ITAT Ahmedabad Sets Aside Ad-Hoc Expense Disallowance As AO Failed To Point Out Defects

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has recently set aside ad-hoc disallowances made against Raghani Tradelink, a commission agent engaged in facilitating sales of sarees, suits, and garments across India, holding that additions towards sub-brokerage and administrative expenses cannot be sustained when the Assessing Officer fails to point out specific discrepancies in the evidence produced by the assessee.

The coram comprising Judicial Member Sanjay Garg and Accountant Member Annapurna Gupta was dealing with the appeal filed by the taxpayer for the Assessment Year 2020–21.

Raghani Tradelink earns income as a collection-cum-commission agent by introducing buyers to manufacturers and facilitating recovery of sale proceeds. For the relevant year, the assessee declared an income of Rs. 91.74 lakh, and the case was selected for scrutiny due to high business expenditure and comparatively low net profit.

During the assessment proceedings, the Assessing Officer disallowed 10% of sub-brokerage expenses out of Rs. 2.53 crore and 10% of administrative expenses out of Rs. 2.05 crore on an ad hoc basis, alleging lack of proper supporting evidence and treating the expenses as exaggerated.

The AO had also disallowed 10% of salary and remuneration expenses, which was later deleted by the Commissioner (Appeals). The Commissioner (Appeals) upheld the disallowances relating to sub-brokerage and administrative expenses, leading to the present appeal before the Tribunal.

Before the Tribunal, the assessee submitted that it had furnished complete details, including names, PANs, agreements with sub-brokers, ledger accounts, and proof of TDS deductions. It was also explained that the nature of its business involved dealing with thousands of sellers across India, and therefore certain transactional details were not retained after commission was received, though all primary evidence had been produced.

The tribunal noted that the assessee had produced extensive documentation in support of its claim.

The bench observed that,

"It was also explained that the assessee do not retain the details of sales made by the manufacturers after receipt of its commission. However, assessee duly furnished the names, addresses and PANs of the sellers along with the amount of collection made. It was also requested to the AO that he may verify the facts from the parties as per law. It was also explained that the sellers also deduct TDS on the payments wherever applicable as evident from 26AS on the portal. The assessee also furnished the entire details of the sub-brokerage paid along with the ledger copies of the sub-brokers and commission payments. TDS had been deducted on all payments made."

The tribunal found that despite the details furnished, the Assessing Officer had not pointed out any specific discrepancy in the evidence and had made the disallowances on general and vague observations on an ad hoc basis.

The bench further stated that,

"despite furnishing of the extensive details and evidence, the AO without pointing out any specific discrepancy in the same and by making general and vague observations held that the claim of sub-brokerage expenditure was exaggerated. The books of accounts of the assessee are duly audited. The assessee has duly mentioned the names, PANs and addresses, etc. not only of the sub-brokers but also of the sellers and also requested the AO to verify the transactions or other details from the concerned persons. In view of the above, we do not find justification on the part of the lower authorities in making/confirming the impugned disallowance @10% of the sub-brokerage paid purely on adhoc basis."

Holding that the additions were made purely on an ad-hoc basis without identifying specific defects or carrying out proper verification, the tribunal deleted the disallowances made towards sub-brokerage and administrative expenses and allowed the appeal of the taxpayer.

For Appellant: Sunil Surana, AR

For Respondent: Abhijit, Sr. DR