2024 (5) TMI 1589 - AT - Income Tax

Disallowance of 50% of expenses on lumpsum basis or on ad hoc basis - Additions on the basis that revenue from the operations had decreased significantly from preceding years - disallowance of employee benefit expenses including salary director s remuneration and related costs - The assessee had admitted that manufacturing activity took place only during the first quarter - HELD THAT - Without making any conclusive remarks on the shortcomings pointed out by the AO in the remand report the CIT(A) has sustained the disallowances on lumpsum basis or on ad hoc basis. We are of the considered view that when the assessee had adduced additional evidences which were admitted and on which the AO had given his remand report wherein except for citing minor discrepancies nothing substantial was found to show that the additional evidences were in any way false and there is any manipulation in the accounts or vouchers as filed then sustaining disallowances on lumpsum basis or ad hoc basis by the CIT(A) is not justified. Accordingly the ground raised is sustained. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this matter are:

(a) Whether the disallowance of employee benefit expenses, including salary, director's remuneration, and related costs, was justified given the limited business activity during the relevant financial year.

(b) Whether the 50% disallowance of various revenue expenses, including purchases, finance costs, other expenses, and depreciation, was sustainable in light of the additional evidence submitted by the assessee and the findings of the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)].

(c) Whether the AO and CIT(A) correctly applied the principles of natural justice and evidentiary standards in admitting additional evidence and assessing the veracity of expenses claimed by the assessee.

(d) Whether the Revenue's appeal should be admitted given the revised monetary limits for filing appeals before the Tribunal as per the CBDT Circular and Notification.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Disallowance of Employee Benefit Expenses

Relevant legal framework and precedents: The Income Tax Act, 1961, mandates that expenses claimed must be incurred wholly and exclusively for the purpose of business. The principle of natural justice allows admission of additional evidence if it goes to the root of the matter and prevents hardship to the assessee.

Court's interpretation and reasoning: The AO disallowed employee benefit expenses amounting to Rs. 20,79,544/- and 50% of other expenses totaling Rs. 1,49,51,354/-, citing lack of business activity after the first quarter and absence of supporting evidence. The CIT(A) admitted additional evidence filed by the assessee under Rule 46A, acknowledging that the business was closed after the first quarter, but some employees had to be retained, and some permanent costs were unavoidable.

Key evidence and findings: The assessee submitted additional documents including salary registers, bills, and vouchers. The CIT(A) noted that the total employee benefit expenses were slightly less than the previous year due to capitalization of some costs in the prior year. However, given the 82% decline in sales and cessation of business activity after the first quarter, the expenses were deemed excessive.

Application of law to facts: The Tribunal observed that while the AO's disallowance was partly justified due to lack of substantiation, the CIT(A)'s partial deletion of the disallowance (allowing Rs. 10 lakhs) was appropriate to balance the interests of both parties.

Treatment of competing arguments: The assessee argued that some employee costs were unavoidable even during inactivity, while the Revenue contended that expenses were excessive and unsupported. The Tribunal found that the CIT(A)'s approach of partial disallowance was a prudent compromise.

Conclusions: The disallowance of Rs. 10,00,000/- on employee benefit expenses on a lump sum basis was upheld as reasonable.

(b) 50% Disallowance of Revenue Expenses (Purchases, Finance Cost, Other Expenses, Depreciation)

Relevant legal framework and precedents: Under the Income Tax Act, expenses must be supported by proper documentation and incurred for business purposes. Section 40A(2)(b) restricts excessive interest payments to related parties. The CIT(A) and AO rely on documentary evidence and ledger reconciliation to verify claims.

Court's interpretation and reasoning: The AO disallowed 50% of purchases due to discrepancies such as mismatched bills, unstamped invoices, and suspected bogus bills. Similar 50% disallowances were made on other expenses and finance costs due to lack of justification, especially given the business inactivity. Depreciation was also disallowed by 50% on the basis that business activity ceased after the first quarter.

Key evidence and findings: The assessee submitted sales registers, VAT returns, bills, ledger accounts, and interest payment details. The AO's remand report acknowledged minor discrepancies but did not find substantial evidence of manipulation or falsification. The CIT(A) sustained the 50% disallowances on an ad hoc basis despite the additional evidence.

Application of law to facts: The Tribunal emphasized that where additional evidence is admitted and no substantial falsity is found, sustaining ad hoc disallowances without clear justification is unwarranted. The Tribunal noted that the AO had not conclusively disproved the genuineness of expenses after considering the remand report and additional documents.

