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Judgment
PER ANUBHAV SHARMA, JM:
This appeal preferred by the assessee against the order dated 19.09.2025 of Ld. National Faceless Appeal Centre (NFAC) (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in DIN & Order No : ITBA/NFAC/S/250/2025-26/1080919213(1) arising out of the order dated 20.02.2025u/s 143(3)of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by Assessment Unit,for AY: 2023-24.
Heard and perused the records. The assessee filed his return of income dated 31.10.2023 declaring income of Rs. NIL. The return was further revised for the year under consideration on 16.12.2023 declaring a total income of Rs. 10,62,91,110/-. Accordingly, the case was selected for scrutiny through CASS for verification of the issue and statutory notice under section 143(2) was issued on 19.06.2024.
During the relevant assessment year, the assessee was providing various assistances, advisory and commercial information services to Canpotex International Pte Ltd. to sell the Canadian Muriate of Potash (fertiliser). An exclusive market service agreement was agreed upon by the two parties. The tenure of the agreement was from 1s of January 2021 to 315 of December 2021, copy of the agreement is filed at page 1 to 17 of the P/B. Furthermore, this tenure of the agreement was amended adding delivery of 25000 Mt to the tenure of the agreement and copy of the amendment is filed at page 18-19 of the P/B.
During the year under consideration the assessee performed the delivery of 25000 Mt in April 2022 and the assessee received a commission of USD 39,994.80 Rs. 30,91,598/- @ Rs.77.30 as on May 2022) copy of the bank statement is filed at page 20 of the P/B.
During the assessment proceedings, the AO concluded that the assessee was out of business after the expiry of the agreement and as the activities of the business of assessee stopped the payment towards salary of employees were treated as personal expenses and not business expense. Accordingly, the AO made a disallowance of Rs. 31,29,560/- and treated salary expenses as personal expenses.
Furthermore, the AO on the perusal of P/L account made an ad-hoc disallowance of 50% of expenses amounting to Rs. 12,46,536/- on account that the agreement between the two parties expired on 31st December 2022.
Lastly, the AO disallowed the audit fees to the extent of Rs. 1,70,000/-on account that the assessee was following cash system of accounting and there were certain items in the balance sheet shown as receivable and payable which is considered to be contradictory to the cash system.
Aggrieved by the assessment order the assessee filed an appeal before the CIT (A) and NFAC upheld the actions of the AO and dismissed the appeal of the assessee. Thus the assessee is in appeal and has raised following grounds;
“1.That on the facts and circumstances of the case and in law, the appellate order passed by NFAC CIT(A) is contrary to the facts and bad in law.
2.That on the facts and circumstances of the case NFAC CIT(A) has erred in disallowing salary expenses amounting to Rs. 31,29,560/- by treating them as bogus business expenses as the appellant was not running any business with Canpotex international Pvt. Ltd. for the year under consideration.
2.1That NFAC CIT(A) has erred in upholding the order of NFAC AO in treating salary expenses as personal expenses.
3.That on the facts and circumstances of the case, NFAC CIT(A) has erred in disallowing 50% of expenses amounting to Rs. 12,46,536/- by treating them as not wholly and exclusively for business activity.
4.That on the facts and circumstances of the case, NFAC CIT(A) has erred in disallowing audit fees amounting to Rs. 1,70,000/-. NFAC CIT(A) has further erred in upholding the order of NFAC AO.
5.That the appellant craves leave to add, amend, and alter any of the grounds of appeal at the time of hearing or earlier.”
Ld. AR submitted that the assessee is a sole proprietor and entered into an agreement with Canpotex International Pte. Ltd. the tenure of the agreement was from 1st January 2022 till 31st December 2022. It is submitted that during the tenure of the agreement the assessee assisted the company with various roles which the assessee duly performed. It is submitted that an amendment was initiated right before the expiry of the tenure for the shipment of 25,00 Mt (+/- 10%) of Potash of Muriate to Chambal Fertilizers and Chemicals Ltd. It is submitted that this delivery was fulfilled by the assessee in April 2022. It is contended by ld. AR that the agreement was extended till the delivery of the product which was fulfilled in the month of April, furthermore, the assessee received commission accordingly in the month of May 2022. It is submitted that the AO failed to consider this and made the additions without any application of mind.
It is submitted that even after the expiry the assessee tried to earn more business from the above mentioned however the deal did not fructify. It is submitted that during the assessment proceedings and appellant proceedings the assessee time and again explained that there has been a steep decline in the expenses of the business. It is submitted that during the relevant assessment year there has only been Rs.41,72,750/- claimed as total salary expense compared to previous. It is submitted that the AO failed to consider comparatives drawn from previous years and confirmed the addition as personal expense. Relevant table has been filed on page 28 of the P/B.
Thought ld. DR has relied the findings of ld. Tax authorities we find that the AO failed to consider the basic principle of going concern assumption that it is a fundamental accounting principle to presume a business will continue to operate for the foreseeable future. Here the assessee continued to maintain his business setup and continued to make efforts to generate more business. This assertion should be accepted unless there is cogent direct evidence to show that it was actually wind of.
Then on comparison from previous years there was a substantial decline in the expenses of the assessee. The expenses were on ordinary head which were accepted in previous assessments. The books were maintained on cash basis and there was no change in accounting method. The invoices given by auditors have been left out of consideration on mere assumptions.
Thus we find that ld. Tax authorities have made disallowances on erroneous belief that as proprietor assessee was engaged in providing services during tenure of the agreement with Canpotex Int. Pte. Ltd, and subsequently the business was wind up so as to make impugned disallowances of salary and other expenses which were accepted in previous years. The grounds deserve to be sustained.
The appeal is allowed and impugned additions are deleted.