Ad-hoc Disallowance Based on "Increase in Expenses" Invalid; Turnover Difference Due to Rounding Off Deleted; TDS Disallowance Upheld for Lack of Auditor's Rectification

Ad-hoc Disallowance Based on “Increase in Expenses” Invalid; Turnover Difference Due to Rounding Off Deleted; TDS Disallowance Upheld for Lack of Auditor’s Rectification

ISSUES

Ad-hoc Disallowance: Whether the Assessing Officer (AO) is justified in making a flat 50% disallowance on miscellaneous expenses (meetings/AGM) merely because the amount increased compared to the previous year, despite the assessee furnishing bills and invoices.
Turnover Mismatch: Whether an addition of Rs. 47,000 representing the difference between turnover in the Income Tax Return (ITR) and the Tax Audit Report (TAR) is sustainable if the difference is due to “rounding off” in financial statements.
TDS Default (Auditor’s Error): Whether a disallowance under Section 40(a)(i) (non-deduction of tax on payments to non-residents) can be deleted based on a verbal claim that the Tax Auditor made a reporting error, without furnishing any rectification from the auditor.

FACTS

Issue I (Expenses): The assessee claimed miscellaneous expenditure for meetings and the AGM. The AO noted an increase compared to the previous year and disallowed 50% on an ad-hoc basis. The assessee had submitted bills, invoices, and vouchers to substantiate the claim.
Issue II (Rounding Off): A difference of Rs. 2.47 lakhs was observed between the sales turnover in the ITR and the TAR. The AO accepted Rs. 2 lakhs (dealer signing fee) but added the remaining Rs. 47,000. The assessee explained this was due to rounding off figures to lakhs in the financial statements.
Issue III (TDS Default): The AO made a disallowance under Section 40(a)(i) for non-deduction of TDS. The assessee argued that the Tax Auditor wrongly mentioned the amounts against certain names in the Audit Report but failed to provide any supporting material or a rectification letter from the Auditor.

HELD

On Ad-hoc Disallowance: The Tribunal held that once the assessee has furnished relevant documents (bills, vouchers, proof of payment) to substantiate the claim, the AO cannot make an ad-hoc disallowance merely because the expense is higher than the previous year. [In Favour of Assessee]
On Rounding Off: The explanation that the minor difference (Rs. 47,000) arose due to rounding up of figures in lakhs in the financial statements was held to be plausible. The addition was deleted. [In Favour of Assessee]
On TDS Default: The Tribunal noted that blaming the Tax Auditor without evidence is insufficient. Since the assessee failed to furnish any clarification or rectification certificate from the Tax Auditor to substantiate the alleged error, the disallowance under Section 40(a)(i) was upheld. [In Favour of Revenue]

KEY TAKEAWAYS

“Increase in Expense” is Not a Ground: An AO cannot disallow expenses simply because you spent more this year than last year. If you have the bills, the quantum of business decision is yours, not the taxman’s.
Rounding Off Reconciliation: Always ensure your ITR and Tax Audit Report (Form 3CD) reconcile perfectly. If you use “Lakhs” in financials and “Absolute Figures” in ITR, keep a reconciliation sheet ready for small differences.
Auditor’s Mistake Requires Proof: If your Tax Audit Report contains a factual error (like wrong TDS reporting), a verbal denial during assessment is useless. You must obtain a Rectification Letter or a revised statement from the Chartered Accountant to submit to the AO.

IN THE ITAT DELHI BENCH ‘C’

Keysight Technologies India (P.) Ltd.

Deputy Commissioner of Income-tax^*

ANUBHAV SHARMA, Judicial Member
and KRINWANT SAHAY, Accountant Member

IT Appeal Nos.4346 & 4347 (Delhi) of 2024
[Assessment years 2017-18 and 2018-19]

NOVEMBER 28, 2025

Dr. Shashwat Bajpai and Ms Ananya Kapoor, Advs. for the Appellant. Om Prakash, Sr. DR for the Respondent.

ORDER

Anubhav Sharma, Judicial Member.- These appeals are preferred by the assessee against the orders dated 23.07.2024 of the Ld. Commissioner of Income-tax (Appeals), Panchkula (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in appeals No.CIT(A), Delhi-5/10179/2019-20 and CIT(A), Delhi-1/10017/2019-20 filed before him against the orders dated 02.10.2019 and 15.03.2019, respectively, passed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) by the ADIT, CPC, Bangalore (hereinafter referred to as the Ld. AO, for short).

