2019 (11) TMI 350 - AT - Income Tax

Adhoc disallowance of 5% of the manufacturing expenses, building repair, hamali expenses, machinery expenses and transportation expenses - 10% of car running, insurance and depreciations claim as well as telephone and miscellaneous expenses have also been disallowed - HELD THAT - There is no specific finding recorded by the AO in terms of any of these expenses having not been incurred for the purpose of business or bogus in nature. The disallowance of expenses have thus been made in the routine manner without pointing out any specific defects in the vouchers or the fact that where the payments have been made in cash, such expenses are not incurred for the purposes of business. Mere incurrence of expenditure in cash by itself cannot be a ground for denial of genuine claim of the assessee. There are business necessities which warrant the assessee to incur the expenditure in cash, a fact which has been recognized by the legislature and adequate safeguards have been put in place by way of section 40A(3). Though lately there is a policy shift towards digital and cashless transactions which no doubt is a welcome step in the right direction, at the same time, there are certain business exigencies which warrant cash payments. Merely because cash payment has been made is not an indicator that the transaction is non-genuine or bogus or the cash payment has not been made for purposes of business. Where in particular facts and circumstances of the case, AO is of the view that there are suspicious cash payments, in such a situation, he should carry out further examination and investigation in the matter and should come out with specific and conclusive findings. However, in the instant case, we donot see any specific finding recorded by the Assessing officer. Further, on perusal of the ledger accounts produced by the ld. AR, it is observed that though there are cash payments, at the same time, there are also payments made by cheque and entries towards expenses which have been claimed as subsequently paid by cheque. Therefore, observation of the AO that payments have been made in cash doesn t apply as far as these transactions are concerned. We therefore find that in absence of any specific findings by the Assessing Officer, there is no basis for disallowance of expenses on an adhoc basis which cannot be sustained in the eyes of law. Hence, the disallowance so confirmed by the ld. CIT(A) is hereby directed to be deleted - Appeal of the assessee is allowed.

Summary

Issues:
1. Adhoc disallowance of trading and manufacturing expenses.
2. Disallowance of various expenses like car depreciation, car insurance, car expenses, telephone expenditure, and miscellaneous expenses.

Analysis:
1. The assessee appealed against the disallowance of expenses by the Assessing Officer, who observed that many expenses lacked proper vouchers and were paid in cash, leading to a 5% disallowance. The ld. CIT(A) partially upheld the disallowance, citing the possibility of non-business elements in expenses due to lack of documentary evidence. The ld. CIT(A) sustained a disallowance of ?1,00,000 and deleted the balance. The Tribunal found the disallowance arbitrary, emphasizing that cash payments alone do not justify denial of genuine claims without specific defects in vouchers or proof of non-business nature. The Tribunal noted the legislative recognition of business necessities requiring cash payments and the absence of specific findings by the Assessing Officer to support the disallowance. Ledger accounts showed a mix of cash and cheque payments, undermining the AO's blanket disallowance. Consequently, the Tribunal directed the deletion of the disallowance confirmed by the ld. CIT(A).

2. The Assessing Officer disallowed 10% of various expenses like car depreciation, car insurance, car expenses, telephone expenditure, and miscellaneous expenses. The ld. CIT(A) disagreed with the disallowance for vehicles and telephone but sustained a 5% disallowance for miscellaneous expenses. The Tribunal found the disallowance arbitrary, emphasizing the lack of specific findings or evidence to justify the disallowance. The Tribunal highlighted the legitimate business reasons for cash payments and the absence of conclusive findings by the Assessing Officer to support the disallowance. Ledger accounts showed a mix of cash and cheque payments, undermining the blanket disallowance. Consequently, the Tribunal directed the deletion of the sustained expenses disallowance.

In conclusion, the Tribunal allowed the assessee's appeal, emphasizing the need for specific findings to support disallowances and rejecting arbitrary adhoc disallowances without concrete evidence. The judgment underscored the importance of genuine business needs for cash payments and the necessity for thorough examination before disallowing expenses.