Ad-hoc Disallowances Without Rejection of Books Under Section 145(3) Are Unjustified and Deletable

ORDER

Rajesh Kumar, Accountant Member. – These Cross appeals filed by the assessee and Revenue are against the orders of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 15.04.2025 & 16.04.2025 for the AYs2020-21 & 2021-22.

2. At the outset, we observe from the appeal folder that there is a delay of 140 days in ITA no.2691 & 2962/KOL/2025 for A.Y. 2020-21 and 2021-22, in filing the appeals by the department in support of which a condonation petitions were filed. It was stated in the condonation petitions that the delay has occurred due to obtaining the administrative approvals from the competent authorities, which took quite a long time and accordingly, the delay is for reasonable cause and may be condoned. The ld. AR, on the other hand, did not oppose the condonation of delay. Considering the reasons cited before us, we are inclined to condone the delay and admit the appeal for hearing.

3. The Revenue has raised following Grounds of Appeal:-

“Whether the CIT(A) has erred in deleting the addition of Rs. 91,23,514/- on account of bogus purchases ignoring the fact that the genuineness of the purchase transactions was not established.

Whether the CIT(A) has erred in restricting the addition to Rs.26,94,891/-[25% Rs. 1,07,79,564/-] and deleting the balance addition ignoring the fact that the assessee failed to show any cogent evidence towards the actual distribution of the gold/silver coins to its customers and in the absence of any evidence towards actual distribution of such coins it is also not established that the expenditure was actually incurred wholly & exclusively for the business purpose.

Whether the CIT(A) has also erred in restricting the addition to Rs.41,80,765/- [25% of Rs. 1,67,23,060/-] and deleted the balance addition of Rs. 1,25,42,295/- ignoring the fact that the assessee failed to establish business connection with the foreign travel expenses.

The appellant craves leave to add any new ground or alter or amend any of the grounds and put up necessary arguments to substantiate the above-noted grounds.”

4. The issue raised in Ground No.1 by the revenue is against the deletion of addition Rs. 91,23,518/- as made by the AO by making ad-hoc/estimated disallowance @12.5% of the total Purchases of 7,30,04,149/-.

5. The Facts in brief are that the assessee filed the return of income on 13.2.2021 by declaring income of Rs. 23,28,02,330/-the AO has made estimated disallowance of 12.5% of the total purchases of 7,30,04,149/-. The said return of income was revised on 31.3.2021 with total income of Rs. 22,08,58,790/-. The return was processed u/s 143(1) of the Act. Thereafter the case of the asse3ssee was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act along with questionnaire were issued and duly served the assessee. the assessee replied all the notices/questionnaire by furnishing all the details and information as sought by the Assessing Officer. The assessee furnished the names and addresses, invoices along with all the evidences n respect of the purchases as noted by the AO on page no. 27 para 12. The notices were issued under section 133(6) of the Income Tax Act, 1961 to suppliers. The AO also issued notices u/s 133(6) of the Act to all the following three parties for doing independent verification however none of the three above mentioned parties replied the said enquiry letters. The details are under:

6. Accordingly, the Assessee was requested to explain the transactionsby issuing show cause notice by furnishing the confirmations from these three parties failing which as to why the same should not be added to the income of the assessee.The Assessee in reply contended that they have furnished all relevant details and documents including bills , vouchers, challans and transportation documents in support of the purchases made by them. It was submitted that the suppliers have charged GST. The assessee filed GST return showing all these details therein.The payments were all made by account payee cheques. The parties were registered with GST. There is no denial of the fact that notices u/s 133(6) were served on them. If they have not replied, the department should employ their machinery and impose the penalty under the provisions of the Act so that they could be compelled to send their replies. The AO rejected the submissions of the Assessee and observed that as parties had not complied with the notices issued under section 133(6) of the Act and the assessee has also not produced any confirmations from them ,consequently the AO estimated disallowance @ 12.50 % of such total purchases made from them and added a sum of Rs. 91,25,518/- to the income of the assessee in the assessment framed u/s143(3) read with section 144B dated 29.9.2022.

7. The Ld. CIT(A) in the case at Para 5.10 to Para 5.10.3 of its Appellate Order dated 15.04.2025 has dealt with the said issue in detail and had deleted the aforesaid disallowance of Rs.91,25,518 after taking into accounts the contentions and submissions of the assessee. The Ld. CIT(A) noted that the all the details of the parties such as PANs and GST Nos. were available with the AO, but the AO did not make any enquiry despite assessee furnishing all the details and evidences qua the said purchases.The ld. CIT(A) noted that all the payments were made by account payee cheques against proper bills and GST input credit was allowed against all the purchases, which could have been seen from GST portal available in the return itself. Moreover, the suppliers were mostly old suppliers. and there was no evidence to hold that the purchases from these parties were not genuine. Further that the parties were GST-registered parties, and GST Numbers were also provided to the Ld AO. The figures of purchases could have been verified from form no. 2A (just like form26A in income tax portal). Therefore, as far as the assessee was concerned, the purchases were fully proved and accordingly the ad-hoc disallowance made on whims and fancies of the AO was not sustainable in law. The ld CIT(A) relied on the judgment in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd. [2013] 35  /[2015] 372 ITR 619 (Bombay), wherein the Hon’ble High Court of Bombay held that where sales supported the purchases and payments were made through banks, merely because suppliers had not appeared before AO, the purchases could not be treated as bogus. The assessee has produced all evidence and has proved the purchases. The total purchases with bills, confirmation of their accounts, and gate-passes/transport challans from these respective three parties.

