Conclusion without Reasoning Opens for Arbitrariness: ITAT deletes ₹1.06 Cr Disallowance of Repairs & Sundry Expenses in Pyung HWA India Case [Read Order]

The Income Tax Appellate Tribunal (ITAT), Chennai bench, has ruled that suspicion unsupported by evidence cannot be a valid ground for disallowance of business expenditure.

The Tribunal was examining additions made on account of Repairs and Maintenance and Sundry Expenses, where the Assessing Officer had resorted to ad hoc disallowances despite the assessee’s audited books and financial statements being on record.

The appellant, Pyung HWA India Private Limited, a manufacturer of automobile parts based in Kancheepuram, Tamil Nadu, filed its returns of income for the Assessment Years 2016-17 and 2017-18 declaring nil income after setting off past losses.

During scrutiny, the Assessing Officer (AO) noted a 5% rise in sales but observed that Repairs and Maintenance expenses had disproportionately increased. Consequently, disallowances of ₹83,00,088 under Repairs and Maintenance and ₹23,12,388 under Sundry Expenses were made on an ad hoc basis.

The Commissioner of Income Tax (Appeals), NFAC, New Delhi [CIT(A)], had earlier upheld the disallowances, reasoning that a disproportionate rise in Repairs and Maintenance and Sundry Expenses indicated that the assessee ought to have replaced machinery through capital expenditure rather than continue incurring high recurring expenses.

The appellant, represented by Chikkars Srikanth, Advocate, argued that the disallowances were arbitrary and unsupported by evidence. It was submitted that the expenses were incurred wholly and exclusively for business purposes and were necessitated by the wear and tear of machinery. It was further submitted that the books of accounts, duly audited and furnished along with audit reports, were neither rejected nor found defective.

The Revenue Authorities, represented by Mr. ARV Sreenivasan, CIT-DR, supported the findings of the AO and the CIT(A), contending that a prudent businessman would have opted for capital replacement of machinery instead of incurring disproportionately high Repairs and Maintenance and Sundry Expenses.

The Bench comprising of George George K, Vice President, and S.R. Raghunatha, Accountant Member, ruled in favor of the appellant. The Tribunal observed that neither the AO nor the CIT(A) had rejected the books of accounts or demonstrated that the expenses were not genuine.

The tribunal observed that “No steps have been taken by the AO to show that the impugned expenses are not genuine. It is a settled legal position that it is not for the department to dictate ‘what amount of expenditure’ the assessee should incur as reasonable for its business. If in the opinion of the AO an expenditure is high, then he should have called the assessee for further details and explanations before drawing any adverse inference, rather than making a disallowance on adhoc basis merely on presumption.”

“The AO was not justified in estimating the impugned disallowance to be made as apart from general suspicion there is no material or fact on record. Further, the Courts have repeatedly held that the reasoning for conclusion is imperative as without reasoning the conclusion arrived at is open to the allegations of arbitrariness which cannot be upheld”, said the bench.

It was noted that suspicion unsupported by evidence cannot form the basis for disallowance. The disallowances totaling ₹1,06,12,476 were deleted, and both appeals of the assessee for AYs 2016-17 and 2017-18 were allowed. Accordingly, the appeals were allowed.

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