No justification for disallowance on Ad Hoc basis, without pointing out any deficiency in books in nature of business: ITAT [Read Order]

In a significant ruling the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) observed that no justification for disallowance on Ad Hoc basis, without pointing out any deficiency in books in nature of business

The counsel for the assessee Mashendra Kumar Mashi raised concerns regarding the oversight by the tax authorities regarding expenditures aligning with the Auditor’s financial records. The counsel  emphasized that all relevant documents, including ledgers, bills, and vouchers, were presented before the authorities, without any specific instance highlighted by the Assessing Officer (AO) indicating an expenditure not related to business activities.

The counsel further argued against the validity of using such cash expenses as a basis for arbitrary disallowances, asserting that they primarily encompassed day-to-day expenses such as food. Furthermore, it was noted that the Auditor’s report had already taken proactive measures by self-initiating disallowances of these cash expenses, which had not been duly acknowledged. Additionally, the AR clarified that advances to staff were designated for staff-related expenses and were adjusted within the expenditure category upon bill submission.

The counsel for the revenue Sapna Bhatia contending that the assessee had not adequately substantiated expenses that appeared to be more aligned with personal expenditure, such as food and beverages.

The Tax authorities have made a determination regarding the excessive and unreasonable nature of expenses, resulting in a 30% disallowance, without explicitly identifying any deficiencies in the books of accounts. Notably, the order issued by the tax authorities does not indicate whether there were any other concerns regarding the financials of the assessee.

The assessee has reported revenue from operations as of March 31, 2017, totaling Rs. 576,98,65,384, a figure that has been accepted by the Revenue. Even during the scrutiny process, while analyzing the apparent disparity between low income and high loans, coupled with high revenue from operations, the tax authorities did not draw any other conclusions aside from noting the lack of proper maintenance of bills and vouchers, which led to the ad hoc 30% disallowance of expenses.

The orders issued by the tax authorities reveal that upon noticing that expenses were recorded under various categories without proper supporting bills and vouchers, and where vouchers lacked receiver signatures and bills were not in the correct format, ad hoc disallowances were imposed.

However, it was imperative to note that the tax authorities should have taken into consideration the nature of the assessee's business, which involves the distribution of highly competitive products such as mobile phones through distributors in the states of Bihar, Jharkhand, and Uttarakhand. In light of this, if certain expenditures, necessary for the day-to-day operations of running the distributorship and managing the employee network, were not documented in the prescribed voucher formats or lacked receiver signatures, this alone cannot justify an ad hoc disallowance of 30%.

The two member bench of the tribunal comprising Shamim Yahya (Accountant member) and Anubhav Sharma (Judicial member) concluded that there was no evidence to suggest that the assessee was presenting any new information that had not been previously available to the tax authorities. What had been established was that, without identifying any specific defects, a portion of the expenses was dismissed on an estimated basis. Such a practice was not legally sustainable

Accordingly the bench allowed the grounds raised by the assessee and the appeal of the assessee was allowed. Disallowance made by the learned AO stand deleted.

To Read the full text of the Order CLICK HERE

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