2018 (12) TMI 1898 - AT - Income Tax

Disallowance of the expenses - Assessee contented that CIT(A) ought to have deleted the disallowances in toto rather than restricting them to 10%, again on adhoc basis, without any defect having been pointed out in the claim of the assessee - HELD THAT - It is settled law that where the taxing authorities do not point out any defect in the claim of the assessee, nor are the books of account maintained by the assessee rejected, no such ad-hoc disallowance at a whimsical figure can be made and the claim of the assessee requires to be accepted as such. See ALLIED CONSTRUCTION. 2005 (10) TMI 227 - ITAT DELHI and SUBHASH CHAND AGRAWAL 2013 (11) TMI 471 - ITAT ALLAHABAD Thus the grievance of the assessee is found to be justified. It is accepted as such. The additions made are, hence, deleted in their entirety. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of expenses at an ad-hoc rate of 30% by Assessing Officer.
2. Restriction of disallowance to 10% by CIT(A).
3. Justification of disallowance percentages without defects in books of accounts.
4. Reduction of disallowance amount by CIT(A) compared to Assessing Officer.

Issue 1: The Assessing Officer disallowed expenses at a uniform rate of 30% without pointing out any defects in the books of the assessee. The appellant contested this ad-hoc disallowance, arguing for the deletion of disallowances entirely rather than a reduction to 10%. The appellant's contention was supported by legal precedents emphasizing the need for specific defects to justify ad-hoc disallowances.

Issue 2: The CIT(A) restricted the disallowance to 10%, leading to the appellant's appeal against this decision. The appellant argued that the CIT(A) should have deleted the disallowances entirely, as no defects were identified in the claim or the books of accounts. The appellant's position was upheld based on established legal principles and previous judgments.

Issue 3: The judgment highlighted that when taxing authorities fail to identify defects in the assessee's claim or reject the maintained books of account, ad-hoc disallowances at arbitrary rates are not permissible. Citing various legal decisions, the judgment emphasized the importance of justifying disallowances with specific defects and rejected the ad-hoc basis for disallowances without proper grounds.

Issue 4: The CIT(A) maintained a disallowance amount lower than that of the Assessing Officer, reducing it from ?4,82,229 to ?68,350. The appellant challenged this reduction, asserting that the disallowance should have been entirely deleted. The judgment found merit in the appellant's argument, leading to the deletion of the disallowance in its entirety and allowing the appeal.

In conclusion, the judgment ruled in favor of the appellant, deleting all disallowances made by the Assessing Officer and upheld by the CIT(A) due to the lack of defects pointed out in the claim or books of accounts. The decision emphasized the necessity of justifying disallowances with specific grounds rather than arbitrary ad-hoc rates.