8. The ld. DR vehemently argued that the suppliers did not respond the enquiry letters issued by the AO u/s 133(6) of the Act and therefore the purchases from the said three parties remained un-verified. The ld. DR therefore prayed the order of ld. CIT(A) deleting the addition may be reversed on this issue and that of the AO may be restored.

9. Per Contra the counsel for the Assessee Company strongly opposed the arguments of the ld. DR by submitting that the assessee has discharged its onus by furnishing all the evidences before the AO and it is not in the hands of the assessee to get the notices issued u/s 133(6) responded by the suppliers. The assessee filed written submissions summarizing all the arguments made during the course of the hearing. It was submitted that once assessee books (audited trading result) were nowhere doubted and much less not rejected u/s 145(3) of the Act and sales were also not doubted , then to make disallowance on arbitrary /adhocbasis is totally wrong and without merit. The ld. AR relied on the following judicial precedents:

10. After hearing the rival contentions and perusing the materials available on record, we find that the AO has made an ad-hoc addition of Rs.91,25,518/- at the rate of 12.5% of the total purchases from 3 parties for the only reason that the said parties have not filed their responses to the notices issued under section 133(6) of the Act. We find that the Assessee has furnished complete evidences and details before the AO as stated hereinabove and thus in our opinion, the addition cannot be made merely because the parties have not responded to the notices issued u/s 133(6) of the Act. We find from the documents placed before us from paging 4 to 101 comprising bills, account confirmations, Transport Challans etc.and all these evidences were also filed before the AO. We note that the books of accounts of the assessee were subjected to audit and the auditors have not pointed out any defect or deficiency in the books of accounts or drawn adverse inference. Moreover, the disallowance made is on adhoc basis by applying a percentage of 12.5% on the total purchases from 3 parties which in our opinion is completely wrong and cannot be sustained. In our opinion,if the AO was not relying the books of account then the ld. AO should have invoke the provisions of Section 145(3) of the Act by pin pointing defects in the books of accounts and only then the estimate income or disallowance of expenses should have been done. However, we note that that was not done in the instant case. The case of the assessee is squarely covered by a series of decision as discussed below:-

“CM No.47025/2017(exemption)

Allowed, subject to all just exceptions.

ITA No.1183/2017 & CM Nos.47024/2017(u/S.5 of Limitation Act) ITA No.1187/2017 & CM No.47029/2017

1. The Revenue is aggrieved by the findings of the Commissioner of IncomeTax (Appeals) and Income Tax Appellate Tribunal (ITAT), whereby disallowances and consequent additions made on two counts, i.e. expenses claimed towards the bricks, Page | 5 Himmayet Hossain Sheikh; A.Y. 2023-24 machinery repair, cartage etc. (Rs.1.1. crores) and labour expenses (Rs.2.3 crores) were set aside.

2. The Assessing Officer (A.O.) made the additions in respect of the return of the Assessee’s income of the Assessment Year 2010-2011.

3. In respect of the first item, i.e. expenses for bricks, machinery repair, cartage etc., the A.O. concluded that insufficient evidence was adduced. He, therefore, disallowed 10% of the claim. This was reduced by half by the C.I.T.(Appeals). The ITAT gave two reasons to set aside the findings of the A.O. – C.I.T.(Appeals). Firstly, that the books of account were not rejected and secondly, that in the past, consistently such expenses were allowed in scrutiny assessments. Likewise, in the case of labour cases too, identical reasons were adduced by the A.O. to bring to tax a sum of Rs.2.2 crores. The same were set aside ultimately by the ITAT.

4. This Court is of the opinion that the principal reasoning of the ITAT, i.e. omission to reject the books of account, in which event the adhoc disallowance could have been adjusted and also the historical treatment of such expenses, cannot be termed as unreasonable; in support of its ultimate conclusion.

5. In these circumstances, no substantial question of law arises.

6. The Appeals are, therefore, dismissed.”

“The learned Tribunal in the impugned order has held that the provision of Section 69C will not be attracted as the assessee has duly disclosed the total purchases in their books of accounts and the payments made to M/s. Chakradhari Industries were also from and out of the books of accounts with explained sources and, therefore, the source of expenditure was also found. That apart, the source of expenditure was also fully explained and, therefore, the addition made by the Assessing Officer under section 69C of the Act cannot be sustained. Section 69C of the Act states that where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the 52 [Assessing] Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case made be, may be deemed to be the income of the assessee for such financial year. It is evidently clear that the said section 69C would stand attracted if the source of expenditure is not satisfactorily explained by the assessee before the Assessing Officer and only then it will be deemed to be income of the assessee. The Assessing Officer alleged the purchases to be bogus. However, the Assessing Officer did not dispute the source of expenditure to be not genuine.

