2024 (1) TMI 691 - AT - Income Tax

Scope of rectification u/s. 154 - Disallowance of freight charges u/s. 40A(3) and disallowance of prior period expenses - HELD THAT - In original assessment order passed u/s. 143(3) of the Act has disallowed a sum on an ad-hoc basis considering that the assessee has mostly incurred these expenses in cash and has produced only self-made vouchers. We find that the Ld. AO, on examining the Tax Audit Report filed by the assessee, made further disallowance by considering the amount as disallowance u/s. 40A(3) and disallowance of prior period expenses. The contention of the Ld. AR is that these expenses incurred by way of cash and prior period expenses have already been produced before the Ld. AO wherein it is deemed that the Ld. AO after considering the same has made an ad-hoc disallowance of 10% on the total expenses claimed by the assessee. We are of the opinion that when an ad-hoc disallowance of 10% has been made by the Ld. AO, no further specific disallowance can be made under any other provisions of the Act. We therefore find merit in the argument of the Ld. AR on this issue of disallowance u/s. 40A(3) and prior period expenses are beyond the scope of rectification u/s. 154 of the Act when the Ld.AO has thoughtfully considered these expenses and has made an ad-hoc disallowance of 10% while framing the original assessment. We therefore direct the Ld. AO to delete the additions made in the rectification order passed u/s. 154 of the Act. Thus, all the grounds raised by the assessee are allowed.

Summary

Issues involved: Appeal against order of Ld. Commissioner of Income Tax (Appeals) regarding disallowance of expenses under sections 40A(3) and prior period expenses for AY 2016-17.

Summary:
1. The assessee, a partnership firm trading in commodities, filed its return for AY 2016-17. The Ld. AO disallowed certain expenses on ad-hoc basis, leading to a rectification order u/s. 154 of the Act adding amounts for disallowance of freight charges and prior period expenses.

2. The Ld. CIT(A)-NFAC upheld the Ld. AO's order, prompting the assessee to appeal, challenging the scope of rectification u/s. 154 and the justifiability of the additions.

3. The grounds raised by the assessee included contentions that the additions were outside the scope of rectification, not justified on merits, and were not substantiated.

4. The Tribunal considered the arguments of both parties and reviewed the original assessment order and Tax Audit Report. It noted that the Ld. AO had already made an ad-hoc disallowance of 10% of total expenses claimed by the assessee.

5. The Tribunal concluded that when an ad-hoc disallowance had been made, no further specific disallowance could be justified under other provisions of the Act. Therefore, it directed the Ld. AO to delete the additions made in the rectification order.

6. As a result, the appeal of the assessee was allowed, and the additions for disallowance of expenses under sections 40A(3) and prior period expenses were set aside.

Separate Judgement: No separate judgment delivered by the judges.