2013 (11) TMI 815 - AT - Income Tax

Disallowance of expenditure towards electricity and furnace oil - AO disallowed 25% of the expenditure incurred towards electricity and furnace oil in the respective assessment years on the reason that Assessee has not substantiated claim Held that - AO has no basis to disallow the expenditure, particularly, when he was completing assessments based on search & seizure operation. There is no iota of information that Assessee has either inflated or suppressed production - The expenditure is reasonable and payments have been made by way of cheques to various public sector undertakings, which can be verified by the AO, if he intended to do so Decided against the Revenue.

Summary

Issues:
Disallowance of 25% of expenses towards electricity and furnace oil expenditure on ad-hoc basis by the AO.

Analysis:
The appeals were filed by Revenue against the orders of CIT(A)-VII, Hyderabad, regarding the disallowance of 25% of expenses towards electricity and furnace oil expenditure for the assessment years 2005-06 to 2008-09. The Revenue contended that the Assessee failed to furnish evidence for the expenses and that the disallowance should have been sustained. The Assessee, a steel re-rolling products manufacturer, argued that the AO did not provide an opportunity to explain, and no incriminating material was found during a search & seizure operation. The CIT(A) deleted the disallowances made by the AO after examining the facts and submissions. The percentage of expenditure on electricity and furnace oil in relation to turnover was found to be reasonable, and no adverse information was available to support the disallowance.

The CIT(A) emphasized that assessments on ad-hoc disallowance cannot be made solely on legal principles but must also consider facts. The Assessee had paid electricity charges to APCPDCL and APGPCL, and furnace oil was purchased from HPCL and BPCL through account payee cheques. The CIT(A) concluded that there was no basis for the disallowance, especially since payments were traceable and reasonable. The AO had completed assessments based on a search & seizure operation without any evidence of production inflation or suppression by the Assessee. The Revenue failed to provide any substantial support for the AO's order, leading to the dismissal of the appeals.

In summary, the ITAT Hyderabad upheld the CIT(A)'s decision to delete the disallowances of 25% of expenses towards electricity and furnace oil expenditure for the assessment years 2005-06 to 2008-09. The Revenue's appeals were dismissed due to the lack of evidence supporting the AO's disallowance and the reasonable nature of the Assessee's expenditure on essential business costs.