accounts. The AO observed that out of total material expenses claimed, only material expenses to the tune of Rs. 7,24,10,516/- could be verified, while the balance amount of Rs. 2,15,000/- could not be verified with evidences which stood disallowed by AO, vide assessment order dated 2.11.2016 passed by AO u/s 143(3) read with Section 254 of the 1961 Act.

4b. The AO further observed from the examination of indirect expenses claimed by assessee in P & L Account that some bills were un-vouched and found not verified from third parties bills . Thus, the AO made following disallowance of expenses which stood added to income of the assessee, vide assessment order dated 2.11.2016 passed by AO u/s 143(3) read with Section 254 of the 1961 Act:

Total of Rs. 75,440/- Disallowance of Rs. 75,440/-“

Thus, these two above at 4a and 4b are only two grievances of the assessee, in its appeal filed with tribunal and we will restrict ourselves to   these two issues only. It could not be shown to us by both rival parties that aggrieved by relief granted by ld. CIT(A), Revenue has come in appeal before tribunal.

5. The matter went to ld. CIT(A) at the behest of the assessee in the second round of litigation , and Ld. CIT(A) dismissed appeal of the assessee on both these issues, vide appellate order dated 02.03.2020 in second round of litigation, by holding as under:

“Decision

I have gone through the facts and the written submissions filed along with the details filed enclose therein. During the remand proceedings appellant was asked to produce bills and vouchers in support of expenses claimed in books of accounts. AO while examining them found that some of the vouchers are not properly supported or vouched in the books of accounts. AO though did not specify these expenses in the order but the addition made is very specific amount and not adhoc on a specific percentage basis. 'Material Expenses’ were claimed of Rs.7,24,10,516/- and AO mentioned small amount of Rs. 2,15,000/ as not verified. In absence of evidence Rs. 2,15,000/- was disallowed. Appellant has submitted that these are adhoc disallowance that is not permissible. I disagree with appellant's contention as the addition is of a specific amount that was observed by AO while examining the books of accounts and not of an adhoc amount. It is agreed though that while making the additions AO should pass a more speaking order. The addition made by the AO is hereby confirmed.

This ground is dismissed.”

********

******** ““

Decision:

I have gone through the facts and the written submissions filed along with the details filed enclose therein. During the remand proceedings appellant was asked to produce bills and vouchers in support of expenses claimed in books of accounts. AO while examining them found that some of the vouchers are not properly supported or vouched in the books of accounts. AO though did not specify these expenses in the order but the addition made is very specific amount and not adhoc on a specific percentage basis. AO has made the addition after giving the details of the total claimed expenses with respect to the un-vouched out of them. In absence of evidence Rs. 75,440/- was disallowed. Appellant has submitted that these are adhoc disallowance that is not permissible. I disagree with appellant's contention as the addition is of a specific amount that was observed by AO while examining the books of accounts and not of an adhoc amount. It is agreed though that while making the additions AO should pass a more speaking order. The addition made by the AO is hereby confirmed.

This ground is dismissed.”

6.  Aggrieved by appellate order dated 02.03.2020 passed by ld. CIT(A), the assessee has come in appeal before the tribunal. Effectively, there are two grievances of the assessee, firstly that ld. CIT(A) upheld the addition of Rs. 2,15,000/- by disallowing Material expenses , and secondly ld. CIT(A) upheld disallowance of certain expenses claimed by the assessee viz. staff welfare expenses to the tune of Rs. 6930/-, Repair and Maintenance Expenses of Rs. 28,000/- , Telephones and Mobile Expenses to the tune of Rs. 18,500/- and Travelling and Conveyance Expenses to the tune of Rs. 22,010/- . The ld. Counsel for the assessee opened arguments before the Bench and submitted that first issue concerns itself with disallowance of Material Expenses , to the tune of Rs. 2,15,000/- which was disallowed by the AO , as against the total Material expenses of Rs. 7,26,25,516/- claimed by the assessee. Our attention was drawn to assessment order passed by AO and   it was submitted that all the bills /vouchers related to Material Expenses were submitted before the authorities below and books of accounts were duly produced. It was submitted that AO as well ld. CIT(A) have observed that Material Expenses to the tune of Rs. 2,15,000/- could not be verified, while Material Expenses to the tune of Rs. 7,24,10,516/- expenses were duly verified by the AO . It was submitted by ld. Counsel for the assessee that both AO as well ld. CIT(A) have not given any details as to the break up of Material expenses of Rs. 2,15,000/- which could not be verified by the AO as well by ld. CIT(A) , as complete details were filed before AO as well ld. CIT(A). The learned counsel for the assessee relied upon the decision of Hon’ble Madras High Court in the case of V.C. Arunai Vadivelan v. ACIT(2021) 128 taxmann.com 195(Mad.). The ld. counsel for the assessee submitted that adhoc disallowance of expenses were made by the authorities below viz. towards telephone expenses , staff welfare expenses , repairs and maintenance and travelling and conveyance expenses, without pointing out any specific defect . The ld. Counsel for the assessee submitted that the assessee is a public limited company and expenses were incurred for business of the assessee which could not be disallowed without pointing specific defects. The ld. Counsel for the assessee relied upon decision of Allahabad-tribunal in the case of DCIT v. A K Construction , in ITA No. 149/Alld/2012 and DCIT v. Chandrawati Construction in ITA No. 140/Alld/2012, vide common order dated 13.12.2012.

6b.The Learned Sr. DR, on the other hand, submitted that this is second round of litigation before tribunal. It was submitted that specific disallowances of expenses have been made. The ld. Sr. DR would rely on appellate order dated 02.03.2020 passed by ld. CIT(A). The ld. Sr. DR would also rely on judgment and order dated 05th January, 2016 of the Hon’ble Allahabad High Court in the case of PCIT v. Rimjhim Ispat Ltd. 81 taxmann. Com 86 (Allahabad) (2016) 382 ITR 152 (Allahabad).

