Higher salary bill couldn't be disallowed on pretext of odd trend if it was genuinely incurred for business

Genuine hike in salary expense incurred for the purpose of business couldn’t be disallowed merely on pretext of odd trend

Facts

a)   The assessee filed its return of income claiming certain expenditure in respect of payment of salaries.

b)   The Assessing Officer issued show-cause notice with reference to inflation in salary expenditure, which the assessee had justified by furnishing relevant details.

c)   Without any further notice, AO disallowed a part of salary expense by applying the ratio of salary expense to domestic turnover in earlier year.

d)   The CIT (A) confirmed disallowance made by AO to a substantial extent. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)   The backward calculation made by AO to disallow salary expenditure couldn’t be accepted in the absence of any allegation against assessee about non-maintenance of books, non-furnishing of vouchers, non-compliance of the notices, as section145 could be applied only when conditions specified therein were satisfied.

2)   Expenditure under section 37(1) could be disallowed only when Assessing Officer could show that expenditure was not incurred wholly and exclusively for the purpose of business. There was no such finding in this order as assessee had justified the expenditure by explaining the change of business profile and also by furnishing necessary statements and vouchers before the authorities.

3)   Without examining these relevant documents, Assessing Officer and Commissioner (Appeals) had erred in resorting to mathematical jugglery so as to deny the expenditure claimed by the assessee. There was no basis for disallowance of the so-called inflated expenditure. Commissioner (Appeals) also did not apply his mind in restricting the amount of disallowance on an ad hoc basis. At least, he should have examined the contentions made by the assessee and proved that they were not correct.

4)   This sort of disallowance of expenditure claimed by the assessee could not be accepted or justified. There should have been no hesitation in cancelling the so-called disallowance of expenditure resorted by the Assessing Officer- IIC Systems (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle -2(1), Hyderabad [2014] 44 taxmann.com 169 (Hyderabad - Trib.)