2025 (2) TMI 86 - AT - Income Tax

Unverifiable purchases - Disallowance on account of direct expenses - disallowance confirmed by the CIT(A) under the head vehicle expenses festival expense travelling expenditure telephone expenses and conveyance expenses - HELD THAT - As submitted that there are expenses incurred with the running of the business and no personal element can be attributed to these expenses and since these expenses of conveyance and small repairs have been self vouched we find that 1/10th of the telephone expenses and conveyance expenses may be treated as personal expenses and so far regarding the festival expenses are concerned are incurred for performing Pooja at office premises etc may be taken and allowed as business expenditure and no disallowance required. There is no any evidence on record of travelling expenses so deserves to be deleted. Regarding the TDS issued the learned AO is directed to reconsider the TDS mismatch and due credit for the tax paid accordingly. Appeal of the assessee is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the estimated disallowance of Rs. 3,00,000/- on account of alleged unverifiable purchases was justified.

2. Whether the estimated disallowance of Rs. 1,00,000/- on account of direct expenses was appropriate.

3. Whether the aggregate disallowance of Rs. 5,18,418/- under various expense heads was warranted, including the applicability of Section 38(2) of the Income Tax Act regarding depreciation.

4. Whether the non-allowance of credit for TDS amounting to Rs. 1,09,815/- was correct.

5. Whether the non-allowance of credit for prepaid taxes amounting to Rs. 81,329/- was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Estimated Disallowance of Rs. 3,00,000/- on Unverifiable Purchases

Legal Framework and Precedents: The disallowance was based on the inability to verify certain purchases due to missing or self-generated vouchers. The relevant legal framework involves the assessment of whether expenses are adequately documented.

Court's Interpretation and Reasoning: The Court noted that the Assessing Officer (AO) did not specify which vouchers were missing or self-generated, leading to a lack of clarity in the disallowance.

Key Evidence and Findings: The appellant argued that the accounts were audited without adverse remarks, suggesting proper documentation. The AO's failure to identify specific missing vouchers was a critical oversight.

Application of Law to Facts: The Court found that the AO's lump-sum disallowance lacked specificity and was not supported by clear evidence.

Treatment of Competing Arguments: The appellant's argument that the disallowance was arbitrary was accepted, as the AO did not provide detailed evidence.

Conclusions: The Court reduced the disallowance from Rs. 3,00,000/- to Rs. 1,00,000/- due to the lack of specific evidence of unverifiable purchases.

2. Estimated Disallowance of Rs. 1,00,000/- on Direct Expenses

Legal Framework and Precedents: Similar to the first issue, this involved the verification of expenses related to Tennis Court maintenance.

Court's Interpretation and Reasoning: The Court observed that the AO's disallowance was based on vague observations without specific discrepancies identified.

Key Evidence and Findings: The appellant's accounts were audited without adverse findings, indicating proper documentation.

Application of Law to Facts: The Court found the disallowance lacked a basis due to the absence of specific evidence.

Treatment of Competing Arguments: The appellant's argument that the disallowance was unsupported was upheld.

Conclusions: The Court reduced the disallowance to Rs. 1,00,000/- due to insufficient evidence.

3. Aggregate Disallowance of Rs. 5,18,418/- under Various Expense Heads

Legal Framework and Precedents: The disallowance covered vehicle, festival, traveling, telephone, and conveyance expenses, with a reference to Section 38(2) regarding depreciation.

Court's Interpretation and Reasoning: The Court found that personal elements could not be attributed to business expenses without evidence.

Key Evidence and Findings: The appellant contended that these were business expenses, and the AO did not provide evidence of personal use.

Application of Law to Facts: The Court concluded that 1/10th of telephone and conveyance expenses could be treated as personal, but no disallowance was needed for festival expenses.

Treatment of Competing Arguments: The appellant's argument that these were legitimate business expenses was largely accepted.

Conclusions: The Court allowed most expenses as business-related, with minimal adjustments for personal use.

4. Non-Allowance of Credit for TDS of Rs. 1,09,815/-

Legal Framework and Precedents: The issue involved the credit for Tax Deducted at Source (TDS).

Court's Interpretation and Reasoning: The Court directed the AO to reconsider the TDS mismatch and provide due credit.

Key Evidence and Findings: The appellant claimed entitlement to TDS credit, which the AO initially denied.

Application of Law to Facts: The Court found that the AO should verify and correct any TDS mismatch.

Treatment of Competing Arguments: The appellant's claim for TDS credit was upheld.

Conclusions: The Court directed the AO to allow the TDS credit after verification.

5. Non-Allowance of Credit for Prepaid Taxes of Rs. 81,329/-

Legal Framework and Precedents: This issue concerned the credit for prepaid taxes.

Court's Interpretation and Reasoning: The Court did not specifically address this issue in detail, but it was implied that the AO should verify and allow the credit.

Key Evidence and Findings: The appellant claimed entitlement to prepaid tax credit.

Application of Law to Facts: The Court's decision implied that the AO should verify and correct any discrepancies.

Treatment of Competing Arguments: The appellant's claim for prepaid tax credit was implicitly supported.

Conclusions: The Court implied that the AO should allow the credit after verification.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The lump-sum disallowance without pointing out exact amount cannot be appreciated."

Core Principles Established: Disallowances must be based on specific evidence, and vague observations do not justify arbitrary disallowances. Proper documentation and audit reports without adverse remarks support the taxpayer's claims.

Final Determinations on Each Issue: The Court reduced the disallowances for unverifiable purchases and direct expenses due to lack of specific evidence. It allowed most business expenses as legitimate, with minor adjustments for personal use. The Court directed the AO to verify and correct TDS and prepaid tax credits.