2022 (8) TMI 244 - AT - Income Tax

Disallowance of expenditure incurred for non-business use - HELD THAT - In the case of Seal For Life India (P.) Ltd 2018 (8) TMI 2086 - ITAT AHMEDABAD ITAT held that ad-hoc disallowance could not be made from total travel and conveyance expenses incurred by assessee company on ground that expenses were in respect of use of vehicles by directors of assessee company was personal in nature. In the case of Kushal Virendra Tandon 2021 (9) TMI 288 - ITAT MUMBAI the ITAT held that in absence of specific finding by lower authorities regarding documentary evidence which pointed out that expenditure were not incurred wholly and exclusively for purpose of business or profession, disallowance of expenses in arbitrary manner on an ad-hoc basis has to be set aside. In the case of ACIT v. Vanesa Cosmetics Adhoc 2021 (4) TMI 1191 - ITAT DELHI additions made by Assessing Officer on account of interest expenses on car having element of personal use, tour and travelling expenses and conveyance expenses respectively, without assigning any reason would not be sustainable in eyes of law. In view of the consistent position taken by various Tribunals on the issue of disallowablility of expenses on purely adhoc basis, without the AO having rejected books of accounts, including the jurisdictional Rajkot ITAT, we are hereby allowing the assessee s appeal in respect of the ad-hoc disallowance. - Decided in favour of assessee.

Summary

Issues:
Appeal against disallowance of expenses for A.Y. 2014-15 under the Income Tax Act, 1961.

Analysis:
1. The assessee appealed against the disallowance of expenses amounting to Rs. 2,00,000 by the Commissioner of Income Tax (Appeals) for the assessment year 2014-15. The expenses in question included conveyance charges, fuel expenses for motor car, repairs & maintenance for motor car, telephone charges, and traveling expenses. The Assessing Officer (AO) disallowed the amount as the assessee failed to separate business and non-business expenses adequately, with many expenses lacking proper documentation and being based on self-made vouchers.

2. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the absence of log books for vehicles and telephones, along with self-made vouchers without proper verification, justified the ad-hoc disallowance. The Commissioner distinguished the case from previous years where similar expenses were allowed, emphasizing the lack of proper documentation in the current assessment.

3. The assessee contended that the disallowance was made on an ad-hoc basis without any fault found in the audited books submitted to the AO. The assessee argued that such a disallowance was impermissible by law. The Tribunal noted that the books of the assessee were audited under section 44AB of the Act and not rejected by the AO. Citing precedents, the Tribunal emphasized that specific expenses must be identified as non-business related before disallowance under section 37 could be made.

4. Referring to various Tribunal decisions, the Tribunal highlighted that ad-hoc disallowances without specific defects pointed out by the Assessing Officer were unsustainable. Cases where expenses were not proven to be wholly and exclusively for business purposes did not justify ad-hoc disallowances. The Tribunal also emphasized the importance of rejecting books of accounts before making such disallowances.

5. Considering the consistent stance of various Tribunals on ad-hoc disallowances without book rejection, the Tribunal allowed the assessee's appeal, overturning the ad-hoc disallowance of expenses for the assessment year 2014-15.

In conclusion, the Tribunal ruled in favor of the assessee, emphasizing the necessity of specific findings and proper documentation before making ad-hoc disallowances of expenses under the Income Tax Act, 1961.