2022 (4) TMI 288 - AT - Income Tax

Ad-hoc disallowance carried out in the assessment without specific findings vis- -vis reasoning - onus to prove - Disallowance of deduction under Section 37(1) - HELD THAT - Neither of the lower tax authorities had pointed any such vouchers, the genuineness of the expenditure therein claimed to have been incurred by the assessee wholly and exclusively for the purpose of its business did not inspire any confidence, nor it was the case of the revenue that any part of the expenditure in question was either found to be bogus or fictitious, nor was found to have not been incurred by the assessee wholly and exclusively for the purpose of his business. Indeed, it showcased an exercise of running around the circle by both the lower tax authorities while dealing with the present case. We neither could come across any provision in the present Income Tax Statute, nor it has been brought to our notice by either parties to dispute, which subscribes vis- -vis authorises the tax authorities to arrive at this logic of subscribing ad-hoc disallowances. Evidently, there has been no clear findings as to number of vouchers requiring denial of allowances with the amount of expenditure and nature of defects therein or therewith, moreover department could not bring out any deprecative material on record to substantiate its conclusion as logical Allowability or disallowance of any individual head of expenditure debited to P L account and claimed in the return of income filed by the assessee, unless put to aforesaid litmus test as envisaged in section 37(1) should not be arrived at. Where any expenditure is debited to P L account and claimed in the return of income as deductible, then the primary onus is undoubtedly casted upon the claimant assessee to vindicate that, each transaction falling within a particular head of expenditure foretaste litmus test, duly supported by genuine and satisfactory proof for short GSP , accompanied by reasonable explanation. Consequently, during course of assessment or reassessment proceedings, the burden of proof of deductibility of expense in relation to queried transaction stands discharged upon the submission of GSP accompanied by relevant voucher and reasonable explanation when called for. Once the assessee is absolved in aforesaid terms, the onus is then shifted on revenue to prove negative litmus test, deprecating the GSP and explanation tendered by the assessee by clear findings on record. More precisely such exercise shall require before arriving at percentile / percentage to be applied for each of the expense (head of expenditure) that disqualifies for allowance as non-deductible and in the absence of any such logic conclusion based upon such exercise, the AO is precluded from making any disallowance merely on surmise conjecture. Consequently, in the instant case, the Ld AO blatantly ignored the period of operation while comparing the figures of present year with that of earlier year and moreover failed to place any deprecative material qua rationale negativizing litmus test, hence is precluded from making any disallowance on surmise or conjecture and this aforesaid view is fortified by the judgment of the Hon'ble High Court of Madras in V.C. Arunai Vadivelan 2021 (2) TMI 501 - MADRAS HIGH COURT - Thus direct Ld AO to delete the ad-hoc disallowance in its entirety and allow the ground/s raised by assessee.

Summary

Issues:
Challenge to ad-hoc disallowance without specific findings or reasoning.

Analysis:
The appeal challenges the legality of an ad-hoc disallowance made in the assessment without specific findings or reasoning. The appellant, a resident individual and proprietor, filed the return of income for the AY 2012-2013, which was selected for scrutiny. The scrutiny assessment resulted in a total income of ?31,07,760, with an ad-hoc addition of ?1,70,000 for disproportionate increase in freight charges. The appellant appealed to the CIT(A), who upheld the disallowance without detailed reasoning. The appellant then appealed to the ITAT Raipur.

Upon review, it was observed that the increase in freight charges was disproportionate compared to the turnover. The AO disallowed ?1,70,000 due to incomplete information and self-made vouchers. The CIT(A) confirmed this disallowance without proper justification. The appellant argued that all expenses were valid under section 37(1) of the Act and the disallowance was arbitrary. The ITAT noted that no specific defects in the vouchers were pointed out by the tax authorities.

The ITAT emphasized that ad-hoc disallowances must be supported by clear findings and rationale. The provisions of section 37(1) allow for deduction of expenses if they meet certain conditions. The burden of proof lies with the assessee to substantiate the claim with genuine proof. The ITAT cited precedents to support the assessee's burden of proof.

The ITAT found that the AO's disallowance lacked a logical basis and failed to provide specific reasons for disallowance. The ITAT referred to a judgment from the High Court of Madras to emphasize the need for concrete evidence before disallowing expenses. Consequently, the ITAT directed the AO to delete the ad-hoc disallowance entirely and allowed the grounds raised by the appellant.

In conclusion, the ITAT allowed the appeal, setting aside the CIT(A)'s order and directing the AO to delete the ad-hoc disallowance. The decision was made without any cost implications.