2019 (6) TMI 914 - AT - Income Tax

Tribunal reduces expense disallowance to 10% due to lack of evidence, deems expenses reasonable.

The Income Tax Appellate Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to scale down the disallowance of expenses to 10% of the ... Addition on unreasonable of expenses - expenditure incurred under the head, ‘Deepavali expenses’, donation, general charges, marketing management specialisation expenses, travelling expenses, business promotion and other expenses - CIT-A deleted addition - HELD THAT:- Substantial increase in certain expenditure incurred under the head ‘Deepawali expenses, donation, general expenses and other expenses. It is also an admitted fact that the turnover of the assessee has been increased from 184 crores to ₹ 387 crores. The AO has disallowed expenditure incurred under various heads without recording any observation as to incorrectness in books of account maintained by the assessee for the relevant financial year or supporting evidence filed in justifying expenditure incurred under those heads. AO has compared increase in expenditure to previous financial year without taking note of corresponding increase in business turnover of the assessee. On the other hand, the assessee has filed necessary details of expenditure and also explained reasons for increase in expenditure. The Ld.CIT(A), after considering relevant facts and also taking note of the fact that there is no observations by the AO in regard to the incorrectness of books of account scaled down disallowance to 10% for such expenses. We do not find any reason to interfere with the findings recorded by the CIT(A) while deleting addition made by the AO towards disallowance of expenditure. - Decided in favour of assessee. Issues Involved:1. Disallowance of expenses due to substantial increase in expenditure.2. Justification of increased expenses in relation to increased turnover.3. Validity of the Assessing Officer’s (AO) disallowance without concrete evidence.4. The Commissioner of Income Tax (Appeals) [CIT(A)]'s decision to scale down the disallowance.Detailed Analysis:1. Disallowance of Expenses Due to Substantial Increase in Expenditure:The AO disallowed Rs. 1,19,72,812 in expenses under various heads, such as Deepawali expenses, donations, general charges, marketing management specialization expenses, traveling expenses, business promotion, and other expenses. The AO's rationale was that there was a substantial increase in these expenses compared to the previous financial year, which was not justified by the assessee. The AO noted that despite a nominal increase in turnover by 14%, the net profit margin had fallen from 0.42% to 0.38%. The AO demanded explanations and evidence for the increased expenses, which the assessee failed to satisfactorily provide.2. Justification of Increased Expenses in Relation to Increased Turnover:The assessee argued before the CIT(A) that the increase in expenses was commensurate with the significant increase in turnover from Rs. 184.02 crores to Rs. 387.97 crores. The assessee contended that the expenses were proportionate to the increased business activities and provided necessary details to support this claim. The CIT(A) acknowledged the increase in turnover and the regularity of such expenses year over year, attributing the increase to factors like higher value of items and increased work and customer base.3. Validity of the AO’s Disallowance Without Concrete Evidence:The CIT(A) found that the AO had not provided concrete material or evidence to justify the substantial disallowance. The AO had not demonstrated any incorrectness in the books of account or the supporting evidence provided by the assessee. The CIT(A) noted that the AO's disallowance was based on an assumption of unreasonableness due to the steep increase in expenses without considering the corresponding increase in business turnover.4. The CIT(A)'s Decision to Scale Down the Disallowance:The CIT(A) decided to restrict the disallowance to Rs. 11,97,281, considering it reasonable under the circumstances, and directed the AO to delete the balance disallowance of Rs. 1,07,75,531. The CIT(A) reasoned that the AO had not brought any concrete material to support the huge disallowance and that the expenses were in line with the increased business activities.Conclusion:The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)’s decision, noting that the AO had disallowed the expenses without recording any observation on the incorrectness of the books of account or the supporting evidence. The ITAT found that the CIT(A) had appropriately scaled down the disallowance to 10% of the expenses, considering the increase in turnover and the lack of concrete evidence from the AO. Consequently, the ITAT dismissed the revenue's appeal and upheld the CIT(A)’s order.Order Pronounced:The appeal filed by the revenue was dismissed, and the order was pronounced in the open court on 15-05-2019.