Disallowance of Expense u/s 37(1) of Income Tax Act is Valid in absence to Contrary Evidence to Purchase of Paddy from Unregistered Farmers: Kerala HC [Read Order]

The Kerala High Court has held that disallowance of expense under section 37(1) of the Income Tax Act, 1961 is valid in the absence of contrary evidence to the purchase of paddy from unregistered farmers.It was viewed that the findings to the contrary of the Appellate Tribunal cannot be legally sustained and it is only the order of the First Appellate Authority that confines the disallowance to an amount of Rs.16,14,411/- that can be legally sustained. 

The appellant assessee M/s.Diamond Food Products challenged the order of the Income Tax Appellate Tribunal. The appellant had filed its return of income declaring a total income of Rs.71,15,290/-  by declaring a net profit of 0.91%. While completing the assessment, the assessing authority considered the appellant's claim for deduction of the amount spent for purchasing paddy from small farmers and, which was used in connection with the manufacture of food products by the appellant.

 Although the appellant had furnished the names of 8503 persons from whom he had supposedly purchased paddy, the assessing authority found that no confirmation was received from any of those persons to support the appellant's contention that they were the persons who supplied paddy to the appellant.  The assessing authority disallowed the deduction claimed by the appellant towards the purchase of paddy from the said persons and added this to the income declared by the appellant.

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For the sake of completion of the facts, we might point out that there was an inconsistency in the order of the assessing authority in the treatment of the said amount inasmuch as in one part of the assessment order he refers to the provisions of Section 40A(3) as the basis on which the additions are made whereas in a latter part of the assessment order, the disallowance is traced to  Section 37(1) of the Income Tax Act.

In an appeal preferred by the appellant before the First Appellate Authority, the said authority found that the assessing authority had not found any defect in the audited books of accounts of the assessee including the Stock Register and the Cash Purchase Register that reflected the trade results of the assessee.

 The appellant had maintained complete quantitative details of purchases and had also maintained Day Book, Ledger, Stock Register, Cash Purchase Register, etc., and these were also produced before the assessing authority for verification.  It was concluded that in the absence of a rejection of the trade results as borne out by the said accounts maintained by the appellant, a disallowance in respect of expenses incurred for the purchase of a raw material, could not have been made. 

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The First Appellate Authority found that the price declared as the purchase price of paddy from unregistered farmers was Rs.14.92 per Kg as against the average price of Rs.14.82 per Kg at which the paddy was purchased from registered farmers and farmers societies. He therefore, disallowed the expenses claimed towards the purchase of paddy to the extent of Rs.0.15 per Kg in respect of those purchases effected from unregistered dealers.  The net addition made to the income declared by the appellant assessee was thus confined to Rs.16,14,411/-.

Both the assessee and the revenue preferred appeal before the Appellate Tribunal. The assessee's appeal was like a cross objection to the revenue's appeal.  The Tribunal by the impugned order restored the findings of the assessing authority.  The reasoning discernible from the order of the Appellate Tribunal appears to be that the burden of proof to show the actual incurring of expenses, to the extent claimed as deduction, is always on an assessee and viewed from that angle, the appellant herein had not discharged the burden by adducing evidence about the actual incurring of the stated expenses while purchasing paddy from unregistered farmers. The Appellate Tribunal proceeded to set aside the order of the  First Appellate Authority and restore the order of the assessing authority. 

It was viewed that there was no justification for proceeding on the assumption that there was no purchase of paddy from unregistered farmers, and for making additions to the income declared by the assessee by disallowing the expenses claimed under Section 37(1) of the Income Tax Act. 

A division bench of Dr Justice A.K.Jayasankaran Nambiar and  Justice K. V. Jayakumar held that the findings to the contrary of the Appellate Tribunal cannot be legally sustained and it is only the order of the First Appellate Authority that confines the disallowance to an amount of Rs.16,14,411/- that can be legally sustained. 

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While allowing the appeall, the bench set aside the impugned order of the Appellate Tribunal, restoring the order of the First Appellate Authority.

To Read the full text of the Order CLICK HERE

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