2019 (4) TMI 1109 - AT - Income Tax

Adhoc disallowance of expenses - Rejection of books of accounts - best judgment assessment u/s 144 - HELD THAT - AO could have ventured into estimation only after rejecting the books of accounts of the assessee u/s 145(3) and thereafter by best judgment assessment u/s 144 of the Act. Here in this case, the AO has not passed any order u/s 144 of the Act. AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses with the self-made vouchers. While scrutinizing the expenditure if the expenses claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of an expenditure, at the most expenses to the extent that are not supported by the vouchers can be held to be non-genuine and can be disallowed by the AO; and item-wise the AO could have disallowed the expenditure rather than going for adhoc disallowance of percentage basis of the expenses claimed by the assessee which action of the AO is arbitrary in nature and cannot be sustained. Set aside the Ld. CIT(A) order wherein also he had restricted the expenses claimed @ 5 percentage of expenses which is also adhoc disallowance. Therefore, the addition is directed to be deleted.

Summary

Issues:
1. Disallowance of expenditure by Assessing Officer
2. Appeal against the order of Ld. CIT(A) restricting the disallowance
3. Estimation of disallowance based on self-made debit vouchers
4. Jurisdiction of Assessing Officer to make estimation without rejecting books of accounts

Analysis:

1. The primary issue in this case revolves around the disallowance of expenditure by the Assessing Officer (AO) based on the suspicion that the assessee might be inflating expenses. The AO disallowed 10% of the expenses claimed by the assessee, amounting to &8377; 88,618, due to the payment being made through self-made debit vouchers.

2. The assessee appealed against the order of the Ld. CIT(A) who restricted the disallowance to 5% of the total expenses. The main contention of the assessee was against the arbitrary nature of the disallowance and the lack of proper justification for the percentage-based estimation.

3. The Tribunal noted that the AO did not reject the books of accounts under section 145(3) or pass an order under section 144 of the Act before making the estimation. The AO's decision to estimate the disallowance based on suspicion without concrete evidence or proper justification was deemed arbitrary and unsustainable.

4. The Tribunal emphasized that if expenses claimed lack nexus to the business, have deficiencies in vouchers, or lack supporting bills, the AO can disallow specific items rather than resorting to ad hoc percentage-based disallowance. The Tribunal set aside the Ld. CIT(A)'s order of restricting the expenses claimed at 5% as it was also considered an ad hoc disallowance.

5. Consequently, the Tribunal partly allowed the appeal of the assessee, directing the deletion of the addition made by the AO. The other general grounds of appeal were dismissed, and the order was pronounced in the open court on 20th February 2019.