Failure Of AO To Conduct Enquiry, Summarily Disallowing Expenses Was Mechanically Endorsed By CIT(A) & ITAT: Bombay HC Quashes Assessment
Observing that a mechanical approach & tactically equitable approach of convenience cannot be endorsed, the Bombay High Court quashes the ITAT's order, upholding an ad-hoc disallowance of 10% of expenses alleging as bogus purchases despite returning a firm finding that the AO's order was untenable, The High Court outlined that once a categorical observation is rendered by...
Observing that a mechanical approach & tactically equitable approach of convenience cannot be endorsed, the Bombay High Court quashes the ITAT's order, upholding an ad-hoc disallowance of 10% of expenses alleging as bogus purchases despite returning a firm finding that the AO's order was untenable,
The High Court outlined that once a categorical observation is rendered by the last fact-finding authority i.e. the ITAT, then the AO's order that was not based on any cogent & convincing evidence, would be rendered judicially untenable.
The Division Bench comprising Justice G.S. Kulkarni and Justice Somasekhar Sundaresan observed that where AO has not conducted enquiry and CIT(A) has effected summary measure of disallowing 10% of expenses and ITAT also endorse same view as equitable middle ground, such approach cannot be accepted.
Facts of the case
The assessee company had approached the High Court challenging the action of the ITAT in upholding the findings of CIT(A), by disallowing 10% of the total purchases alleged to have been bogus, and adding such sum to the income of the assessee for the relevant A.Ys.
The assessee claimed that all the purchases were genuine and must be allowed as legitimate expenses, whereas the Revenue contended that all the expenses ought to have been treated as bogus and that the ITAT was wrong in disallowing only 10% of such expenses.
Observations of the High Court
The Bench emphasized that the Tribunal's observation that the assessee's failure to substantiate the alleged purchases with proper documentation/concerned parties, and draw opinion that the goods could have been purchased in the grey market, was simply an easy approach to affirm the CIT(A)'s order.
The Bench noted that the ITAT endorsed the CIT(A)'s acceptance of the indirect tax compliance, and consequently rendered a firm finding that there is no convincing evidence in the AO's order.
The Bench opined that once there is a quasi-judicial finding that there is no cogent and convincing evidence, it would be wrong to expect that the assessee would still have to prove its innocence.
The Tribunal's analysis is totally absent in the impugned order on why 10% disallowance was plausible, reasonable, and necessary, added the Bench.
The Bench observed that not only the AO has failed to conduct the necessary exercise expected of him, but the CIT(A) has effected a summary measure of disallowing 10% expenses, which has been endorsed by the ITAT.
The Bench asserted that where the counter parties in these purchases could not be produced in later years, then simply adopting a 10% disallowance would be arbitrary and unreasonable.
Thus, the High Court concluded that the Tribunal's affirmation of 10% disallowance was repugnant, when it had rendered a firm finding that the AO's order was untenable.
Thus, the High Court allowed Assessee's appeals.
Counsel for Appellant/ Assessee: Advocate N. M. Porwal
Counsel for Respondent/ Revenue: Advocate Swapna Gokhale
Case Title: Ashok Kumar Rungta vs. ITO
Case Number: ITA No. 1753 of 2018