2019 (8) TMI 1726 - AT - Income Tax

Disallowance on account of staff welfare expenses, conveyance expenses, general expenses and office maintenance expenses - CIT(A) held these disallowances @ 10% to be reasonable for the reason that all these expenses were booked on the basis of self made vouchers and payments were made in cash - HELD THAT - The authorities below have made adhoc disallowances of expenses incurred under the various heads to the extent of 10% of the total claim of the assessee. The only reasons attributed by the authorities are that these expenses were incurred in cash and booked on the basis of self made vouchers. In our opinion, the disallowance was purely made on the basis of presumptions and surmises and adhoc in nature without pinpointing any specific defects or deficiencies. Therefore , we deem it fit to restrict the disallowance to 5%. Appeal of the assessee is partly allowed.

Summary

Issues:
Adhoc disallowance of expenses under various heads by AO and confirmation of the same by CIT(A) at 10% - Appeal against the order.

Analysis:

Issue 1: Adhoc Disallowance of Expenses
The AO observed that the assessee had claimed expenses under different heads totaling to ?1,15,93,429. Previous year's disallowance under these heads was at 10%. The AO, noticing that most vouchers were self-made and expenses were in cash, made an adhoc disallowance at 10% amounting to ?11,59,343. The CIT(A) upheld this disallowance reasoning that since the expenses were based on self-made vouchers and paid in cash, a 10% disallowance was reasonable.

Issue 2: Appellate Tribunal's Decision
Upon review, the Appellate Tribunal found the adhoc disallowance made by the authorities to be based on presumptions and surmises, lacking specific identification of defects or deficiencies. Consequently, the Tribunal deemed it appropriate to reduce the disallowance from 10% to 5% as the original disallowance was arbitrary. The Tribunal directed the AO to adjust the disallowance accordingly.

Conclusion
The Appellate Tribunal partially allowed the assessee's appeal, reducing the adhoc disallowance of expenses from 10% to 5%. The decision was based on the lack of concrete evidence supporting the initial disallowance percentage. The Tribunal emphasized the need for specific defects or deficiencies to justify disallowances rather than relying on general presumptions. The order was pronounced on 09.08.2019, with the AO directed to implement the revised disallowance percentage.