Therefore, the assessee was fully justified in contending that the sales are accepted, purchase cannot be treated as bogus. The CIT(A) was of the view that the notices issued under section 133(6) of the Act to the other party remained non-complied and the inspector deputed from the department for verification has reported that the said party is not found. Admittedly, this fact was never brought to the notice of the assessee and the assessee came to know of it only from the assessment order”

“The short issue which falls for consideration is whether the reopening of the assessment was validly done and whether the learned Tribunal was justified in allowing the assessee’s appeal and setting aside the reopening of the assessment

As could be seen from the reasons for issuance of notice under section 148, the Assessing Officer relied upon a report termed as ‘suspicious transaction report’ in the case of M/s. S. R. Sales Corporation and based on that the Assessing Officer opined that he has reason to believe that income of the assessee chargeable to tax has escaped assessment within the meaning of Section 147 of the Act. The assessee submitted a detailed reply to the notice proposing to reopen the assessment. However, the reply did not find favour with the Assessing Officer and the objections were rejected and assessment was reopened and completed by order dated 29th December, 2016 and added Rs.99,35,000/- to the assessed income of the assessee company. The first aspect to be considered is whether the reopening of the assessment for the reasons which have been recorded was justified in law.

It is evidently clear from the records that the books of accounts produced by the assessee were not rejected by the Assessing Officer, rather they were not considered by the Assessing Officer nor by the first Appellate authority

The documents which were produced by the assessee are the copies of the ledger account of M/s. S. R. Sales Corporation in the books of the assessee depicting the complete details of the purchases as given by the assessee and also establishing the fact that payments have been made through banking channels. The assessee produced the copies of purchase bills from M/s. S. R. Sales Corporation, copy of excise declaration issued by M/s. S. R. Sales Corporation, copy of the audited receipt, copy of the road permit, copy of the packing list. Apart from the above, the assessee also produced the relevant documents which are issued under the provisions of the Value Added Tax Act. It cannot be disputed by the revenue that the documents which have been issued by the VAT authorities are issued after a thorough check of the goods while in transit by way of an inter-state road movement. In this regard the assessee has enclosed about fifty documents in the form of a paper book before the Assessing Officer. Thus, the learned Tribunal took note of these factual details and held that the reopening of the assessment is bad in law. In more than one place the learned Tribunal has pointed out that the booksof accounts have not been rejected. The transaction cannot be doubted and assessment could not have been reopened.

In the light of the said factual background, we are of the view that the learned Tribunal was fully justified in allowing the assessee’s appeal and setting aside the reopening of assessment.”

“The learned ITAT found that the disallowance of expenditure is not sustainable and found that the evidence and material produced by the assessee establish that it had incurred the expenditure as claimed. The learned ITAT found that there is no dispute that, in fact, the assessee had made payments through banking channels to its suppliers and there was no evidence or suggestion that cash had been repaid by the said suppliers to the assessee.

20. As noted by the learned ITAT, there is no evidence to suggest that the amounts paid by the assessee for the supplies booked in its books of accounts had been returned to the assessee in a form of cash or through any accommodation entry.

It is clear from the above that the controversy involved is fact-centric and revolves on the question whether, in fact, the purchases booked in the books of accounts were wholly and exclusively for the purpose of business as claimed by the assessee. The findings of the learned ITAT in this regard cannot be held to be perverse.”

“In so far as the Assessee is concerned, there is no allegation that the Assessee had made any payment in cash in respect of the purchases in question. Thus, no connection is shown between the Assessee’s transaction of purchases and the transactions of deposits and withdrawals in cash from the bank accounts of the two individuals [M/s. Ramesh Kumar, Tarun Kumar and Sh.Kushal Kumar Jain [Proprietor of M/s. Mittal Traders] In appeal, the learned ITAT perused the material on record and found that the Assessee had in fact established that its purchases were genuine The assessee from its side, in order to prove the genuineness of purchases made from these two concerns, furnished copies of ledger accounts, purchase invoices, material, receipt notes, suppliers bale wise weight note, copies of VAT D- 3, weight slip at factory premises, laboratory test report in factory of the assessee of goods purchased, details of excise register/ records maintained, bank statements showing payments made through banking channels. It is clear from the above that the learned ITAT had concluded that the Assessee had established the purchases made from the named two persons and the same could not be considered as bogus. Thus, the findings of fact, which are premised on a cogent material cannot by any stretch of imagination be termed as perverse or unsustainable. There is no material on record which would substantiate that the purchases reflected were accommodation entries.

There is no allegation or finding that cash had been received back by the Assessee in respect of the purchases reflected in its books of account. On this ground alone the present appeal ought to have been dismissed:

“impugned assessment is jurisdictionally flawed “24. The series of judgments referred to hereinabove clearly allude to the settled position of law that the books of account have to be necessarily rejected before the AO proceeds to the best judgment assessment upon fulfilment of conditions mentioned in the Act. The underlying rationale behind such an action is to meet the standards of correct computation of accounts for the purpose of a more transparent and precise assessment of income. Therefore, any pick and choose method of rejecting certain entries from the books of account while accepting other, without an appropriate justification, is arbitrary and may lead to an incomplete, unreasonable and erroneous computation ofincome of an assessee”

11. Similar view has been taken in the following decisions namely; Ashok Surana (supra), Himmayet Hossain Sheikh v. ITO [IT Appeal No. 2871 (Kol.) of 2025, dated 27-03-2026] and Axora Resources Ltd. vs ITO [IT Appeal No. 1275 (Kol.) of 2025, dated 16-9-2025] have decided the similar issues in favour of the assessee.