Treatment of competing arguments: The assessee argued that the additional evidence substantiated the expenses and that the disallowances were arbitrary. The Revenue maintained that discrepancies justified partial disallowances. The Tribunal sided with the assessee, finding the disallowances arbitrary in the absence of conclusive adverse findings.

Conclusions: The Tribunal held that sustaining lump sum or ad hoc disallowances after admission of additional evidence and absence of substantial defects was unjustified and allowed the appeal on these grounds.

(c) Admission of Additional Evidence and Application of Natural Justice

Relevant legal framework and precedents: Rule 46A of the Income Tax Rules permits the admission of additional evidence before the appellate authority if it is relevant and necessary for the case. The principle of natural justice requires that parties be given a fair opportunity to present their case.

Court's interpretation and reasoning: The CIT(A) admitted additional evidence filed by the assessee after remand to the AO. The Tribunal acknowledged that admitting such evidence was appropriate to avoid hardship and ensure justice, especially since the evidence went to the root of the additions.

Key evidence and findings: Additional documents included detailed bills, vouchers, ledger entries, and reconciliations supporting the expenses claimed.

Application of law to facts: The Tribunal found no fault in the CIT(A)'s decision to admit additional evidence and considered the AO's remand report as part of the record. The Tribunal emphasized that once admitted, such evidence must be fairly evaluated and not disregarded by sustaining arbitrary disallowances.

Treatment of competing arguments: The Revenue did not dispute the admission of additional evidence but relied on minor discrepancies to justify disallowances. The Tribunal found these insufficient to uphold the disallowances.

Conclusions: The admission of additional evidence was proper, and subsequent disallowances should be based on substantive findings rather than ad hoc assessments.

(d) Admissibility of Revenue's Appeal in Light of Revised Monetary Limits

Relevant legal framework and precedents: CBDT Circular No. 17/2019 and the Notification dated 20th August, 2019 revised the monetary threshold for Revenue appeals before the Tribunal to Rs. 50 lakhs, applicable even to pending appeals.

Court's interpretation and reasoning: The Tribunal observed that the tax effect in the Revenue's appeal was below the revised threshold. The Revenue's Senior DR did not dispute this fact.

Key evidence and findings: The appeal's tax effect was quantified and found to be below Rs. 50 lakhs.

Application of law to facts: In accordance with the CBDT Circular and Notification, the Tribunal dismissed the Revenue's appeal on the ground of low tax effect.

Treatment of competing arguments: The Revenue did not contest the tax effect calculation or applicability of the revised limit.

Conclusions: The Revenue's appeal was dismissed as not maintainable due to insufficient tax effect, rendering the assessee's cross-objection infructuous.

3. SIGNIFICANT HOLDINGS

"Looking to the fact that there is hardly any actual business activity carried out for 9 months, the claim towards salary and wages (50,00,189), director's remuneration (12,00,000) etc. is excessive as the work carried out by such employee and director is not substantiated through any evidence to justify such expenses. In a prudent business practice, when business is not carried out, the expenses towards wages and salary is not found justified to have been incurred for the purpose of business."

"Accordingly, looking to the facts and circumstances as mentioned above, it is found appropriate to retain disallowance to the extent of Rs. 10,00,000/- on lump sum basis and the remaining addition is allowed. This will meet justice from both the ends."

"Though appellant tried to justify the same, however, contention of the appellant cannot be considered in full. Further, details were not provided during assessment proceedings. Looking to the discrepancies noticed by the AO in the submissions, as pointed out in the remand report, the contention of the appellant cannot be considered as fully justified. Therefore, the disallowances made out of purchases is restricted and sustained to the 50% and the balance 50% is allowed. This will meet justice from both the ends."

"When the assessee had adduced additional evidences which were admitted and on which the AO had given his remand report wherein except for citing minor discrepancies, nothing substantial was found to show that the additional evidences were in any way false and there is any manipulation in the accounts or vouchers as filed, then, sustaining disallowances on lumpsum basis or ad hoc basis by the CIT(A) is not justified."

"Accordingly, the appeal of the assessee is allowed."

"In the light of the CBDT Circular No. 17/2019 dated 8th August, 2019 raising the monetary limit for filing of appeal by the Revenue before the Tribunal to Rs. 50 lakhs and the Notification dated 20th August, 2019 clarifying that the revised monetary limit so mentioned in the Circular No. 17/2019 is applicable even to pending appeals, the appeal in ITA No. 4700/Del/2019 is dismissed on the ground of low tax effect."