2019 (11) TMI 1398 - AT - Income Tax

Disallowance on various heads on ad hoc basis - Expenses on maintenance of computer consultancy charges conveyance charges miscellaneous charges and salary - assessment u/s 143(3) - HELD THAT - We note that the AO could have ventured into estimation only after rejecting the books of accounts of the assessee u/s 145(3) and thereafter by best judgment assessment u/s 144 of the Act. Here in this case the AO has not passed any order u/s 144 - AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses. While scrutinizing the expenditure if the expenses claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of an expenditure at the most expenses to the extent that are not supported by the vouchers can be held to be non-genuine and can be disallowed by the AO; and item-wise the AO could have disallowed the expenditure rather than going for ad hoc disallowance of percentage basis of the expenses claimed by the assessee which action of the AO is arbitrary in nature and cannot be sustained. Appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance on maintenance of computer
2. Disallowance on consultancy charges
3. Disallowance on conveyance charges, miscellaneous charges, and salary

Analysis:

Issue 1: Disallowance on maintenance of computer
The appeal was filed against the order by the Commissioner of Income Tax (Appeal)-9, Kolkata regarding the disallowance made by the Assessing Officer on the maintenance of a computer. The appellant argued that the disallowance of a sum of Rs. 50,000 on estimate basis was unjustified both in law and on facts. The Tribunal noted that the Assessing Officer had made the disallowance on an ad hoc basis without rejecting the books of accounts or passing an order under section 144 of the Income Tax Act, 1961. The Tribunal held that such estimation without proper basis or rejection of accounts was arbitrary and unsustainable. Therefore, the Tribunal allowed the appeal on this issue.

Issue 2: Disallowance on consultancy charges
The second ground of appeal was related to the disallowance of 100% of consultancy charges amounting to Rs. 2,50,000 by the Assessing Officer. The appellant contended that this disallowance was also unjustified. The Tribunal reiterated that the Assessing Officer's approach of making ad hoc disallowances without proper scrutiny or rejection of accounts was not in accordance with the law. The Tribunal emphasized that if expenses lacked nexus to the business or were unsupported by vouchers, only those specific expenses could be disallowed, not a blanket percentage. Consequently, the Tribunal allowed the appeal on this issue as well.

Issue 3: Disallowance on conveyance charges, miscellaneous charges, and salary
The final ground of appeal involved the disallowance of a lump sum amount of Rs. 3,00,000 on conveyance charges, miscellaneous charges, and salary. The appellant challenged this disallowance as being unjust and contrary to law. The Tribunal reiterated that the Assessing Officer's action of making ad hoc disallowances without proper justification or rejection of accounts was arbitrary and unsustainable. The Tribunal emphasized that disallowances should be specific and supported by valid reasons, not based on mere suspicions. Consequently, the Tribunal allowed the appeal on this issue as well.

In conclusion, the Tribunal found that the Assessing Officer's approach of making ad hoc disallowances without proper basis or rejection of accounts was arbitrary and against the provisions of the Income Tax Act. Therefore, the Tribunal allowed the appeal of the assessee on all grounds, setting aside the disallowances made by the Assessing Officer.