12. We, therefore respectfully following the order of Hon’ble Apex Court and other decisions as cited above , uphold the order of ld. CIT (A) on this issue by dismissing the ground no. 1 of the revenue appeal.

13. The issue raised in Ground No.2 by the Revenue is against restricting the disallowance/addition to Rs.26,94,891 by ld. CIT(A) as made by the AO in respect of sales promotion expensesby disallowing the total expenses of Rs.1,07,79,564. The assessee has also assailed the order of ld. CIT(A) in its cross appeal vide ground no. 4 challenging the part sustaining of addition at Rs. 26,94,891/-.

14. The facts in grief are that the Assessing Officer has disallowed the expenses incurred towards purchase of Gold/Silver coins and Jewellery which were distributed to customers, dealers and stockist as Sales Promotion in order to promote the sales. The AO has disallowed the said expenses by disregarding the evidences furnished before him during the assessment proceedings and acting only on the basis of suspicions, surmises and conjectures. The AO totally ignored the evidences placed before him which are also available in the Paperbook filed before us. The AO made the disallowance for the reason that the assessee could not submit evidences of having distributed the gold coins and therefore the assessee could not establish the genuineness of the jewellery/gold coins distributed and consequently added the entire amount to the income of the assessee of Rs. 1,07,79,564/-.

15. In the course of Appellate Proceedings, the Ld. CIT(A) after considering the submissions, details and evidences furnished by the assessee recorded a finding that incurring of such sales promotion expenses were necessary for the assessee company on account of its Pan India business. It was acknowledged and noted by the Ld. CIT(A) that such expenses are incurred for attracting customers and boosting sales. The Ld. CIT(A) noted that the assessee’s incentive schemes were directly linked to business and thus was allowable expenditure under section 37 of the Act as wholly and exclusively incurred for the purpose of business of the assessee. However, despite of all such findings, the Ld. CIT(A) reduced and restricted the disallowance to Rs.26,94,891, being 25% of the total expenses of Rs.1,07,79,564/-disallowed by the AO and directed to allow 75% of such expenses as allowable business expenditure. The Ld. CIT(A) has confirmed the disallowance to the extent of 25% only on the basis of surmises and conjectures that misuse or personal element cannot be ruled out although no such evidence of any personal misuse was brought on record by the AO or by ld. CIT(A). The counsel of the Assessee submitted before us that although Books of accounts were accepted and therefore the revenue was totally unjustified in making ad-hoc disallowance in respect of the sales promotion.

16. After considering rival contentions and the material on record, we note that these are recurring nature of expenses incurred by the assessee which in our opinion wholly and exclusively incurred for the purpose of business. In our considered view no part of such sales promotion expenses can be disallowed. It the AO or CIT(A) was not relying the books of account of the assessee then they should have invoked the provisions of Section 145(3) of the Act to reject the books of accounts of the assessee and only then the estimated disallowance of expenses can be made, however, that was not done. The case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in case of R.G. Buildwell Engineers Ltd. (supra). The relevant portion of the judgment is already reproduced above and the said ratio will apply squarely to the issue before us. Considering the facts of the case in the light of the above decision, we are inclined to set aside the order of CIT(A) on this issue and direct the AO to delete the addition. The ground no. 2 of revenue appeal is becoming infructuous as we have deleted the entire addition made by the Assessing Officer and is accordingly dismissed. The ground no. 4 of assessee appeal is allowed.

17. The issue raised by the Revenue in the Ground No.3 is against the restriction of the disallowance/addition of Travel expenses to Rs.41,80,765 [25% of the total expenses disallowed by the AO of Rs.1,67,23,060] as against the total disallowance by the Assessing Officer. The assessee has also assailed the order of ld. CIT(A) in its cross appeal vide ground no. 6 challenging the part sustaining of addition at Rs. 41,80,765/-

18. The AO during the course of assessment proceedings noted that assessee has incurred some expenses on foreign travels. The assessee furnished before the AO all the details and evidences qua the foreign travelling’s. The Assessing Officer has disallowed the expenses incurred towards Foreign Travel on the ground that out of the total exports of Rs.7.24 Crores, exports of Rs.6.57 crores were made to Nepal and balance amount of Rs.66 lakhs were towards exports made to USA, Port Louis, Mauritius etc. The AO has disallowed the said expenses by contending that the Assessee failed to prove the nexus of such travel expenses with the business of the Assessee. The AO totally ignored the evidences placed before him which are also enclosed in the Paper book filed before us. The AO acted only on the basis of suspicions, surmises and conjectures alone without bringing on record any adverse material to justify the disallowance.

19. In the course of Appellate Proceedings, the Ld. CIT(A), after considering the explanations and evidences furnished before him, clearly noted that there was apparent business nexus of the foreign tours with the exports sales of the Assessee Company. The Ld. CIT(A) observed and held as under:

“…It is required to be borne in mind that exporting the ayurvedic medicines and concoctions to the Western world dominated by the established structure of new-age allopathic medicines would require persistent and determined solicitation and convincing.”

