Unverified and Excessive Operating Expenses not Allowable u/s 37 of Income Tax Act: ITAT Reduces Disallowance from 10% to 2% [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, reduced the disallowance from 10% to 2%, on finding that operating expenses is unverified and excessive and hence not allowable under Section 37 on the Income Tax Act, 1961.

The aforesaid observation was made by the Delhi ITAT, when appeals were filed before it by the assessee as well as the revenue, as against the order of the CIT(A), New Delhi, for AY 2013-14.

The sole ground of the assessee ‘s appeal being that the CIT(A) upholding the ad hoc disallowance of Rs. 2,78,44,608/- being 2% of the operating expenses incurred during the year under consideration, is unverified, unreasonable and excessive, hence, not allowable under the provisions of Section 37(1) of the Income Tax Act, it was submitted by Sh. Deepak Chopra and Ms. Priya Tandon, the Advocates on behalf of the assessee, that there is no order against the assessee alleging that the claim of operating expenses is either bogus or false or the quantum claim1 of the assessee is not correct.

The counsel of the assessee further submitted that the department has consistently allowed the claim of the assessee which is clearly discernible from the orders for AO for AY 2007-08 & 2012-13, and hence that no disallowances is called for in this regard.

However, on the other hand, Sh. P. Praveen Sidharth, the CIT DR, supported the part confirmation of disallowances by the CIT(A) but stressed upon fact that the CIT(A) restricted the disallowance to 2% despite the fact that the assessee could not substantiate its claim of operating expenses debited in its books of account without requisite supporting evidence/ bills etc and therefore that, the genuineness of the entire claim was not verifiable.

Hearing the opposing contentions of both sides and thereby perusing the materials available on record, the coram of B. R. R Kumar, the Accountant Member and C.M Garg, the Judicial Member thus held:

“The CIT(A) has rightly restricted the disallowance to 2% of total claim instead of 10% as made by the AO on account of operating expenses. in view of the above we have no hesitation to hold that the CIT(A) has taken a very balances and justified approach in upholding the action of the AO in making disallowance on account of operating expenses and he was also right in reducing the disallowance from 10% to 2% keeping in view the entire facts and circumstances of the case.”

“Therefore, no interference is called for in the first appellate order on this issue and we uphold the conclusion drawn by the CIT(A) with the conclusion that claim of assessee on operating expenses deserves to be disallowed to the tune of 2% of total claim”, the ITAT coram thus concluded.

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