The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the ad hoc disallowance made without rejecting books of account was not justified and needed to be deleted. The court observed that when books of account maintained by the assessee having been duly audited have not been rejected by the AO the ad-hoc disallowance made based on surmises is not sustainable.
The appellant, M/s. Merchant Agri Global Private Limited (‘the assessee’) filed an appeal to set aside the impugned order dated 28.02.2023 passed by the National Faceless Appeal Centre(NFAC) on the grounds inter-alia that “Whether on facts and circumstance of the case and in law The CIT(A) has erred in deleting the addition made by the Assessing Officer of Rs. 7,85,54,891/-being 10 per cent out of various expenses.
The assessee’s return of income for the year under consideration declaring total income at Rs.3,22,87,840/- was subjected to scrutiny. Assessing Officer (AO) during the scrutiny proceedings noticed that the assessee has claimed direct expenses to the tune of Rs.78,55,48,913/-. In reply to the explanation called by the AO assessee stated that it is having turnover of Rs.600 crores and there are voluminous vouchers for expenses and it is difficult to upload all the vouchers on the Income Tax Business Application (ITBA) portal.
AO noticed that the assessee has not furnished even the documentary proof for the major expenses claimed under the heads freight, transport, coolie and cartage, loading/unloading charges, godown expenses, other expenses, brokerage/commission on purchases etc. nor has filed ledger in relation to these expenses. So the AO reached the conclusion that the assessee has failed to substantiate the expenses, hence made adhoc disallowance of 10% of the expenses which comes to Rs.7,85,54,891/- and thereby framed the assessment under section 143(3) of the Income Tax Act, 1961 ( ‘the Act’.) On appeal, the CIT(A) confirmed the addition by dismissing the appeal.
It was evident that the AO has made adhoc disallowance of expenses claimed by the assessee to the tune of Rs.78,55,48,913/- @10% of the total expenses. It is also not in dispute that books of assessee are duly audited under section 44 AB of the Act. It is also not in dispute that the AO while making adhoc disallowance has not rejected the books of account.
A division bench of Kuldip Singh (Judicial Member) and S. Rifaur Rahman (Accountant Member) held that when books of account maintained by the assessee having been duly audited have not been rejected by the AO the adhoc disallowance made on the basis of surmises is not sustainable in view of case of Principal Commissioner of Income Tax vs. R.G. Buildwell Engineers Ltd.
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