No Defect in Books Found: ITAT Upholds Deletion of Ad-Hoc 5% Disallowance on Various Business Expenses [Read Order]
The Tribunal held that when the books of accounts were not rejected and the business method had been accepted in previous years, the ad-hoc disallowance of expenses without pointing out specific defects was not justifiable
Disallowance
Disallowance
The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) confirmed the deletion of an ad-hoc disallowance of 5% of various business expenses made under Section 37(1) of the Income Tax Act, 1961.
Samarth Lifestyle Retailing Pvt. Ltd. (assessee), a private limited company engaged in the retail and trading of branded goods, filed return of income (ROI) for the Assessment Year (A.Y.) 2018-19.
During the assessment proceedings, the Assessing Officer (AO) called for documentary evidence for five major expense heads: Alteration Charges, Event Management Expenses, Housekeeping and Security Charges, Processing Fees and Charges for Loan, and Salary.
Despite the assessee submitting voluminous details, ledger accounts, sample invoices, and explanations for making payments in cash (due to the small nature of transactions, like tailor payments), the AO selectively rejected the explanations.
The AO noted the assessee failed to provide contra confirmations, or detailed bank statements and rejected the bulk of the expenses. However, instead of rejecting the books of accounts under Section 145(3), the AO, based on suspicion, disallowed 5% of the total expenses claimed, amounting to ₹78,95,329/-, under Section 37(1) of the Act.
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Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) carefully reviewed the comprehensive documentation submitted by the assessee and noted that all major expenses were verifiable.
The CIT(A) also took into consideration the observations of the Principal Chief Commissioner of Income Tax (Pr. CCIT), Rajasthan, where the High-Pitched Scrutiny Assessment Committee had noted that the AO had not rejected the books of account and that the assessee's method of doing business had been accepted in previous assessment years.
The CIT(A) concluded that since the books were not rejected and the AO failed to point out any specific or factual defect in the expenses, the ad-hoc disallowance of 5% was not justified and deleted the addition.
Aggrieved by the CIT(A)'s order, the department filed an appeal before the ITAT. The Revenue Counsel argued that the CIT(A) relied on material not submitted to the AO without calling for a remand report.
The two-member bench comprising Gagan Goyal (Accountant Member) and Narinder Kumar (Judicial Member) observed that the voluminous details submitted by the assessee to the AO were sufficient to justify the expenses.
Given that the books of accounts were accepted and the method of accounting was consistent and previously accepted, the Tribunal held that the CIT(A) was correct in setting aside the ad-hoc disallowance.
The Tribunal upheld the deletion of the ad-hoc disallowance. In the result, the appeal filed by the department was dismissed.
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