Nature Of Business Alone Is No Justification For Disallowance On Ad Hoc Basis, Without Pointing Any Deficiency In Books: New Delhi ITAT

On finding that without pointing out anything specific defect on wholesome basis, certain part of the expenses has been discarded on estimate basis, the New Delhi ITAT deleted the addition made by AO.

The Bench comprising Anubhav Sharma (Judicial Member) and Shamim Yahya (Accountant Member) observed that, “However, Tax Authorities were supposed to consider the nature of the business of the assessee being in distribution business of very competitive project like mobile phones through distributors in the States of Bihar, Jharkhand and Uttrakhand and on that account if certain expenditures, on day to day basis for running the distributorship and employees network were not in proper vouchers formats or signed, that alone cannot be a justification for disallowance on ad hoc basis to extent of 30%.” (Para 10)

As per the brief facts of the case, the assessee's return of income at loss was selected for scrutiny. The AO was not satisfied with the genuineness of the expenditure on account of business expenses. During assessment proceeding, the assessee was asked to furnished ledgers along with supportive bills & vouchers of expenses. However, the assessee had not furnished ledgers & all supporting bills & vouchers of expense incurred towards the expenses claimed in Profit & Loss Account. It appeared that the expenditure incurred by the assessee during the course of business operation was excessive and unreasonable and was liable to be disallowed. Hence on finding, expenses were unreasonable, excessive, few are personal in nature and wholly and exclusively was not utilized for the business purpose as per section 37(1) and was hereby added back to the total income of the assessee.

The CIT(A) upheld the addition made by AO after observing that the expenses claimed by the assessee under various heads are not adequately supported by bills and vouchers.

The Bench pointed that tax authorities make it apparent that on observing that the expenses have been booked under various heads are not supported with proper bills and vouchers and vouchers are not signed by receivers, bills are not in proper format, ad hoc disallowance was made.

The Bench noted that the tax authorities without actually pointing out any deficiency in the books of account have inferred that the expenses are excessive and unreasonable so as to disallow to the extent of 30%.

The Bench observed that when the scrutiny was taken up, for analysing low income in comparison to high loans etc. and high revenue from operations, but except for observing that there was non-maintenance of proper bills and vouchers to disallow expenses @ 30% on ad hoc basis, no other conclusion was drawn with regard to profit calculation reflected in the financials.

Therefore, on finding the order passed by AO as unsustainable, the ITAT allowed the assessee's appeal.

Counsel for Appellant/ Taxpayer: Mashendra Kumar Mashi

Counsel for Respondent/ Department: Sapna Bhatia

Case Title: Zheng Yuan Mobiles Pvt. Ltd. verses DCIT

Case Number: ITA No. 864/DEL/2023

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