2016 (10) TMI 993 - AT - Income Tax

Tribunal Emphasizes Specific Disallowances Over Arbitrary Ad Hoc Decisions

Aditya Kumar Agarwal Versus The Joint CIT, Range V, Lucknow and The Dy. CIT, Range V, Lucknow Versus Aditya Kumar Agarwal

Aditya Kumar Agarwal Versus The Joint CIT, Range V, Lucknow and The Dy. CIT, Range V, Lucknow Versus Aditya Kumar Agarwal - TMI Issues Involved:1. Ad hoc disallowances of various expenses.2. Addition of outstanding creditors for labor charges and stone cutting/polishing charges.3. Ad hoc disallowance of labor charges and stone cutting/joining expenses.4. Ad hoc disallowance of business promotion expenses.5. Non-acceptance of agricultural income and addition under unexplained cash deposits.Detailed Analysis:1. Ad hoc Disallowances of Various Expenses:The primary issue involves the ad hoc disallowances made by the Assessing Officer (AO) on various expenses such as machinery maintenance, staff welfare, carving & molding, clamp making, overtime, business promotion, cartage, conveyance, crane maintenance, Deepawali expenses, repairs & maintenance, and vehicle running expenses. The AO disallowed these expenses due to the absence of vouchers and the payments being made in cash. The CIT(A) provided partial relief by sustaining 50% of the disallowances. The Tribunal noted that the AO made these disallowances without pointing out specific defects in the books of accounts or considering comparable cases. The Tribunal decided to fix the percentage of disallowance at 3%, considering the average ad hoc disallowances in previous years, thereby partly allowing the assessee's appeal and dismissing the Revenue's appeal on this ground.2. Addition of Outstanding Creditors for Labor Charges and Stone Cutting/Polishing Charges:The AO issued notices under section 133(6) to verify the outstanding creditors for labor charges and stone cutting/polishing charges. Notices to 103 persons were returned undelivered, leading the AO to disallow Rs. 42,58,791 under section 68. The CIT(A) confirmed this addition. The Tribunal, however, noted that more than 50% of the notices were served, suggesting that the list provided by the assessee was reliable. The Tribunal decided to restrict the disallowance to 50% of Rs. 42,58,791, amounting to Rs. 21,29,395.3. Ad hoc Disallowance of Labor Charges and Stone Cutting/Joining Expenses:The AO disallowed Rs. 75 lakhs out of labor charges and Rs. 10 lakhs out of stone cutting/joining expenses due to non-verifiable payments and lack of supporting vouchers. The CIT(A) reduced the disallowance to Rs. 30 lakhs and Rs. 4 lakhs, respectively. The Tribunal found that the AO's method of ad hoc disallowance was arbitrary and noted that a significant portion of notices sent to laborers were served. Consequently, the Tribunal deleted the sustained disallowances by the CIT(A).4. Ad hoc Disallowance of Business Promotion Expenses:The AO made an ad hoc disallowance of Rs. 50,000 out of business promotion expenses claimed by the second proprietary concern, M/s Marble Engravers, due to cash payments and lack of vouchers. The CIT(A) reduced this disallowance to Rs. 30,000. The Tribunal, maintaining consistency with its stance against ad hoc disallowances, deleted the entire disallowance.5. Non-acceptance of Agricultural Income and Addition under Unexplained Cash Deposits:The AO questioned the agricultural income claimed by the assessee and added Rs. 12,99,220 under section 68 as unexplained cash deposits. The CIT(A) allowed agricultural income of Rs. 7,60,000 based on past accepted assessments and confirmed the addition of Rs. 7,40,000. The Tribunal, considering the overall facts and the Department's stance in subsequent years, found the CIT(A)'s confirmation of Rs. 7,40,000 to be fair and reasonable, thereby dismissing both the assessee's and the Revenue's appeals on this issue.Conclusion:The Tribunal provided a balanced judgment by partly allowing the assessee's appeal and dismissing the Revenue's appeal. It emphasized the need for specific and item-wise disallowances rather than arbitrary ad hoc disallowances and upheld the CIT(A)'s decision where it was found reasonable and justified.