20. However, despite of all such findings, the Ld. CIT(A) reduced the disallowance to Rs.41,80,765, being 25% of the total expenses of Rs.1,67,23,060 disallowed by the AO and directed to allow 75% of such expenses as allowable business expenditure. The Ld. CIT(A) has partly confirmed the disallowance to the extent of 25% only on the basis of surmises and conjectures that element of personal nature for sightseeing and fun cannot be ruled out although no such evidences of incurring of personal expenses were brought on record by the AO or CIT(A). The ld. CIT(A) confirmed the addition to the extent of Rs. 41,80,765/- and confirmed to the extent of Rs. 1,25,42,295/- and thus partly allowed the appeal of the assessee.

21. The counsel of the Assessee Company submitted before us that although Books of accounts were accepted, the revenue was totally unjustified in making ad-hoc disallowance.

22. After considering rival contentions and the material on record, we note that during the assessment proceedings the AO disallowed the foreign travel expenses on adhoc basis without any valid basis. The ld. CIT(A) partly sustained the addition as made by the AO despite recording a finding to the effect that expenses were incurred for the purpose of business of the assessee and connected with exports of the assessee. Considering these facts,we are of the view that no part of such foreign travel expenses can be disallowed in such a manner. In our opinion, if the department was not relying the books of account, then they should had invoked the provisions of Section 145(3) of the Act to reject the books and only then the estimated disallowance of expenses could be made, however, that was not done. The case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in case of R.G. Buildwell Engineers Ltd. (supra). The relevant portion of the judgment is already reproduced above and the said ratio will apply this issue also. The case is also squarely covered by the decision of the coordinate Bench in the case of Mukund Oil Mills Pvt. Ltd. v. DCIT [IT Appeal No. 2534 (Kol.) of 2025), dated 12-1-2026]. Considering the facts of the case in the light of the above decisions, we are inclined to set aside the order of CIT(A) on this issue and direct the AO to delete the addition. The ground no. 3of revenueappeal becomes infructuous as we have deleted the entire addition made by the Assessing Officer and is accordingly dismissed. The ground no. 6 of assessee appeal is allowed.

23. The Appeal of the Revenue is dismissed.

24. Grounds of Appeal raised in the Appellant Company’s Appeal:

25. The issue raised in Ground No.1 of the Assessee’s Appeal is not pressed and is accordingly dismissed as not pressed.

26. The issue raised by the Assessee in the Ground No.2 is against the confirmation of ad-hoc /estimated disallowance of Rs.8,40,000 made out of the related party payments made to Mrs Bhawna Sharma and Mrs Shruti Sharma, on account of remuneration paid towards professional/Consultancy services, under section 40A(2)(b) of the Act.

27. The AO observed on the basis of evidences/details furnished by the assessee that assessee has incurred professional and consultancy charges of Rs. 4,54,86,644/- out of which a sum of Rs. 25,39,360/- to Mrs. Manju Sharma (director ‘s wife) and Rs. 42,00,000/- to Mrs Shruti Sharma (Director’s relative) as reported in the TAR. The AO had originally disallowed Rs.16,80,000, being 20% of the said related party transactions and the Ld. CIT(A) had reduced the same to 10%. The Assessing Officer has disallowed the said expenses on the ground that consultancy fees paid to them were excessive and more than market rates. The AO made comparisons with Consultancy charges paid to other consultants of the Company although without establishing that whether the same could be considered as comparable cases. The AO further acting on suspicions, surmises and conjectures alone made such ad-hoc and estimated disallowance.

28. The Ld. CIT(A) after examining the explanation furnished came to that the two ladies viz. Bhavna Sharma (MBA in Finance) and Shruti Sharma (Bachelor of Engg. and Master of Science from USA) could not be overlooked. The Ld. CIT(A) also noted that the comparisons made with other two persons did not match on the ground of stark difference in their qualifications. Despite this Ld. CIT(A) restricted the disallowance to 10%. The counsel of the Assessee Company submitted before us that although Books of accounts were accepted and therefore no disallowance can be made in such manner.

29. After considering rival contentions and the material on record, we are of the view that no part of such professional and consultancy expenses can be disallowed or confirmed partly when the ld. CIT(A) himself that the comparison made by the AO was unfair and not truly comparable. We also note that the books of account were accepted and the provisions of Section 145(3) of the Act not invoked. Therefore no disallowance is justified on adhoc basis. The case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in case of R.G. Buildwell Engineers Ltd. (supra). Accordingly, we set aside the order of ld. CIT(A) on this issue and direct the AO to delete the addition. The ground no. 2 is allowed.

30. The issue raised by the Assessee in the Ground No.3 is against the confirmation of ad-hoc estimated disallowance of Rs.84,00,000/- as made by the AO on account of alleged ineligible cash expenses.

31. The AO observed from the books of account that the assessee has incurred cash expenses of Rs. 8,44 Cr during the impugned year. The AO disallowed 50% of the total alleged cash expenses of Rs.8.44 Crores on the basis of his allegations that supporting documents were not filed by the assessee. The AO further made certain observations about the salary and wages expenses being incurred without TDS deduction at source in some cases. The assessee furnished before the AO all the evidences qua the salary and wages paid during the year which showed that only 25 employees were paid more than 2.00 lacs, wages paid 10 contractors Rs. 3.25 Crores. It was submitted that 117 employees were paid salary between 1.00 to 2.00 lacs and 110 employees were paid less than 1.00 salary. The Assessee has all along been contending that cash expenses were met out of the cash withdrawals which were duly appearing in Form 26AS.

