2019 (9) TMI 1514 - AT - Income Tax

Ad hoc trading addition - Non invoking provisions of Section 145(3) - AO has given reasons for making ad hoc disallowance that too as a lump sum trading addition as the freight expenses were not fully supported by proper bills and vouchers - HELD THAT -Though the term used by the A.O. in the assessment order being the trading addition is not justified when there is no rejection of books of account u/s 145(3) of the Act. However in substance the A.O. has made this addition on account of claim of expenses not verifiable. The A.O. has not given the finding that the claim of expenditure is either excessive or bogus having regard to the facts of turnover during the year under consideration and nature of business of the assessee. There is no dispute that in the business of the assessee the freight expenses are inevitable and therefore if the claim is not found to be excessive or bogus then merely because of the some of the expenses are not supported by proper vouchers no ad hoc disallowance is called for. If certain claim of expenditure is not found to be incurred wholly and exclusively for the business purpose of the assessee then the same is liable to be disallowed. However if the expenditure incurred by the assessee is found for the business purpose of the assessee then due to certain irregularity in maintaining the supporting evidence an ad hoc disallowance is not called for. Accordingly without specifying the instance of the expenditure which is either excessive or found not incurred for the business of the assessee the action of the A.O. in making ad hoc disallowance and confirmed by the ld. CIT(A) is not justified. Hence ad hoc disallowance is deleted. - Appeal of the assessee is allowed

Summary

Issues Involved:
- Ad hoc trading addition without invoking Section 145(3) of the Income Tax Act, 1961.
- Justification of ad hoc disallowance of expenses.
- Burden of proof on the assessee for claiming expenses under Section 37 of the Act.

Analysis:

Ad hoc Trading Addition:
The appeal was against the order of the ld. CIT(A) upholding the ad hoc trading addition of ?1,50,000 made by the Assessing Officer (A.O.) without invoking Section 145(3) of the Income Tax Act, 1961. The A.O. had made the addition due to incomplete details/papers supporting certain expenses claimed by the assessee. The Tribunal noted that no rejection of books of account under Section 145(3) had occurred. The A.O. did not find the claimed expenditure excessive or bogus considering the turnover and nature of business. The Tribunal held that if expenses are essential and not excessive, ad hoc disallowance is unwarranted. The ld. CIT(A) confirmed the disallowance, but the Tribunal found it unjustified, leading to deletion of the ad hoc disallowance.

Justification of Ad Hoc Disallowance:
The A.O. disallowed ?1,50,000 as a lump sum trading addition for freight expenses lacking proper bills and vouchers. The A.O. did not establish the claimed expenses as excessive or non-business-related. The ld. CIT(A) upheld the disallowance, emphasizing the burden on the assessee to prove expenses were wholly and exclusively for business. However, the Tribunal held that if expenses were for business purposes, minor irregularities in supporting evidence do not warrant ad hoc disallowance. The Tribunal found the A.O.'s action unjustified without specifying excessive or non-business-related expenses, leading to deletion of the ad hoc disallowance.

Burden of Proof for Claiming Expenses:
The ld. CIT(A) stated that to claim deductions under Section 37 of the Act, the assessee must prove expenses were wholly and exclusively for business. The Tribunal agreed but emphasized that if expenses were indeed for business, minor irregularities do not justify ad hoc disallowance. The Tribunal emphasized the necessity of proving expenses for business purposes rather than focusing on minor documentation discrepancies. Consequently, the Tribunal allowed the appeal, deleting the ad hoc disallowance of ?1,50,000.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeal and deleting the ad hoc disallowance of expenses. The judgment highlighted the importance of proving expenses were for business purposes, emphasizing that minor documentation issues do not warrant ad hoc disallowances when expenses are essential and not excessive.