2022 (4) TMI 580 - AT - Income Tax

Disallowance of certain expenses on an ad-hoc basis - Whether AO failed to point out any basis which could justify the respective disallowance so made by him? - HELD THAT - Disallowance of certain expenses on an ad-hoc basis by the Assessing Officer is merely backed by general observations and not on the basis of any material which would support the same. Admittedly, an assessee remains under a statutory obligation to substantiate that his claim for deduction of expenses falls within the four corners of Sec. 37(1) On a perusal of the assessment order, we find that there is no whisper as regards any such material and/or basis which would justify the disallowance of the expenses so carried out by the A.O - ad-hoc disallowance of expenses by the A.O is not backed by any supporting material but is merely guided by general observations on his part. We are unable to comprehend as to on what basis part of the expenses had been disallowed by the A.O, while for the remaining part has been allowed. Apart from that, we find there is no whisper in the body of the assessment order about any such specific expenses which as per the AO could not be verified, or, were not supported by bills or vouchers. In our considered view, such disallowance of expenses on an ad-hoc basis, i.e, de hors any supporting material can by no means be permitted. We find substantial force in the claim of the ld. A.R that devoid of any specific infirmity qua the assessee s claim for deduction of the aforesaid expenditure by the lower authorities, the disallowance of a part of the same in a most arbitrary and a whimsical manner, i.e, on an ad- hoc basis could by no means be held to be justified. We are unable to concur with the disallowance of the expenses in question on an ad hoc basis by the A.O. We, thus, not finding favor with the view taken by the lower authorities set-aside the order of the CIT(A), and vacate the disallowance - Decided in favour of assessee

Summary

Issues:
Appeal against CIT(A) order on ad-hoc disallowances of expenses.

Analysis:
The appeal was filed against the CIT(A) order, which upheld certain ad-hoc disallowances made by the Assessing Officer (A.O) under Sec.143(3) of the Income-tax Act, 1961. The assessee challenged the impugned order on various grounds, primarily contesting the ad-hoc disallowances totaling &8377; 8,30,000. The assessee argued that the A.O's disallowances lacked a proper basis and were arbitrary. The A.O had disallowed expenses without providing specific reasons or supporting material, leading to a whimsical decision. The Authorized Representative (AR) for the assessee contended that the A.O's actions were unjustified and should be vacated. In contrast, the Departmental Representative (DR) supported the A.O's decision, citing the lack of substantiation by the assessee.

Upon review, the Tribunal found that the A.O's disallowances were not supported by specific material or valid reasons. The A.O had failed to demonstrate that the expenses did not meet the criteria under Sec. 37(1) of the Act. The Tribunal emphasized that while an A.O can disallow expenses that do not meet statutory requirements, such actions must be supported by irrefutable evidence. In this case, the ad-hoc disallowances lacked a legal basis and were solely based on general observations. The Tribunal highlighted the necessity for concrete grounds for disallowances, such as expenses not being incurred exclusively for business purposes or being of a capital nature. Referring to precedents, the Tribunal concluded that the arbitrary ad-hoc disallowances were unjustified. Consequently, the Tribunal set aside the CIT(A) order and vacated the &8377; 8,30,000 disallowance. Ground No. 2 of the appeal was allowed based on these findings.

Additionally, the Tribunal dismissed Ground No. 1 and Ground No. 3 to 5 as they were of a general nature and not pursued during the hearing. The appeal of the assessee was allowed based on the detailed analysis and observations made. The judgment was pronounced on March 30, 2022, by the Tribunal comprising Shri Ravish Sood, Judicial Member, and Shri Jamlappa D Battull, Accountant Member. The Authorized Representative for the assessee and the Revenue Representative were Shri Prafulla Pendse and Shri Gitesh Kumar, respectively.