2015 (12) TMI 1768 - AT - Income Tax

Disallowance of 50% of the indirect expenses incurred in cash - AO has passed ex parte assessment order u/s 144 - Best Judgement assessment - Held that - Assessing Officer must not act dishonestly or vindictively or capriciously. He must make, what he honestly believe to be a fair estimate of the proper figure of assessment and for this purpose he must be able to take into consideration, local knowledge, reputation of the assessee about his business, the previous history of the assessee or the similarly situated assessee. It is also pertinent to mention that judgment is a faculty to decide matter with wisdom, truly and legally. Judgment does not depend upon the arbitrary, caprice of an adjudicator, but on settled and invariably principles of justice. Thus, in a best judgment, even if, there is an element of guess work, it should not be a wild one, but shall have reasonable nexus to the available material and circumstances of each assessee. Admittedly the assessee was not in a position to produce supporting evidence, then ad hoc disallowance on account of such failure ought not to be made more than 20% of the expenses. - Decided partly in favor of assessee.

Summary

Issues: Disallowance of indirect expenses incurred in cash

The judgment by the Appellate Tribunal ITAT Ahmedabad involved the appeal of the assessee against the order of the ld.CIT(A) confirming the disallowance of &8377; 22,55,435, which is 50% of the indirect expenses incurred in cash for the Asstt.Year 2004-05. The assessee filed its return of income declaring a loss, and the AO passed an ex parte assessment order noting the details of the indirect expenses. The ld.AO directed the assessee to submit supporting details, but as the details were not provided, a disallowance was made at 50% of the expenditures. On appeal, the disallowance was restricted to &8377; 22,55,435 by the ld.CIT(A). The Tribunal emphasized that in best judgment assessment, the AO must not act dishonestly or capriciously, and the estimate should be fair based on available material. The Tribunal found the 50% disallowance to be on the higher side as the assessee could not produce supporting evidence, and reduced the disallowance to 20% of the expenses, resulting in a disallowance of &8377; 14,69,950. Consequently, the appeal of the assessee was partly allowed.

In conclusion, the judgment highlighted the importance of fair estimation in best judgment assessments and emphasized that the disallowance should have a reasonable nexus to the available material and circumstances of each assessee. The Tribunal considered the lack of supporting evidence from the assessee and reduced the disallowance from 50% to 20% of the expenses, resulting in a reduced disallowance amount.