2024 (5) TMI 1597 - AT - Income Tax

Disallowances on adhoc basis - Non rejecting the books of accounts of assessee - HELD THAT - Since the various disallowances are made on the basis of presumptive inferences by the Ld. AO without mentioning any logic for such estimations. While making such disallowances the books of accounts of the assessee were not rejected under the provisions of section 145(3). It shows that the books results of the assessee were disturbed by the Ld. AO without rejecting the books which are the foundation of such books results. The order of the Ld. AO is silent about the defects in the books of the assessee thus the additions made on estimated basis under the best judgment assessment are arbitrary in absence of any plausible reason to justify such estimation. It is also worth to note that similar expenses incurred by the assessee even it a higher proportion to the sale in the immediately preceding assessment year i.e. AY 2015-16 were accepted by the department which are also subjected to scrutiny assessment u/s 147 r.w.s. 143(3) of the Act. Thus respectfully following the decision of M/s Sanjay Agrawal 2021 (9) TMI 1515 - ITAT RAIPUR we are of the considered opinion that the additions made based on estimation by the Ld. AO on account of possible leakage of revenue unexplained expenditure u/s 69C unexplained investment u/s 69 and high / improper / illogical expenditure of salary are without any proper basis arbitrary presumptive such action of the Ld. AO is not permissible under the law. Even if any plausible reason is available and the circumstances forced the Ld. AO to adopt the method of best judgment assessment the same cannot be exercised without rejection of books of accounts by invoking provisions of section 145(3). In the present case since the expenditure doubted were incurred at a lower proportion to be sale as compared to their proportion in the preceding year also supports the contentions of the Ld. AR that there was no basis with the Ld. AO for making such disallowances. Addition made u/s 69C in the present case is unjustified and liable to be vacated as in absence of any evidence of payment it can be safely construed that the payments are outstanding towards the balances of creditors therefore explanation regarding the source of expenses is not called for and therefore the provisions of section 69C are not triggered. We direct to delete the Estimated disallowance of 5% of Purchase Hamali Transport expense and Wages Estimated Addition of 10% of sundry creditors u/s 69C as unexplained expenditure Estimated Addition of 10% of loans and advances to suppliers u/s 69 as unexplained investment and Estimated disallowance of 50% of Truck Employees. Disallowance u/s 40(a)(ia) for non-deduction of TDS on payment of interest - Since the assessee was unable to furnish certificate from accountant in the prescribed form before the Ld. AO or Ld. CIT (A) or even before us therefore we do not find any force in the contentions raised by the assessee consequently the disallowance made by the Ld. AO and sustained by the Ld. CIT (A) deserves to be upheld. Assessee appeal partly allowed.

Summary

ISSUES:

Whether disallowances and additions made on an adhoc/estimated basis by the Assessing Officer without rejection of books of accounts under section 145(3) of the Income Tax Act, 1961 are permissible.Whether the principle of natural justice was violated by the Commissioner of Income Tax (Appeals) in passing an ex-parte order without providing sufficient opportunity of being heard.Whether the adhoc disallowance of expenses related to Purchase of raw material, Hamali Expenses, Transporting expenses, and Wages is justified.Whether disallowance under section 40(a)(ia) for non-deduction of tax at source on interest payments to NBFCs without confirming payment of tax by the recipient is valid.Whether addition under section 69C on 10% of outstanding Sundry Creditors as unexplained expenditure is justified.Whether addition under section 69 on 10% of loans and advances to suppliers as unexplained investment is justified.Whether adhoc disallowance of salary expenses paid to truck drivers, helpers, supervisors, clerks, and mechanics on an estimated basis is valid.

RULINGS / HOLDINGS:

Disallowances and additions made on estimated basis without rejection of books of accounts under section 145(3) are "arbitrary, presumptive" and "not permissible under the law"; such additions are liable to be deleted.The appeal against the ex-parte order on grounds of violation of natural justice was raised but no specific ruling on this ground is recorded in the judgment due to absence of opposing party and reliance on written submissions.The adhoc disallowance of Rs. 1,84,55,604/- relating to Purchase, Hamali, Transporting, and Wages expenses is unjustified as the books were not rejected and the expense proportions declined compared to the preceding year; thus, the disallowance is liable to be deleted.The disallowance of Rs. 1,89,557/- under section 40(a)(ia) for non-deduction of TDS on interest paid to NBFCs is upheld due to failure to furnish the prescribed accountant's certificate.The addition of Rs. 45,62,243/- under section 69C on 10% of sundry creditors is not justified as no payment was made and the balances were outstanding; hence, section 69C is not triggered and the addition is liable to be vacated.The addition of Rs. 70,39,496/- under section 69 on 10% of loans and advances to suppliers as unexplained investment is arbitrary and liable to be deleted for lack of proper basis and rejection of books.The adhoc disallowance of Rs. 33,35,270/- on salary expenses paid to truck employees is arbitrary and unjustified without supporting evidence, and is liable to be deleted.

RATIONALE:

The legal framework primarily involves provisions of the Income Tax Act, 1961, specifically sections 40(a)(ia), 69, 69C, 143(3), 145(3), and 250.The Tribunal relied on precedents emphasizing that best judgment assessments and estimations are permissible only after rejection of books of accounts under section 145(3), and that estimation without basis or defect in books is arbitrary and perverse.Precedents cited include judgments holding that low profit or absence of evidence of defect in books cannot justify estimated disallowances, and that unexplained expenditure additions under section 69C require actual expenditure/payment, not mere outstanding balances.The Tribunal applied comparative analysis of expense proportions between the assessment year and preceding year to demonstrate absence of any basis for disallowance.The Tribunal noted absence of any material or reason recorded by the Assessing Officer to justify estimated disallowances and additions, underscoring the requirement of "plausible reason" and "reasonable and fair estimations" in best judgment assessments.The upheld disallowance under section 40(a)(ia) was based on the assessee's failure to produce the prescribed accountant's certificate, a mandatory compliance requirement.No dissent or doctrinal shift was noted; the decision follows established principles restricting estimation powers in assessments and reinforcing procedural fairness and evidentiary standards.