2019 (3) TMI 1294 - AT - Income Tax

10% adhoc disallowance - bogus expenditure - CIT(A) sent the additional evidence for verification to A.O and noted that the A.O. has not responded then he proceeded to take adverse reference against the assessee - HELD THAT - We find that the CIT(A) has passed a bizarre order. When the A.O. has not responded to his remand, how adverse inference can be taken against the assessee is beyond comprehension. Hence, in the facts and circumstances of the case, in the interest of justice, we remit this issue to the file of the A.O. The A.O. is directed to consider the issue afresh in light of the additional evidence submitted by the assessee. - Appeal by the assessee is allowed for statistical purpose.

Summary

Issues:
Adhoc disallowance of expenses made by the AO without proper supporting documents.

Analysis:
The appeal by the assessee was against the order of the Commissioner of Income Tax (Appeals) confirming a 10% adhoc disallowance made by the Deputy Commissioner of Income Tax in relation to various expenses claimed by the assessee. The AO disallowed 10% of the total expenses amounting to Rs. 3,19,63,456 due to lack of proper bills/vouchers. The assessee contended that the expenses were wholly and exclusively incurred for business activities, and the statutory and tax auditors did not raise any concerns except for certain expenses reported in the audited accounts. The AO, however, made the disallowance based on the lack of supporting documents.

Before the CIT(A), the assessee provided detailed submissions explaining the nature of its business operations, revenue earned, and expenses claimed. The assessee highlighted that certain expenses were not adequately supported, but the AO's adhoc disallowance was unjustified. The CIT(A) requested the AO to verify additional evidence submitted by the assessee, but the AO failed to respond or provide a remand report. Despite this, the CIT(A) dismissed the appeal, stating that the appellant failed to substantiate the expenses incurred, leading to the disallowance.

The ITAT Mumbai found the CIT(A)'s decision perplexing as the AO did not respond to the remand request, yet adverse inference was drawn against the assessee. In the interest of justice, the ITAT remitted the issue back to the AO for fresh consideration in light of the additional evidence submitted by the assessee. Consequently, the appeal by the assessee was allowed for statistical purposes, emphasizing the need for a proper examination of the supporting documents before making adhoc disallowances.