2024 (8) TMI 1013 - AT - Income Tax

Disallowance of expenditure incurred for earning the income under section 57(iii) - HELD THAT - AO in the assessment order has disallowed the expenditure claimed on ad-hoc basis. AO nowhere challenged the genuineness of the expenditure. Rather in the assessment order, AO had mentioned that Bills, Vouchers were submitted. It is an admitted fact that expenditure has been claimed u/s 57(iii) of the Act. Thus, as per section 57(iii), any expenditure which has been incurred wholly and exclusively for earning income and which is not capital expenditure is an allowable deduction. In this case, it is not the case of the AO that the expenditure was capital expenditure. Thus, the only thing one needs to verify is that whether it was incurred wholly and exclusively for the purpose of earning income. Admittedly, assessee had earned income from dispensing medicines. We have perused the list of expenditure submitted by the ld.AR and apparently, we are convinced that it was incurred in relation to income earned from dispensing medicines. The AO has also not challenged genuineness of the expenditure. The AO has not doubted that expenditure was not incurred for earning income. As relying on PETROLEUM SPORTS PROMOTION BOARD 2014 (3) TMI 298 - DELHI HIGH COURT we are of the opinion that AO had no jurisdiction to make the ad-hoc disallowance of 50% expenditure without pointing out any defect in the Bills, Vouchers or Ledgers pertaining to the expenditure - we direct the AO to delete the addition made - Accordingly, Ground No. 1 of the assessee is allowed.

Summary

Issues:
- Disallowance of expenditure claimed by the assessee under section 57(iii) of the Income Tax Act, 1961
- Jurisdiction of the Assessing Officer in making ad-hoc disallowance without pointing out any defect in the bills, vouchers, or ledgers pertaining to the expenditure

Analysis:

Issue 1: Disallowance of Expenditure
The appeal was filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeal) regarding the disallowance of Rs. 53,56,317 being 50% of the expenditure claimed. The assessee, a charitable trust, explained that the expenditure was incurred for charitable healthcare facilities, mainly from the cost of medicines dispensed. The Assessing Officer disallowed the expenditure as the return was filed in ITR-5 instead of ITR-7 and claimed deduction under the wrong section. The Ld.CIT(A) upheld the disallowance, leading to the appeal before the Tribunal.

Issue 2: Jurisdiction of the Assessing Officer
The Tribunal found that the Assessing Officer disallowed the expenditure on an ad-hoc basis without challenging the genuineness of the expenditure. The expenditure was claimed under section 57(iii) of the Act, which allows deductions for expenses incurred wholly and exclusively for earning income. The Tribunal noted that the expenditure was related to the income earned from dispensing medicines and was not capital expenditure. Referring to a decision of the Hon'ble Delhi High Court, the Tribunal held that the AO had no jurisdiction to make the ad-hoc disallowance without pointing out any defects in the bills or vouchers. Consequently, the Tribunal directed the Assessing Officer to delete the addition made, allowing Ground No. 1 of the assessee.

In conclusion, the Tribunal dismissed the appeal and ordered the deletion of the disallowed expenditure, emphasizing the need for Assessing Officers to establish defects in expenditure documentation before making ad-hoc disallowances. Ground No. 2, being general in nature, did not require adjudication.