Disallowance Based on Comparative Analysis Unsustainable Without Identifying Defects in Expense Claims: ITAT Deletes ₹25.48 Lakh Additions [Read Order]

The Income Tax Appellate Tribunal (ITAT) Mumbai Bench deleted ad-hoc additions amounting to ₹25.48 lakh made and held that disallowance of expenditure merely on comparative analysis without identifying any defects in supporting documents was unsustainable in law.

The assessee, Maiden Marketing India Pvt. Ltd. engaged in providing advertising agency services had filed its return for Assessment Year 2023-24 declaring a loss of ₹1.30 crore. During scrutiny assessment proceedings, the AssessingOfficer (AO) observed that although the company’s turnover had declined by 23.93% certain expenses had increased substantially compared to the previous year.

Based on this comparative analysis, the AO issued a show-cause notice proposing disallowance of increased expenditure. Thereafter, additions were made towards workmen and staff welfare expenses, travelling expenses and professional charges aggregating to ₹25.48 lakh.

The assessee explained that the rise in expenditure was attributable to post-COVID business recovery, resumption of office operations, expansion into new business segments, participation in industry events, increase in employee strength, statutory compliance requirements and Internal Financial Controls (IFC) audit obligations.

Detailed ledgers, comparative statements, event details, employee travel records and supporting documents were also furnished before the tax authorities.

However, the AO rejected the explanation and proceeded with ad-hoc disallowances which were later confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] on the ground that the additions were based on objective examination of facts, comparative analysis, and reasonable estimation.”

Further, the assessee stated that neither the AO nor the CIT(A) had disputed the genuineness of the expenditure or pointed out any specific defect in the documentary evidence produced. It was argued that the additions were purely estimate-based and lacked any concrete finding of inflation or bogus expenditure.

The Tribunal observed that the assessee had furnished detailed explanations along with supporting documents to justify the increase in expenditure during the relevant assessment year. The bench noted that the tax authorities failed to identify any infirmity in the material placed on record.

The bench comprising Rahul Chaudhary and Vikram Singh Yadav held that disallowances made solely on comparative analysis of expenditure trends and turnover, without disproving the genuineness of the claims, could not be sustained.

Accordingly, the tribunal deleted the additions relating to staff welfare expenses, travelling expenses and professional fees and allowed the appeal in favour of the assessee.

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