2020 (9) TMI 616 - AT - Income Tax

Ad-hoc disallowance - assessee contended that it has maintained all these records and vouchers and that the assessee s books are statutorily audited so no ad-hoc disallowance was warranted - HELD THAT - Assessee who would be claiming a deduction is expected to have some evidence of such expenditure incurred, as no one is expected to incur expense by any payment to another without there being any proof of it. Having said so, the AO should have item-wise examined the expenditure as claimed by the assessee and in case if he is not convinced by the genuinity of the expenditure as claimed by the assessee, then he can item-wise deny the expenditure. In this case, the AO without rejecting the books of account as required u/s. 145(3) has resorted to estimate the income by ad-hoc disallowance of expenditure claimed by the assessee and according to us if the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) of section 145 has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2) of section 145 then the AO may make an assessment in the manner provided in section 144, which allows the AO to make Best Judgment Assessment. This is not what the AO did. Thus, the AO has not followed the procedure prescribed by the statute and therefore, he violated the principle of Rule of Law and the action of the AO is arbitrary and therefore, the ad-hoc disallowance of 10% made by the AO cannot be allowed. - Decided in favour of assessee.

Summary

Issues:
Ad-hoc disallowance of expenses

Analysis:
The appeal was against the Ld. CIT(A)'s order confirming the ad-hoc disallowance of expenses made by the AO. The AO disallowed 10% of the claim of expenses amounting to ?2,09,135 as the expenses were incurred in cash and supported by self-made debit vouchers. The AO raised concerns about the genuineness of the transactions due to the lack of party-wise details provided by the assessee. The assessee contended that all payments were supported by proper vouchers and maintained records, emphasizing the necessity to employ local workers due to union rules in village areas. However, the AO rejected the explanation and made the ad-hoc disallowance.

The ITAT noted that the assessee was engaged in the business of running a cold storage facility, incurring expenses for collie and cartage charges. The payments were made based on the quantity handled, with rates similar to nearby cold storages. The AO's rejection was based on three reasons: lack of party-wise details, past non-disallowance not being a ground, and local union rules not proving the absence of extra expenditure. Sample bills were produced for verification, showing charges linked to the quantity stored. The ITAT observed that the AO did not follow the required procedure under the Income-tax Act, resorting to ad-hoc disallowance without proper examination or rejection of accounts as per Section 145(3). The AO's approach was deemed arbitrary and a violation of the Rule of Law, leading to the direction to delete the disallowance.

In conclusion, the ITAT allowed the appeal, directing the AO to delete the ad-hoc disallowance of ?2,09,135. The judgment highlighted the importance of proper examination and evidence for claimed expenditures, emphasizing adherence to statutory procedures and principles of law in assessment procedures.