2018 (8) TMI 912 - AT - Income Tax

Ad hoc disallowance of expenses on estimated basis - telephone expenses, deepawali expenses, rent, miscellaneous expenses and travelling expenses - whether expenses were incurred wholly and exclusively for the purpose of business - Held that - Assessing Officer has verified all the vouchers with the ledger account of these expenses but he could not be able to pinpoint any defect in such bills and vouchers maintained by the assessee, except expressing with his view that these expenses were not wholly and exclusively made for the purpose of business. Considering the nature of such expenses like freight, telephone expenses deepawali expenses, rent miscellaneous expenses and travelling expenses and in the absence of corroborative documentary evidence, we do not find such contention taken by the lower authorities as justified for ad hoc disallowances. Additions so made deleted - Decided in favor of assessee.

Issues:
1. Ad hoc disallowance of expenses made by the Assessing Officer.
2. Confirmation of the ad hoc disallowance by the Commissioner of Income-tax (Appeals).
3. Justification of the disallowance based on lack of proper supporting vouchers.
4. Challenge to the disallowance by the appellant.
5. Consideration of legitimate business needs and past history of expenses.
6. Verification of expenses by the Assessing Officer.
7. Decision on the appeal and deletion of the ad hoc addition.

Ad hoc Disallowance by Assessing Officer:
The appeal was filed against the order of the Commissioner of Income-tax (Appeals) upholding an ad hoc disallowance of ?3,50,000 made by the Assessing Officer out of various expenses for the assessment year 2014-15. The appellant contended that the disallowance was arbitrary and unjust as it was based on estimated expenses without proper supporting evidence.

Confirmation of Disallowance by Commissioner of Income-tax (Appeals):
The Commissioner confirmed the addition, stating that the expenses were not supported by proper bills and vouchers, and some were not incurred exclusively for business purposes. The appellant argued that all expenses were legitimate business expenses, supported by the needs of the business and past history.

Challenge by Appellant:
The appellant challenged the ad hoc disallowance, emphasizing that the expenses were incurred wholly and exclusively for business purposes. The appellant's representative argued that the disallowance was arbitrary and unjust, lacking specific instances of alleged non-business expenses.

Verification of Expenses:
While the lower authorities noted lack of proper vouchers for verification and questioned the business purpose of some expenses, the appellant provided ledger accounts to prove the expenses were for business. The Commissioner should have substantiated excessive expenses in relation to the turnover of the assessee before confirming the disallowance.

Decision on the Appeal:
After considering the evidence and arguments, it was found that the Assessing Officer could not pinpoint any defects in the bills and vouchers provided by the assessee. The nature of expenses and absence of corroborative evidence did not justify the ad hoc disallowance. The Commissioner's decision to uphold the disallowance was deemed unjustified, and the ad hoc addition of ?3,50,000 was deleted. Consequently, the appeal of the assessee was allowed.

In conclusion, the judgment focused on the arbitrary ad hoc disallowance of expenses by the Assessing Officer, the subsequent confirmation of the disallowance by the Commissioner of Income-tax (Appeals), and the appellant's challenge to justify the business nature of the expenses. The decision to delete the ad hoc addition highlighted the importance of proper verification and substantiation of expenses in line with the legitimate needs of the business and past history.

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