2020 (1) TMI 1542 - AT - Income Tax

Disallowance of expenses like telephone expenses, miscellaneous expenses, entertainment expenses and depreciation - assessee could not produce documents such as log books, bills/vouchers, etc.. - AO has also noted that in some cases the expenses were incurred in cash and the vouchers were self made and hand written- HELD THAT - CIT (A) has upheld the findings of the AO by noting that the assessee was unable to substantiate that the entire expenses were wholly and exclusively for the purpose of business and details like log books etc for vehicles, telephone were not available. The fact remains that this disallowance has been made on a lump sum basis/ad hoc basis without bringing on record any specific defect in the accounts of the assessee or in the details submitted by the assessee. There are numerous judicial precedents wherein it has been laid down that no ad hoc disallowance can be made without pointing out any specific defect in the books of accounts of the assesee or in the documents furnished by him. Therefore, we are unable to uphold the findings of the Ld. CIT (A) and we set aside the impugned order and direct the AO to delete the addition - Decided in favour of assessee.

Summary

Issues: Appeal against order of Ld. Commissioner of Income Tax (Appeals) for assessment year 2013-14 - Disallowance of expenses on lump sum basis without specific defects in accounts - Challenge to confirmation of disallowance by Ld. CIT (A).

Analysis:

Issue 1: Disallowance of expenses on lump sum basis
The appellant filed a return of income declaring ?29,86,930, later revised to ?2,43,17,680. The assessment was completed at ?3,25,45,855 after disallowances under section 40(a)(ia), rent, and other expenses. The Ld. CIT (A) partly allowed the appeal, deleting the rent disallowance but upholding the ?10,00,000 disallowance on a lump sum basis from various expenses. The appellant contended that the disallowance lacked specific defects in accounts, a requirement for ad hoc disallowances. The AO disallowed ?10,00,000 due to lack of documentation and self-made vouchers. The Tribunal noted that no specific defects were highlighted in the accounts, and the disallowance was made ad hoc. Citing precedents, the Tribunal held that ad hoc disallowances without specific defects are impermissible. Consequently, the Tribunal directed the AO to delete the addition, allowing the appeal of the assessee.

Issue 2: Challenge to confirmation of disallowance by Ld. CIT (A)
The Ld. CIT (A) upheld the ad hoc disallowance of ?10,00,000, stating that the expenses were not fully substantiated for business purposes. However, the Tribunal found that the disallowance lacked specific defects in the accounts or documents submitted by the assessee. The Tribunal emphasized the necessity of pinpointing specific defects before making ad hoc disallowances. As a result, the Tribunal set aside the Ld. CIT (A)'s order and directed the AO to delete the disallowance. This decision highlights the importance of providing concrete evidence before disallowing expenses on a lump sum basis.

In conclusion, the appeal was allowed, and the disallowance of expenses on a lump sum basis without specific defects in the accounts was rejected. The Tribunal emphasized the need for specific defects to justify ad hoc disallowances, setting a precedent for future cases.