Selective Comparison of Expense Heads across AYs Cannot Justify Disallowance without Evidence: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that an Assessing Officer cannot make ad hoc disallowances merely by selectively comparing higher expenses under certain heads across assessment years.

The bench observed that such disallowances were without pointing out defects in supporting documents or proving that the expenditure is non-genuine or not incurred for business purposes.

Wizcraft Entertainment Agency Private Limited, a corporate entity engaged in organizing and executing entertainment events, concerts and theatrical productions, filed a writ petition for Assessment Year 2022-23, challenging the disallowance made by the income tax department.

The assessee filed its return declaring income of over ₹23 crore. During scrutiny assessment, the Assessing Officer observed that against gross receipts of about ₹248.67 crore, the assessee had claimed expenses of about ₹238 crore.

The officer compared these figures with the subsequent assessment year, where receipts were slightly lower but certain expense heads such as advertisement, professional fees, media purchase, leave travel allowance and bonus appeared lower.

On this selective comparison, the AO concluded that expenses under these heads were “substantially higher” in the relevant year and proceeded to disallow 10% of such expenses, resulting in an addition of about ₹15.77 crore.

Before the first appellate authority, the assessee’s counsel Siddharth Srivastava, CA challenged the disallowance as purely ad hoc and unsupported by evidence.

The CIT(A) accepted the assessee’s contention and deleted the addition, holding that the AO had not demonstrated any specific defect in the books of account or supporting vouchers.

The Revenue carried the matter to the ITAT, arguing that the assessee had failed to justify the higher expenditure and that the CIT(A).

The Tribunal noted that while some heads showed higher spending in the impugned year, several other major heads such as salary and wages, coordination charges, artiste fees, and venue charges showed substantial increases in the subsequent year.

The order noted rises such as nearly 180% in salary and wages, over 90% in coordination charges, and more than 150% in venue charges in the following year. This was ignored by the AO.

This, according to the bench of Arun Khodpia (Accountant member) and Saktijit Dey (Judicial Member), showed that the comparison exercise was one-sided and not a fair evaluation of the full financial picture.

The Tribunal noted that the AO found no defects in the assessee’s supporting documents and did not prove the expenses were bogus or non-business. It held that higher spending alone cannot justify a percentage-based disallowance without evidence, and therefore upheld deletion of the ₹15.77 crore ad hoc addition.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates