Assessee not prejudiced when AO disallowed only 10% of expenses instead of rejecting books – HC

The assessee was not prejudiced when AO disallowed only 10% of expenses instead of rejecting the books u/s 145 and pass best judgment assessment order under Section 144- High Court 

ABCAUS Case Law Citation:
ABCAUS 2488 (2018) 08 HC

The instant appeal was filed by assessee against the order of the Income Tax Appellate Tribunal (ITAT/Tribunal) in confirming the addition of 10 per cent of Consumable Stores expenses by the Assessing Officer (AO).

The assessee was a company carrying on the business of manufacturing and trading of iron and steel items. The assessee filed its return of income disclosing loss. The case was selected for scrutiny and a notice under Section 143(2) of the Act was issued. Thereafter, notice under Section 142(1) of the Act was issued.

From examination of the books of account the assessing officer noticed that in the Profit and Loss account the assessee had claimed an expenditure under the head ”Consumable Stores” which was highly disproportionate to such expenses claimed in the immediate preceding year. However, the activities of the assessee remained the same as was in the immediate preceding year.

No supporting evidence for claiming this amount towards “consumable stores” was produced by the assessee before the AO. The AO also recorded a finding of the fact that the expenses claimed under this head were also incurred in cash. In absence of evidence to establish the claim of “Consumable Stores”, 10% of the expenses claimed under this head was disallowed by the AO inter alia other disallowances which were not questioned by the assessee.

Aggrieved by the aforesaid assessment order passed by the AO u/s 143(3) of the Act, the assessee filed an appeal before the CIT(Appeals) who held that bills and vouchers were neither produced before the AO nor before the Commissioner himself. No stock register for such consumables was maintained. The CIT(A) also held that the assessee had failed to offer any plausible explanation in respect of disproportionate rise in the expenditure incurred on consumables as compared to the increase in sales/production. The CIT(A) was of the view that merely because most of the payments were made by the cheque the same would not itself prove the case of the assessee. The CIT(A) held that in the next year, such expenses had not increased in proportion to sales.

The CIT(A) also noticed that in contrast to production of Iron and Steel products in the current assessment year, the consumables had increased by more than 100% and same could not be explained by the assessee.

The CIT(A) was of the view that the AO had been quite generous in disallowing only 10% of assessee’s claim in respect of “Consumable Stores”. The CIT(A) dismissed the appeal and confirmed disallowanace. 

The Tribunal too dismissed the appeal and affirmed the orders passed by the authorities below. 

The Hon’ble High Court observed that the assessee in support of its claim in respect of consumable stores did not produce any supporting evidence either before the AO or before the CIT(A) or before the Tribunal. All three authorities including ITAT, which is the last fact finding authority under the Act had concurrently held that the appellant assessee could not substantiate its claim for such a high rise in the expenditure on this account if it was considered with the expenditure on this head incurred in the immediate preceding financial year.

It was also noted that the CIT(A) as well as the Tribunal had made comparative study of the expenditure incurred on “consumable stores” and turnover of the assessee for preceding and subsequent assessment years with relevant assessment year. The authorities had found that more 100% increase of expenditure on this account was not justified whereas the turn over was increased marginally. 

The Hon’ble High Court opined that issues raised were only questions of fact and no question of law was involved. All three authorities have concurrently held after examining the facts, evidence and material on record that the assessee was unable to substantiate its claim for exponentially increase in the expenditure on consumables.

The Hon’ble High Court opined that it was permissible for the AO to reject the books of account under Section 145 of the Act and pass assessment order under Section 144 of the Act. Instead, the AO had disallowed the claim of expenditure on “Consumable Stores” only 10%. The assessee was not prejudiced in any manner in not resorting to the best judgment assessment by the AO. Instead, AO taking a liberal view of the matter had disallowed only 10% of the expenditure on “Consumable Stores”.

The Hon’ble High Court upheld the order passed by the ITAT and dismissed the appeal.

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