In a recent decision, the Income Tax Appellate Tribunal ( ITAT ), Delhi Bench, remanded a case involving the assessee, Virtual Global Education Ltd. back to the Assessing Officer ( AO ), after finding that the income tax addition made by the department was based on guesswork and lacked sufficient justification. The case, related to the assessment year 2015-16, involves the disallowance of INR 3.74 crore by the AO, who made an ad hoc addition of 30% of the total expenses claimed by the assessee without substantial evidence.
The case began when the assessee, Virtual Global Education Ltd. filed its return of income electronically, declaring an income of INR 32.23 lakh. The case was selected for scrutiny under Section 143(3) of the Income Tax Act, 1961 (ITA). During the assessment proceedings, the AO raised concerns over the assessee-company’s inability to furnish complete books of accounts and supporting vouchers for various expenses. Despite several opportunities given to the assessee to provide the necessary documents, no satisfactory explanation was offered. As a result, the AO disallowed 30% of the total expenses, which amounted to INR 12.46 crore, on an ad hoc basis, citing the absence of proper evidence and verification.
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The assessee, aggrieved by this decision, filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] through the National Faceless Appeal Centre (NFAC), Delhi. However, the CIT(A) upheld the AO’s decision, stating that the assessee had not complied with the demands for producing adequate evidence, such as ledgers, bank statements, and vouchers, to substantiate its claims. The CIT(A) also agreed that most of the payments were made in cash, and the company had failed to explain cash withdrawals and their purposes. Therefore, the addition made by the AO was confirmed.
Aggrieved with the outcome, the assessee escalated the matter to the ITAT.
Before the tribunal, the representative for the assessee argued that the lower authorities had not given the company sufficient opportunity to present its case. It was claimed that if given another chance, the assessee-company could provide the necessary documentary evidence to justify the expenses. The representative also contended that the addition made by the AO was arbitrary and based on guesswork rather than any concrete findings. The failure of the AO to give specific reasons for the disallowance was highlighted, stressing that an ad hoc addition could not be sustained without proper evidence.
On the other hand, the Senior Departmental Representative for the Revenue defended the decisions of the AO and CIT(A), stating that the assessee had multiple chances to provide documentation but had failed to comply. He supported the conclusion that the disallowance was justified due to the non-verifiability of the expenses claimed by the company.
After reviewing the arguments and the material on record, the ITAT bench, consisting of Judicial Member Shri Kul Bharat and Accountant Member Shri Avdhesh Kumar Mishra, noted that the additions made by the AO were purely on an ad hoc basis. The tribunal observed that the AO’s actions were based on assumptions and lacked concrete justification. It further noted that the assessee had been given insufficient opportunity to present its case before the lower authorities.
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In its order, the ITAT stressed that ad hoc additions based on guesswork and surmises could not be sustained, especially when the assessee is willing to furnish supporting evidence. The tribunal observed the need to uphold the principles of natural justice and stated that the assessee-company should be given a fair chance to provide the necessary documents to prove its case. As a result, the ITAT set aside the orders of the lower authorities and remanded the case back to the AO for fresh assessment.
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