32. The Ld. CIT(A) noted the submissions made by the Assessee in detail in Para 5.9 to 5.9.3 of hisorder. The Ld. CIT(A) noted that the AO has failed to point out any such cash transactionswhich were claimed as deduction and thus no disallowance could be made more so, when the accounts were audited and the said accounts were not rejected u/s145(3) of the Act. No specific item of the expenses claimed as deduction has been pointed out to be not allowable. The Ld. CIT(A) also noted that no part of the expenses was sought to be disallowed in excess of limit of Section 40A (3) of Act. The Ld. CIT(A) noted the arguments of the Assessee that it had PAN India presence and in running a business, there is always a need to incur some petty expenses in cash. Particularly, in the case of the appellant, it could be noted that they have a pan-national presence in multiple states, UTs, and cities, and therefore, the quantum of petty cash expenses is likely to be substantial. As long as the expenses are incurred wholly and exclusively for the purpose of business and are not in violation of Sec. 40A (3) of the Act, it does not entitle the tax authorities to take an adverse view. The AO has accepted the fact that the Assessee was maintaining day-to-day books of accounts and the same were subject to tax audits. The sales and purchases of the assessee were duly supported by the bills and vouchers. No expense in cash were incurred in violation of the provisions of section 40A (3) of the Act. In the present case, the AO has not rejected the books of the appellant by invoking the provision of section 145(3) of the Act the Ld. CIT(A) noted that no disallowance was warranted in the probability of expenses being unvouched unless it has been established that the expenditures claimed by the assessee are unvouched. The ld. CIT(A) has also accepted the fact that the accounts were duly audited and that the cash expenses were justified on the grounds of business expediency. The Ld. ld. CIT(A) despite factual findings recorded in the appellate order, chose to restrict the said addition to Rs.84,00,000, being 10% of total alleged cash expenses of Rs.8.44 crores although it was established that cash expenses were in fact cash withdrawals and for the purpose of business of the assessee.

33. After considering rival contentions and the material on record, we are of the view that no part of such cash expenses can be disallowed on ad hoc basis. We note that the books of account were not rejected by invoking the provisions of Section 145(3) of the Act and therefore the estimate of disallowance of cash expenses is without any basis and cannot sustained. The case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in case of R.G. Buildwell Engineers Ltd. (supra). Considering the facts in the light of above decision, we are inclined to set aside the order of ld. CIT(A) and direct the AO to delete the disallowance. The ground no.3 is allowed.

34. The issue raised in Ground No.4 is covered by our findings in Ground No.2 of the Revenue’s Appeal in ITA no.2691/Kol/2025 where we have deleted the part sustenance of disallowance by ld. CIT(A) by dismissing the ground no. of the revenue’s appeal and by allowing ground no. 4 of the assessee’s appeal.

35. The issue raised in Ground No.5 is towards the disallowance of Sec.14A expenses, deduction under Section 80G and club expenses confirmed by ld. CIT(A) which were originally made in the intimation passed under section 143(1) of the Act but no appeal was filed against the said Intimation. The argument of the Assessee regarding the merger of intimation in the Assessment Order passed under section 143(3) of the Act is untenable and accordingly Groundno. 5 is dismissed.

36. The issue raised in Ground No.6 is covered by our findings in Ground No.3 of the Revenue’s Appeal in ITA no.2691/Kol/2025 where we have deleted the part sustenance of disallowance by ld. CIT(A) by dismissing the ground no. 3 of the revenue’s appeal and by allowing ground no. 6 of the assessee’s appeal.

37. The appeal of the assessee is allowed.

38. The following Grounds of Appeal were raised in the Revenue’s Appeal:

“1. Whether the CIT(A) has erred in restricting the addition 10% of Rs.33,63,43,852 and deleting the balance addition ignoring the fact that the assessee failed to show any cogent evidence towards the actual distribution of the gold/silver coins to its customers and in the absence of any evidence towards actual distribution of such coins it is also not established that the expenditure was actually incurred wholly & exclusively for the business purpose.

2. Whether the CIT(A) has also erred in restricting the addition to 25% of Rs.7,52,011/- and deleting the balance addition ignoring the fact that the assessee failed to establish business connection with the foreign travel expenses.

3. The appellant craves leave to add any new ground or alter or amend any of the grounds and put up necessary arguments to substantiate the above-noted grounds.

39. The issue raised in Ground No.1 by the Revenue is against the restriction of the disallowance/addition Rs.3,36,34,385 [10% of the total expenses disallowed by the AO of Rs.33,63,43,852] by Id. CIT(A) as made by the AO of Rs. 33,63,43,852/- in respect of sales promotion expenses.

40. The Assessing Officer has disallowed the expenses incurred towards purchase of Gold/Silver coins and Jewellery which were distributed to customers, dealers and stockist as Sales Promotion. The AO has disallowed the said expenses by disregarding the evidences furnished before him and acting only on the basis of suspicions, surmises and conjectures. The AO totally ignored the evidences placed before him which are also enclosed in the Paperbook filed before us. The AO made the disallowance of entire sales promotion expenses on the ground that no evidences were produced as to whom these gifts were given and consequently added the entire amount of sales promotions of Rs. 33,623,43,852/- to the income of the assessee in the assessment framed u/s 143(3) read with section 144B of the Act dated 30.12.2022.

41. In the course of Appellate Proceedings, the Ld. ld. CIT(A), after considering the details and evidences furnished before him, clearly noted that incurring of such Sales promotion expenses are necessary for the assessee on account of its Pan India business presence . It was also recorded in the appellate order by ld. CIT(A) that such expenses were incurred for attracting customers and boosting sales. The Ld. ld. CIT(A) also noted that the assessee’s Incentive Scheme showed that the same was directly linked to business and this is allowable expenditure under section 37 of the Act. However, despite of all such findings, the Ld. ld. CIT(A) reduced the disallowance to Rs.3,36,34,385, being 10% of the total expenses of Rs.33,63,43,852 incurred on sales promotions and directed to allow 90% of such expenses to the tune of Rs.30,27,09,466 as allowable business expenditure. The Ld. CIT(A) has confirmed the disallowance to the extent of 10% only on the basis of surmises and conjectures that use of personal purposes couldnot be ruled out although no such evidences of any persona use or nature were brought on record by the AO or ld. CIT(A). The counsel of the Assessee Company submitted before us that although Books of accounts were not rejected u/s 145(3) of the Act and thus the even the confirmation of disallowance to the extent of 10% is not sustainable under the Act.

42. The issue raised in this ground of appeal is similar to one as decided by us in ground no. 2 of the revenue appeal in ITA No. 2691/KOL/2025 & ground no. 4 of assessee’s appeal in ITA No. 1032/KOL/2025 A.Y. 2020-21 wherein we have deleted the addition made by the AO and partly sustained by the ld. CIT(A). Therefore our decision in the above grounds would apply to ground no. 1 of revenue appeal and to ground no.4 of the assessee’s appeal. Accordingly ground no. 1 of the revenue appeal is dismissed and ground no. 4 in assessee’s appeal is allowed.

43. The issue raised by the Revenue in the Ground No.2 is against the restriction of the disallowance/addition of Travel expenses to 25% of the total expenses disallowed by the AO of Rs.7,52,011.

44. The issue raised in Ground No.2 is covered by our findings in Ground No.3 of the Revenue’s Appeal in ITA no.2691/Kol/2025 where we have deleted the part sustenance of disallowance by ld. CIT(A) by dismissing the ground no.3 of the revenue’s appeal and by allowing ground no. 6 of the assessee’s appeal. Therefore our decision in the above grounds would apply to ground no. 2 of revenue appeal and to ground no.5 of the assessee’s appeal. Accordingly ground no. 2 of the revenue appeal is dismissed and ground no. 5 in assessee’s appeal is allowed.

45. The appeal of the revenue is dismissed.

46. The assessee has raised following grounds of appeal:-

“1 . For that the assessment is bad in law since notice u/s 143(2) was not issued in accordance with law.

2. For that the ld. CIT (A) erred in confirming the addition 10% of the remuneration on estimate being remuneration paid to Smt. Bhavan Sharma and Smt. Shruti Sharma,Anjana Sharma, Jorie and Manju u/s 40A(2)(b) when the same was not applicable nor any material was brought on record by the AO to prove that the remuneration paid was excessive.

3. For that the ld. CIT (A) erred in confirming the addition 10% of the salary paid on estimate when full details and corroborative papers including PF ESI payments etc were filed, no payment of any bogus nature is pointed out as such the disallowance is improper.

4. For that the ld. CIT (A) erred in confirming the addition of Rs. 3,36,34,385/- form sales promotion on presumption that the same may contain some personal element without pointing out any such expenses when details and evidences called for were produced, no defectin the same was found, such sales promotion expenses were continuing from earlier years but never disallowed and there was no basis to disallow 10% of such business expenses

5. For that the ld. CIT (A) erred in confirming the addition of 25% from foreign travel expenses simply on estimate when the same were incurred for business purposes.”

47. The issue raised in Ground No.1 is not pressed and accordingly same is dismissed as not pressed.

48. The issue raised in Ground No.2 is against the part confirmation of payments made to related parties. The said Ground No.2 is covered by our findings in Ground No.2 of the assessee in ITA No. 1032/Kol/2025 A.Y. 2021-22. Therefore our decision would,mutatis mutandis, apply to ground no. 2 as well of this appeal. Consequently the ground no. 2 is allowed.