6c. The Learned Counsel for the assessee submitted in rejoinder that books of accounts along with vouchers were all produced before the AO as well ld. CIT(A).

7. Before proceeding further, It is observed that the Registry has stated vide entry made in appeal file that this appeal is late by 214 days beyond the time prescribed u/s 253(3) of the 1961 Act. It is observed that the appellate order was passed by ld. CIT(A) on 2nd March, 2020, which is stated in Form No. 36 by assessee to have been received on 6th April, 2020 . This appeal was filed by assessee on 5th January, 2021. There was a Covid19 pandemic, and the Hon’ble Supreme Court directed to exclude period from 15th March 2020 till 28.02.2022, for the purposes of computing limitation period, for which Hon’ble Supreme Court passed series of orders. Reference is drawn to the recent directions of Hon’ble Supreme High Court in Suo-motu writ petition(C) No. 3 of 2020 vide order dated  10th Jan., 2022, wherein Hon’ble Supreme Court held that for the purposes of computing limitation, period from 15th March 2020 till 28th February, 2022 shall be excluded. This appeal was filed on 05th January, 2021 , while appellate order was passed by ld. CIT(A) on 02nd March, 2020 which is stated to be received by assessee on 06th April, 2020. Thus, we hold that there is no delay in filing of this appeal keeping in view of binding decision of Hon’ble Supreme Court extending limitation period in view of Covid19 pandemic and directing to exclude period from 15th March,2020 to28th February, 2022, as this appeal is covered by the aforesaid decision and directions of Hon’ble Supreme Court.

8. We have heard rival contentions and perused material on record. We have observed that this is second round of litigation before tribunal. We have observed that effectively two issues survives for our adjudication which are raised by assessee in its appeal filed with tribunal in the second round of litigation, and we shall restrict ourselves to these two issues. It is not shown by both the parties that Revenue has come in appeal before tribunal agitating relief granted by ld. CIT(A) in the second round of litigation. The first effective issue is concerning disallowance of Material Expenses to the tune of Rs. 2,15,000/- , out of total Material Expenses to the tune of Rs. 7,26,25,516/- claimed by the assessee to have been incurred for business purposes . The AO has observed that the assessee could not produced vouchers/bills to the tune of Rs. 2,15,000/- . The AO accepted Material Expenses to the tune of Rs. 7,24,10,516/- claimed by the assessee. The AO did not specify as to what are the specific expenses aggregating to Rs. 2,15,000/- which could not be satisfactorily explained by the assessee, as no specific details are given by AO pinpointing specific expenses aggregating to the tune of Rs. 2,15,000/- claimed by the assessee as business expenses , but could not be satisfactorily explained by the assessee. The ld. CIT(A) although confirmed additions to the tune of Rs. 2,15,000/- as were made by AO, but ld. CIT(A) did not furnish the details/breakup of the Material expenses aggregating to the tune of Rs. 2,15,000/- which could not be satisfactorily explained by the assesseee. The powers of ld. CIT(A) is co-terminus with the powers of the AO, and the ld. CIT(A) ought to have verified all these Material expenses aggregating to the tune of Rs. 2,15,000/- which were disallowed by AO, but no such specific details are furnished by ld. CIT(A) nor any specific defects are furnished . It is observed that the assessee produced books of accounts before the authorities below and claim is made that complete details of bills/vouchers were furnished . The ledger account of Material Expenses is also furnished before us. Thus, in the facts and circumstances of the case, where the assessee is satisfactorily able to provide details and establish genuineness of Material Expenses to the tune of Rs. 7,24,10,516/- out of total Material Expenses claimed to be incurred for business of the assessee to the tune of Rs. 7,26,25,516/- , and merely Rs. 2,15,000/- is disallowed by authorities below of which even specific details/breakup of the expenses which are disallowed is not furnished by the authorities below with no specific defects being pointed out , we hold that disallowance as were made by authorities below is not sustainable and we allow these Material expenses to the tune of Rs. 2,15,000/- which stood disallowance by authorities below , and we order deletion of these additions to the tune of Rs. 2,15,000/-. We are of the view that ratio of decision of Hon’ble Allahabad High Court in the case of Rimzhim Ispat(supra) has no applicability to the facts and circumstances of this case, as in the instant case the assessee produced books of accounts as well vouchers/bills before the authorities below and primary onus which lay on the assessee stood discharged, and it is now for the authorities below to bring out specific defects in the books of accounts as well bills and vouchers furnished by the assessee after making necessary enquiries and investigation and the authorities are to point out which expenses are not allowable and reasons thereof , which has not been done by authorities below in this case. Same is the fate of other expenses to the tune of aggregating Rs. 75,440/- , on account of staff welfare, repairs and maintenance, telephone and mobile expenses and travelling and conveyance, which disallowance to the tune of aggregating Rs. 75,440/- also stood deleted. We order accordingly.

9. Thus, the appeal of the assessee in ITA no. 01/Vns/2021 for ay: 2010-11 is allowed. We order accordingly

Order pronounced on 12/09/2022 at Allahabad , U.P. in accordance with Rule 34(4) of Income-Tax (Appellate Tribunal) Rules, 1963

► Summery :

Varanasi ITAT: Where complete details were filed along with bills and vouchers, the assessee has discharged its onus and now it was upon the AO to point out specific defects in the books of accounts as well as bills and vouchers after making necessary enquiries and investigation and the authorities are to point out which expenses are not allowable and reasons thereof. No adhoc disallowances can be made in absence of such investigation by AO