2017 (9) TMI 428 - AT - Income Tax

Adhoc disallowance of 20% - absence of verifiable vouchers - Conveyance, Telephone and Sundry Expenses - reasonable estimate - As assessee is unable to explain element of personal nature in above expenses AO disallowed 1/5th of the same and also confirmed by CIT(A). Held that - 20% of disallowance on these type of expenses is on higher side and accordingly, we restricted the disallowance at 10%. - Assessee s appeal is partly allowed. Disallowing interest paid to parties u/s 40A(2)(B) - charging Notional Interest @12% - CIT(A) confirming and enhancing disallowance @18% made by AO - Held that - CIT(A) has not given any reason for enhancing the income and there is no indication as to how he has applied the provision of section 40A(2)(b) of the Act.- Decision in the case of CIT vs. Indo Saudi Services (Travel) (P.) Ltd. 2008 (8) TMI 208 - BOMBAY HIGH COURT followed - Additions deleted - Decided in favor of assessee.

Summary

Issues:
1. Adhoc disallowance of expenses without verifiable vouchers.
2. Disallowance of interest paid to parties under section 40A(2)(B) and enhancement of assessment.

Analysis:
1. The first issue pertains to the adhoc disallowance of expenses by the AO and confirmed by CIT(A) due to the absence of verifiable vouchers. The assessee contested this disallowance, arguing for a reasonable estimate. The Tribunal found the 20% disallowance excessive and reduced it to 10%, noting the lack of personal element explanation. The appeal on this issue was partly allowed.

2. The second issue involves the disallowance of interest paid to parties under section 40A(2)(B) by the AO and its enhancement by CIT(A). The AO charged notional interest on interest-free advances, leading to an addition to the total income of the assessee. CIT(A) upheld and increased this disallowance, citing higher interest rates paid to family members. However, the Tribunal observed that the interest could only be disallowed, not charged, and found the enhancement arbitrary. Referring to a Bombay High Court decision, the Tribunal ruled in favor of the assessee, deleting the addition and partly allowing the appeal.

In conclusion, the Tribunal addressed the issues of adhoc disallowance of expenses and interest disallowance under section 40A(2)(B) in the judgment. The decision provided relief to the assessee by reducing the disallowance percentage on expenses and deleting the addition of notional interest, following the legal principles established in relevant precedents.