Indirect expenses can never be in proportion to sale. There was no reason to ask justification to explain variation in expenses for the fluctuation in sales

Indirect expenses can never be in proportion to sale. There was no reason to ask justification to explain variation in expenses for the fluctuation in sales and make addition of projected expenses on the basis of increase in sale.  This was held by ITAT, Chandigarh while quashing additions made for expenses claimed more then the proportion of increase in sales.

Case Law Details:
ITA No.1112/Chd/2012 Assessment Year : 2008-09
M/s H.Sagar Knitwears vs. DCIT
Date of Judgment/Order: 27/05/2016

Brief Facts of the Case:
For the relevant assessment year, the assessee had shown an increase of 12.34% in sales as compared to immediately preceding year. The Assessing Officer was of the view that the expenditure claimed during the year should also increase on proportionate basis i.e. increase @ 12.34% over the last year expenses. Accordingly, the Assessing Officer made an addition of Rs.15,79,495/- for expenses claimed under various heads i.e. freight, insurance expenses, telephone expenses, interest paid on partner’s capital and contribution to recognized PF. On appeal, CIT(A) gave a partial relief by deleting the disallowance of Rs.51,739/- on account of contribution of recognized provident fund being in the nature of government dues.

The assessee contested the order of CIT(A) in Tribunal.

Important Excerpts from ITAT Judgment:

We see that there are eight heads of expenditure under which the Assessing Officer has proposed the addition on the basis of increase in sales as compared to the earlier year. These are freight, contribution to recognized provident fund, insurance, workman & staff welfare expenses, traveling expenses including foreign traveling, telephone expenses, other expenses and interest. The assessee has given explanation with regard to the increase in freight expenses as compared to the expenses computed by the Assessing Officer. The learned CIT (Appeals) has given relief to the assessee on account of contribution to recognized provident fund. However, we observe that all other heads of expenses remaining are in the nature of operating expenses and in fact form part of the Profit & Loss Account of any concern and not of trading account. The expenses are in the nature of indirect expenses like traveling expenses including foreign traveling, telephone expenses, other expenses and interest, etc. which cannot be related to the increase or decrease in sales dur ing the year. We do not find any substance in the action of the Assessing Officer in comparing these expenses in relation to the increase in sales. There is no justification to explain nature of all these expenses being fluctuated for the fluctuation in the sales. These are expenses of indirect nature and can never be in proportion to the amount of sale. We do not appreciate the way the issue has been handled even at the level of CIT (Appeals) since while giving relief to the assessee on account of contribution to recognized provident fund, he himself states that the same is not related to the sale, then how can he for all other expenses from a view that those should be related to the quantum of sales. The Assessing Officer as well as CIT (Appeals) has nowhere given any finding as to the expenses being either personal in nature or not being incurred wholly and exclusively for the purposes of business. Even the argument of the assessee that all these expenses are properly vouched, has not been controverted by any of the lower authorities. There cannot be any presumption under law that the expenses are necessarily to be incurred in direct proportion to the quantum of sales. In this view, there is no justification in making addition of these projected expenses on the basis of increase in sale. 

Indirect expenses can never be in proportion to sale

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