2. Heard and perused the records. The appeals were heard together and have common issue so where necessary facts for AY 2018-19 shall be narrated. The factual aspects necessary for determination of these appeals are that the Appellant was incorporated on February 14, 2014 in India as private limited company and is engaged in business of marketing, distribution and after sales services of the products manufactured by Keysight Group entities under the Electronic Measurement Group business. Such products are used primarily for measurement of signals and cater to industries such as communications, aerospace/ defense, industrials / semi-conductor etc. During the year under consideration AY 2018-19, the Appellant paid certain customs duty amounting to INR 99,35,027 and while computing the total income, the Appellant claimed a deduction of INR 99,35,027 under section 43B of the Act on account of payment of custom duty. A communication dated June 22, 2018 was issued to Appellant by the Ld. AO proposing an adjustment under section 143(i)(a)(iv) of the Act to make the following disallowance.

“Inconsistency in amount disallowed under section 43B in any preceding previous year but allowable during the previous year”

3. The case of assesse is that customs duty was paid under protest as mandated by the Customs Act, 1962. The foremost contention was that the disallowance made by the Ld. AO is outside the purview of the processing of return u/s 143(1) of the Act. Then it was contended by ld.AR that Section 43B of the Act allows deduction of statutory liabilities in the year of payment irrespective of the method of accounting followed by an assesse and Appellant fulfills the conditions laid down by the various judicial precedents read with provisions of the Act for claiming deduction under Section 43B of the Act in respect of customs duty paid under protest. Thus liability to pay customs duty must be allowed as a deduction under Section 43B of the Act in the year in which the payment is made by the Appellant irrespective of the fact that the Appellant has recorded it as an expenditure in the books of accounts or not. Appellant’s AR submits that in the year in which the determination of tax liability reached finality, the refunded amount of the impugned customs duty paid under protest has been offered to tax in AY 2020-21 and will be offered to tax in future also in the year of actual receipt. Thus, the additions made by the Ld. AO on this account are contrary to the facts of the case and liable to be deleted.

4. Ld. DR has submitted that there cannot be any provision or advance payment of any customs duty which has to accrue on basis of productions. He relied orders of ld. Tax authorities below.

5. Now with regard to the issue before us we find that Appellant’s liability arises for payment of customs duty on raising of demand by customs authorities in FY 2017-18 as during the year appellant has imported goods for the purpose of selling to its customers in India and as per instructions of CBEC where items are imported from related party the declared import price of said items are required to be certified by Special Valuation Branch (SVB). These instructions mandate that an additional customs charge in the form of Extra Duty Depoists (EDD) of 1% is payable on provisional basis until the investigation is underway. The Appellant has paid ‘Extra Duty Deposits (EDD)’ in accordance with Circular No. 5/2016 issued by Central Board of Excise and Customs dated 9th February 2016. It comes up that the Appellant has in fact received a favorable order from the SVB wherein the declared price has been accepted and the refunds of the taxes paid was accordingly payable to the Appellant.

6. It is settled law that once the demand has been quantified, the amount paid towards discharging the liability irrespective of the matter is pending for adjudication at higher level same is an allowable deduction. Reliance is rightly placed by ld. AR on decision of Hon’ble Supreme Court Kedarnath Jute Manufacturing Co. Ltd v. CIT [1971] 82 ITR 363 (SC)and CIT v. Bharat Carbon & Ribbon Mfg. Co. (P.) Ltd. (SC)/[1999] 239 ITR 505 (SC).

7. We are of considered view that once the customs authority order for clearance of goods, then statutory liability of customs duty, is deemed to have incurred by the Appellant in such year in which the liability has been paid. Thus, on the basis of the aforesaid discussion, we are of the considered view that Section 43B of the Act permits certain deductions only on actual payment of the amounts and same provides a clear departure from the method of accounting followed by an assessee. It allows deduction of statutory liabilities in the year of payment notwithstanding the fact that the liability in respect thereof may have been incurred in another year. More so when appellant has offered to tax in AY 2020-21, the amount refunded in pursuance thereof and thus if the impugned addition is sustained it will lead to double taxation. In the light of the aforesaid, the grounds in both the years deserve to be sustained. The appeals of the assessee are allowed.