Mumbai ITAT: Not Allowed to Grant Adhoc Disallowances Without Leaving Books of Account

The Mumbai ITAT on observing that the AO had audited and still not denied the books of account, ruled that the ad hoc disallowance that the AO had made was not justified and ought to be deleted.

The Bench of the ITAT (Income Tax Appellate Tribunal) Kuldip Singh (Judicial Member) and S. Rifaur Rahman (Accountant Member) repeated while considering the findings of the CIT(A) that as the books of accounts of the assess were audited and the AO did not discover any infirmity in them, and also the AO found any discrepancy/infirmity, he must have rejected the appellant’s books of account, which he had not done before proceeding.

Also, in earlier assessment years these expenses were authorized which is evident from the earlier assessment orders. Even if the taxpayer’s submission may be regarded incomplete or deemed inadequate evidence therefore it will not grant a right to the AO to make an ad-hoc disallowance. What the AO needed to have done was to ask for specific proof before making a decision in such specific instances.

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(Para 6) Under the case, the return of the taxpayer was selected for scrutiny, wherein AO witnessed that the taxpayer had claimed direct expenses to the tune of Rs.78,55,48,913.

Answering the explanation called by the AO, the taxpayer cited that it has a turnover of Rs.600 crores, there are voluminous vouchers for expenses and it is not easy to upload all the vouchers on the Income Tax Business Application (ITBA) portal.

The taxpayer has not provided even documentary proof for the major expenses nor has filed a ledger for such expenses, AO observed. Consequently, the AO reached the finding that the taxpayer failed to substantiate the expenses and, therefore made ad-hoc disallowance of 10% of the expenses and completed the assessment.

The Addition Made by the AO Has Been Deleted by CIT(A).

The Bench learned that the books of accounts are audited duly under income tax section 44 AB and AO does not have rejected the books of account during making ad-hoc disallowance.

The statement made by the Bench refers to the decision of the Supreme Court in the case of Principal Commissioner of Income Tax vs. R.G. Buildwell Engineers Ltd.

As per the statement, when the books of account maintained by the assessee have been duly audited and not rejected by the AO, any ad-hoc disallowance made based on surmises is not sustainable.

The Bench made an observation that even though the relevant evidence was not produced by the taxpayer before the AO, he proceeded to make the ad hoc disallowance.

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However, during the appellate proceedings, the Ld. CIT(A) duly perused the bills, vouchers, balance sheet, tax audit report, ledger copy, and bank statement under the fact that the taxpayer has a turnover of Rs. 600 crores and the duly audited books of accounts of the taxpayers have not been rejected by the AO. The Ld. CIT(A) moved to delete the ad hoc disallowance.

ITAT dismissed the appeal of the revenue on learning that no illegality in the order of CIT(A) is there.