2021 (1) TMI 603 - AT - Income Tax

Ad hoc disallowances @20% of expenses for want of proper bills and vouchers as well as the telephone and vehicle expenses on the ground of personal use - assessee has submitted that the AO has made ad hoc disallowances in respect of certain expenses without pointing out any specific defect or the profit declared by the assessee is less than the past history - HELD THAT - So far as the expenditure in respect of advertisement, miscellaneous expenses, repair and maintenance of shop expenses special discount, the same are disallowed by the AO for want of bills and vouchers. The expenditure on account of telephone and vehicle running are also disallowed to the extent of 20% for personal purpose. The assessee has not disputed the fact that the proper bills and vouchers were not produced by the assessee for verification therefore to that extent the assessee has failed to prove that all the expenses were incurred wholly and excessively for business purpose. The onus to prove the claim of expenditure incurred wholly and excessively for business purpose lies on the assessee. Accordingly, there is a default on the part of the assessee to substantiate the claim of the expenditure. However, the disallowance of 20% made by the AO is arbitrary and excessive. As relying on M/S. RIMJHIM ISPAT LIMITED 2016 (1) TMI 374 - ALLAHABAD HIGH COURT ad hoc disallowance made by the AO @ 20% is restricted to 5%. The AO is directed to re-compute the disallowance by applying 5%. The appeal is partly allowed.

Summary

Issues:
Ad hoc disallowances of expenses made by the Assessing Officer.

Analysis:
The appeal concerns the order of the CIT(A) for the assessment year 2012-13. The assessee challenges the assessment made under sections 147/143(3) of the IT Act, particularly the disallowances of various expenses. The main issue revolves around the ad hoc disallowances made by the Assessing Officer, specifically at 20% for lack of proper bills and vouchers, and for alleged personal use of telephone and vehicle expenses.

The assessee argues that the disallowances are excessive and arbitrary, emphasizing that all expenses were incurred solely for business purposes. Citing relevant case law, the assessee contends that the disallowances are unjustified. On the contrary, the Department asserts that the disallowances were warranted due to unsupported expenses and personal use of certain items. The Department relies on legal precedents to support their position.

Upon review, it is established that the Assessing Officer disallowed 20% of various expenses due to lack of bills and vouchers, as well as personal use of telephone and vehicle expenses. The assessee failed to provide necessary documentation to substantiate the business nature of the expenses. While acknowledging the assessee's failure to produce proper bills and vouchers, the Tribunal deems the 20% disallowance excessive and arbitrary. Referring to a relevant High Court decision, the Tribunal limits the ad hoc disallowance to 5%, directing the Assessing Officer to adjust the disallowance accordingly. Consequently, the appeal is partially allowed, with the disallowance reduced to 5%.

In conclusion, the Tribunal's decision mitigates the ad hoc disallowances imposed by the Assessing Officer, emphasizing the need for proper documentation to support expense claims while ensuring a fair and reasonable disallowance percentage.