ITAT Chandigarh Quashes Ad Hoc Disallowance of General, Business Promotion & Commission Expenses in ACIT Vs Sharmanji Yarns Pvt. Ltd.

Background of the Cross Appeals

In ACIT Vs Sharmanji Yarns Pvt. Ltd., the Income Tax Appellate Tribunal, Chandigarh Bench, examined cross appeals filed by both the assessee and the Revenue for Assessment Year 2022-23. The controversy centered on:

  • Disallowance of general expenses of ₹3.03 crore
  • Disallowance of business promotion expenses of ₹1.13 crore
  • Disallowance of commission expenses of ₹4.02 crore

The Tribunal ultimately:

  • Deleted the entire disallowance of ₹3.03 crore towards general expenses
  • Upheld deletion of ₹1.13 crore relating to business promotion expenditure
  • Confirmed deletion of ₹4.02 crore towards commission payments

The order carries important guidance on when ad hoc disallowances can (and cannot) be sustained, particularly in cases where the assessee maintains audited books and the Assessing Officer (AO) has not recorded specific defects or adverse findings.

Condonation of Delay in Assessee’s Appeal

Delay and Explanation

The assessee’s appeal before the Tribunal was filed with a delay of 20 days. The justification offered was that the assessee’s Chartered Accountant, due to heavy engagement with time-barring matters, inadvertently failed to file the appeal in time.

The Revenue argued that the assessee ought to be more careful and vigilant in prosecuting its income-tax litigation.

The Tribunal considered Section 253(5) of the Income Tax Act 1961, which empowers the Tribunal to admit an appeal filed beyond the prescribed time if “sufficient cause” is shown. The same expression appears in Section 249(3) of the Income Tax Act 1961 and Section 5 of the Indian Limitation Act, 1963.

To interpret this expression, the Tribunal relied on landmark rulings of the Hon’ble Supreme Court, including:

  • Collector Land Acquisition Vs. Mst. Katiji & Others, 1987 AIR 1353
  • N. Balakrishnan Vs. M. Krishnamurthy (1998) 7 SCC 123

These decisions emphasize that:

  • Limitation rules are not intended to extinguish substantive rights, but to prevent undue delay
  • “Sufficient cause” must be interpreted liberally to promote substantial justice
  • There is no automatic presumption that delay is motivated by mala fides or culpable negligence
  • Courts should lean in favour of deciding matters on merits rather than shutting out parties on technical delay

Tribunal’s Finding on Delay

Applying these principles, the Tribunal noted:

  • There was no evidence of mala fide intention on the part of the assessee
  • The delay stemmed from a bona fide lapse by the professional
  • The same order was already under challenge in the Revenue’s appeal, and the assessee could have even invoked Rule 27 of the ITAT Rules or filed cross-objections

In this overall context, the Tribunal condoned the delay and proceeded to adjudicate the appeals on merits.

General Expenses of ₹3.03 Crore: Ad Hoc Disallowance Rejected

Assessment Proceedings and AO’s Approach

The assessee, a Private Limited Company engaged in manufacturing various categories of cotton yarns, PC yarns, trading in knitted cloth, and undertaking agricultural activities, filed its return of income on 11.10.2022, declaring total income of ₹2,21,31,21,840. The return was processed under Section 143(1) and later selected for scrutiny.

The total turnover during the relevant year was reported at ₹84,175.69 lakh, with raw material purchases of ₹6,699.04 lakh. The accounts were duly audited.

The AO, while framing the assessment, took a very brief approach in dealing with the issue of general expenses. In substance, he:

  • Reproduced a couple of vouchers in the order
  • Recorded that the assessee had not justified the nature and business nexus of the general expenses
  • Noted that general expenses had increased by about 350% vis-à-vis the preceding year, whereas purchases and sales had grown only by about 55–65%
  • Observed that some expenses appearing under “general expenses” resembled transport/travel in nature, despite separate travel expenses being claimed
  • On that basis, disallowed the entire ₹3,03,05,000 claimed as general expenses

No specific voucher was found to be bogus, nor were the books of account rejected or held unreliable.

Relief by CIT(A)

On appeal, the CIT(A) partially accepted the assessee’s submissions. Without finding any concrete defect in the accounts, the CIT(A) took a middle path and restricted the disallowance to 20% of the total general expenses, thereby: