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This appeal is filed by the assessee against the order dated 10/07/2019 passed by Commissioner of Income Tax (Appeals)-38, New Delhi for Assessment Year 2016-17.
2. The grounds of appeal are as under:-
1. “On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad both in the eyes of law and on facts.
2. (i) On the facts and circumstances of the case, the learned CIT(A) is erred both on facts and in law in confirming disallowance of Rs.3,73,50,300/- made by the AO on account of following expenses treating the same as unexplained:
(ii) That the above disallowances have been confirmed despite the fact these expenses have been incurred wholly and exclusively for the purpose of the business of the assessee.
(iii) That the above disallowances have been confirmed despite the fact that the disallowances have been made by the AO by grossly indulging into surmises and conjectures without there being any basis for the same.
3. (i) On the facts and circumstances of the case, the learned CIT(A) is erred both on facts and in law in confirming the addition of Rs.1,06,20,125/- on account of advances from customers treating the same as unexplained liability.
(ii) That the above addition has been confirmed rejecting the detailed submissions and explanations alongwith the evidences brought on record by the assessee in this regard.
4. (i) On the facts and circumstances of the case, the learned CIT(A) is erred both on facts and in law in confirming the disallowance of Rs.5,67,633/- made by the AO on account of excess interest paid on loan.
(ii) That the above disallowance has been confirmed rejecting the detailed submissions alongwith the explanations made by the assessee in this regard.
5. (i) On the facts and circumstances of the case, the learned CIT(A) is erred both on facts and in law in confirming the disallowance of Rs.5,13,810/- on account of Diwali expenses incurred by the assessee.
(ii) That the above disallowances have been confirmed despite the fact theseexpenses have been incurred wholly and exclusively for the purpose of the business of the assessee.
6. The appellant craves leave to add, amend or alter any of the grounds of appeal.”
3. The assessee company is in the business of manufacturing of color Master Batches (plastic granules). It is a manufactures, exporters and suppliers of rotofoam master batch, color master batches, polymer processing aid master batches, carbon black master batches, additive master batches, prafil compound, pracolcolour, black master batches, roto foam powder, white master batches. The assessee company e-filed its return of income for A.Y. 2016-17 on 16.10.2016 declaring income of Rs 7,91 86,890/-. The case was selected for scrutiny and statutory notices u/s 143(2) of the Income Tax Act, 1961 were issued on 17.07.2017 and 26.09.2017 which were properly served. Thereafter, notices u/s 142(1) of the Income Tax Act, 1961 were issued on 12.01.2018, 14.09.2018, 19.11.2018 and 13.12.2018 which were properly served. In response to the notices, advocate of the assessee attended and filed the replies from time to time. The Assessing Officer made addition on account of excess interest loan at Rs 5,67,633/-, addition on account of unexplained expenses amounting to Rs.3,73,50,300/-, addition on account of unexplained Diwali expenses amounting to Rs.5,13,810/- and addition on account of unexplained liability amounting to Rs.1,06,20,125/-.
4. Being aggrieved by the assessment order, assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.
5. The Ld. AR submitted that ground no.1 and 6 are general in nature, therefore, Ground Nos. 1 and 6 are dismissed.
6. As regards Ground no.2, relating to the disallowance of Rs.3,73,50,300/- on ad-hoc basis on account of various expenses incurred during the year, the Ld. AR submitted that the Assessing Officer disallowed expenses on the assumption that expenses increased/decreased in proportion to sales. The Ld. AR further submitted that the Assessing Officer has observed in his order that sales figure has been reduced by 5.62% i.e. from Rs.3,20,49,20,000/- in F.Y. 2014-15 to Rs.3,02,90,97,000/- in F.Y. 2015-16. On the same basis, the Assessing Officer compared expense of F.Y. 2015-16 vis-à-vis the F.Y. 2014-15. The Ld. AR submitted that the Assessing Officer held in the assessment order that while the sales have declined, there is an abnormal increase in the expenses and, thus, disallowed the expenditure which is in excess of 1.05% in comparison to F.Y. 2014-15. At the outset, the Ld. AR further submitted that the Assessing Officer has not rejected books of accounts produced by the assessee. These books are audited and no irregularity has been observed by the Assessing Officer. The Ld. AR further submitted that the Assessing Officer has neither questioned/doubted the ledger account produced by the assessee, nor he found any irregularity in the details and expenses filed. It is, thus, evident that there is no dispute about genuineness and admissibility of claim of expenses made by the assessee. The Ld. AR submitted that these expenses are incurred wholly and exc usively for the business u/s 37(1) of the Act. The reasons for the increase in the expenses as pointed out by the Assessing Officer are arbitrary and unjustified having regard to the business of the assessee. The Assessing Officer as well as the CIT(A) did not pointed out any specific expenses which do not clarify the expressions u/s 37(1) of the Act. Thus, the Assessing Officer admitted that the payments were made for such expenses. It is evident that the Assessing Officer made the disallowance in the absence of any tangible material on record. Thus, the Ld. AR submitted that this addition be deleted. The Ld. AR relied upon the following decisions:
a) Dhakeswari Cotton Mills Ltd. Vs. CIT, West Bengal, (1954) 26 ITR 775 (SC).
b) Lalchand Bhagat Ambica Ram vs. CIT 37 ITR 288 (SC).
c) CIT vs. Ms. Shehnaz Hussain 267 ITR 572 (Del).
d) J. J. Enterprises vs. CIT  254 ITR 216 (SC).
e) Vichitra Constructions Pvt. Ltd. Vs. ACIT (ITA No.5047/Del/2015 dated 27.05.2019).
7. The Ld. DR submitted that the Assessing Officer as well as the CIT(A) has rightly disallowed these expenses as the assessee could not prove the genuineness of the expenditure. Thus, the Ld. DR relied upon the assessment order and the order of the CIT(A).
8. We have heard both the parties and perused all the relevant materials available on record. It is pertinent to note that the books of accounts produced by the assessee during the course of assessment proceeding were never doubted and were not rejected. The addition is only on the basis of presumption and assumption that decrease in sales amounts to decrease in expenses. The ledger accounts were very much produced before the Assessing Officer and the same was before the CIT(A). Merely on the basis of conjecture, the ad-hoc addition cannot be made without any tangible reason to do so. Therefore, Ground no.2 is allowed.
9. As regard Ground No.3, relating addition of Rs.1,06,20,125/- on account of advances from the customers, the Ld. AR submitted that the assessee duly filed the details of advances received from customers alongwith the details of current liabilities. The documents were not doubted. The Ld. AR further submitted that these advances have been cleared in the subsequent years. The sales invoices have been raised in the subsequent years and copies of ledger accounts for three Financial Years i.e. 2014-15, 2015-16 & 2016-17 were submitted before the authorities and the assessee demonstrated that these are regular advances. The Ld. AR submitted that theses parties are regular customers and the assessee has supplied the goods to those parties in the normal course of business and these advances have been adjusted against