Disallowed Payments due to Inconsistency in Statements and Transactions Held Unreasonable as per Income Tax Act: ITAT Allows Appeal [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, allowed an appeal in the case where disallowances were made without appreciating the facts. The tribunal made note of the delay of 87 days and condoned it following reasonable cause.

The assessee, Zeta Buildtech Pvt. Ltd., filed an appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] dated 20.12.2024 for AY 2020-21. The assessee is engaged in the business of distribution of all types of liquor, spirits, alcohol, wines and beverages including non-alcoholic beverages.

The facts state that the assessee filed return of income for Assessment Year 2020-21 on 09.01.2021 declaring an income of INR 98,48,230/-, claiming a refund of INR 80,80,460/-. The return was processed under Section 143(1)(a) of the Income Tax Act, 1961 (the Act).

The case was selected for complete scrutiny under CASS and notices under Section 143(2) and 142(1) were issued and served where several opportunities were given to the assessee to furnish a response.

The Assessing Officer (AO) observed that during the assessment year the assessee received commission and interest income of INR 20,39,83,741/- and claimed business expenditure INR 19,41,35,511/-, declaring net income of INR 98,48,230/-.

In the assessee’s response to the show cause notice (SCN), they have claimed contract purchases paid to S P Jindal Financial Services Limited for periodic internal checks and regular MIS. The copies of invoices raised by SP Jindal Financial Services have been attached in their reply.

The assessee was accordingly asked to submit details of the work done, the copies of MIS reports etc., but the assessee submitted that SP Jindal Financials were providing services by doing physical stock verification in their warehouse. AO made note of no documentary evidence being filed for this claim.

Additionally, another company was also doing stock verification and book keeping but were only paid Rs. 8 lakhs. The contract charges of Rs. 31.8 lakhs given to SP Jindal were disallowed and added to the income. AO disallowed another claim for expenditure for MIS reports by a third company. AO also disallowed Rs. 18.5 lakhs that the assessee had given to SP Jindal for marketing purposes.

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When appealed before the CIT(A), the additions of disallowances were upheld. Therefore, the assessee appealed before the Tribunal, raising several grounds of impropriety in the assessment orders.

The counsel for the assessee argued that the stock verification reports signed by independent Chartered Accountants were ignored by the lower authorities. It was submitted that since they were engaged in the business of selling liquor, the stock verification is a thorough process which needs to be done from various viewpoints. Further, the reasonableness of the expenditures is not an issue in the case and hence disallowance made by the AO was argued to be improper according to law. Reliance was placed on several cases.

The differences in payments made to the consulting parties were highlighted by the Departmental Representative as well as the decisions of the lower authorities.

The tribunal carefully considered the documents provided by the assessee-appellant during the assessments and held that the disallowances were not tenable as the reliance on books of account is not called into question.

The two member bench of Raj Kumar Chahuan (Judicial Member) and S. Rifaur Rahman (Accountant Member) considered the following cases: CIT v. Pashupati Nath Agro Food Products Pvt. Ltd. (2017) and PCIT v. RG Buildwell Engineers Ltd. (2018) and allowed the appeal while also pointing to the stock verification report provided by the assessee and allowed the appeal.

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