49. The issue raised in ground no.3 is against the part confirmation of disallowance / addition by the CIT (A) equal to 10% as made by the ld. AO equal to 20% of the total payment of salary to other related parties excluding directors which comes to Rs. 3,29,34,428/-

50. The facts in brief are that the ld. AO noted during the course of assessment proceedings that the assessee has paid huge salary to the related person of key management persons. The ld. AO noted that the salary payment was Rs. 16,43,28,927/-. Accordingly, the ld. AO called upon the assessee to furnish the appointment letter, qualification, experience, nature of work done place of work etc. The ld. AO also called upon the assessee to furnish the experience, qualification, designation and experience of non-related persons to whom the salaries were paid 10 lacs or above. It was submitted before the ld. AO that the employees are very old and on the verge of retirement and some have already retired since, 2020. It was submitted that PF and ESI were duly paid in respect of each and every employee except one or two who opted out of PF and ESI, since; they were on the verge on the retirement. Accordingly, furnish the minutes of the board meeting. The assessee also furnished a PAN Number, TDS returns of the employees drawing Rs. 10 lacs or more. The Id. AO observed that since, the salary was paid to some of the students who was studying abroad and well within the purview of section 40A(2) of the Act and accordingly, a show cause notice was issued as to why the same should not be disallowed equal to 20% the assessee replied. Thereafter the ld. AO noted that in terms of section 40A(2) of the Act the salary paid to the assessee was non-reasonable having regard to fair market value of the services and accordingly disallowed 20 % of the total amount of Rs. 16,46,72,139/- which comes to Rs. 3,29,34,428/-. Similarly, in respect of the salary paid to 3 related persons who were studying under graduate course in UK. The Id. AO noted that the salary paid was Rs. 24,30,500/- to Miss. Tarini Sharma, Rs. 18,43,212/- to Rishi Raj Sharma and Rs. 3,43,212/- to Shri Adhiraj Sharma aggregating to Rs. 46,16,924/-, which was disallowed. Thereby making aggregate disallowance of Rs. 3,75,51,252/- which was added to the income of the assessee .

51. In the appellate proceedings, the ld. CIT (A) partly allowed the appeal by observing and holding as under:-

“It is noted from the assessment order itself that the appellant is adopting the policy of employing the young ones belonging to the KMPs and promoters. And if we factor-in the annual increments, the salary of most of the seniors, as pointed out by the AO. would be good. In today’s world, the life expectancy is high and also the employability of individuals beyond 60 years of age cannot be questioned. There are many examples in the corporate world around us, where individuals as senior as in their late seventies or eighties or even nineties are working very well. So, in my view, age cannot be the criteria for ad-hoc disallowance of salary unless established that those people never attend to their respective work. I have also discussed in Para 15.4 and15.5 above that the decisions like whom to employ, at what age to employ, what qualification or skill set to look for, and what compensation to pay is vested with the KMPs (decision makers) of the company. It is also noted from the order that the AO has not considered various factors such as qualification, skill certifications, role and responsibilities assigned, work experience, employee productivity, projects completed etc. to objectively conclude that the appellant’s case deserves disallowance @20% across the board. Such ad-hoc disallowance@20%, based on a subjective judgment of the AO, therefore, cannot be justified. However, taking the balance view of the matter AO is directed to restrict such disallowance @10%. Therefore, this ground of appeal is partly allowed.”

52. After hearing the rival contentions and perusing the materials available on record, we find that the ld. AO has made disallowance on adhoc and estimated basis at the rate of 20% of the total salary paid of Rs. 16,46,72,139/-,which was reduced by the ld. CIT (A) to 10%. In our opinion, the disallowance made by the ld. AO is purely based on presumption and surmises without pointing out any defect or deficiency in the evidences filed by the assessee. We note that the assessee has furnished a very detail submission along with evidences qua each and every employee but the ld. AO failed to appreciate the fact that the disallowance cannot be made in a whimsical manner. Similarly, the ld. CIT (A) recorded a finding that AO has made adhoc disallowance which is incorrect but himself resorted to restricting the disallowance to 10% which is incorrect and cannot be sustained. Moreover, we note that the books of accounts of the assessee were not rejected u/s 145(3) of the Act and therefore, estimated disallowance made by the ld. authorities below is not sustainable under the Act. The case of the assessee is squarely covered by the decision of Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd. (supra). Consequently, we set aside the order of CIT (A) and direct the ld. AO to delete the addition. Ground no.3 is allowed.

53. The issue raised in ground no.4 is against the part confirmation of addition by the ld. CIT (A) to the tune of Rs. 3,36,34,385/- as made by the Id. AO of Rs. 33,63,43,852/- in respect of sale promotion expenses.

54. We have aIready decided the issue in Revenue’s Cross appeaI in ITA No. 2692/KOL/2025 A.Y. 2021-22 in ground no. 1 (supra), wherein we have set aside the order of ld. CIT (A) and directed the ld. AO to delete the entire addition of Rs. 33,63,43,852/-. Accordingly, the ground no. 4 is allowed.

55. The issue raised in ground no.5 is against the order of ld. CIT (A) part confirming the addition to the extent of 25% of foreign travel expenses when the same were incurred for the purpose of business exclusively.

56. The issue of part deletion of addition to the extent of 75% of the foreign travel expenses were decided in ITA No. 2692/KOL/2025 A.Y. 2021-22 of ground no. 2 (supra), wherein we have set aside the order of ld. CIT (A) and directed the Id. AO to delete the entire addition of Rs. 7,52,011/-. Accordingly, the ground no. 5 is allowed. The appeal of the assessee is allowed.

57. In the result, the appeals of the assessee are allowed and the appeals of the Revenue are dismissed.