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2018 (12) TMI 2019 - AT - Income TaxDisallowance of the expenses on the estimated basis being 10% - HELD THAT - AO had made the ad-hoc disallowance because the assessee failed to furnish the necessary supporting evidence. Therefore in our considered view such ad-hoc disallowance is justified. In holding so we find support and guidance from the judgment of CIT Vs. Chandravilas Hotel 1986 (3) TMI 27 - GUJARAT HIGH COURT wherein held production of vouchers in support of the claim for deduction of the expenditure by way of commission paid to Ramkumar would not prove the claim made by the assessee. It was its duty to prove payment to Ramkumarspecially when the ITO doubted genuineness thereof. Basis for the quantification of ad- hoc disallowance - In our considered view even the assessee failed to furnish the supporting evidence the ad-hoc disallowance must be made on a scientific basis. The rate of ad-hoc disallowance cannot be decided arbitrarily as held by this tribunal in case of Mahendra oil cake industries Pvt Ltd 1996 (3) TMI 148 - ITAT AHMEDABAD-A We find that the AO in the instant case has failed to take the rate of disallowance on a scientific basis. Even before us neither the Ld. DR nor the assessee in her written submission has brought anything on record regarding the historical data of the assessee or any comparable cases. Therefore we have no alternative except to make the disallowance on estimated basis as we did not get the necessary assistance from the Revenue as well as from the assessee. The fact that the assessee failed to produce the documentary evidence cannot be ignored. Therefore there have to make some disallowances. To put an end to this ongoing dispute and for speedy justice to the assessee we are not inclined to restore the issue to the file of AO for fresh adjudication in the light of above discussion. Accordingly we restrict the ad- hoc disallowance made by the authorities below by 5% of the total expenses as discussed above. Appeal of the assessee is partly allowed.
The core legal issue considered in this appeal pertains to the validity and quantum of an ad-hoc disallowance of business expenses made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. Specifically, the question is whether the AO was justified in disallowing 10% of the total expenses claimed by the assessee on an ad-hoc basis due to the alleged failure of the assessee to produce adequate supporting evidence, and if so, whether the rate of disallowance was appropriate.
Another ancillary issue concerns the condonation of delay in filing the appeal, which was initially found to be eight days late. Regarding the condonation of delay, the Tribunal noted that the delay was minimal and adequately explained by the assessee through an affidavit citing social engagements and lack of sufficient knowledge in income tax matters. The Revenue did not oppose the condonation. Consequently, the Tribunal exercised discretion to condone the delay and proceeded to adjudicate the appeal on merits despite the assessee's absence at the hearing, relying on written submissions filed by the assessee. The principal issue revolves around the disallowance of Rs. 8,88,690/- (10% of Rs. 88,86,904/-) made by the AO on account of expenses claimed by the assessee under various heads in the profit and loss account. The AO disallowed this amount on the ground that the assessee failed to furnish adequate supporting evidence such as vouchers or detailed ledgers during the assessment proceedings, thereby impeding verification of the genuineness and business nexus of the expenses. The CIT(A) upheld this disallowance, observing that the assessee had not produced the requisite books of account or supporting documents either before the AO or during appellate proceedings. The assessee contended that she had submitted copies of bank statements, ledger copies, audit reports, and other evidence to substantiate the expenses and that the disallowance on an ad-hoc basis was unjustified. She argued that the expenses were wholly and exclusively incurred for business purposes and were necessary for the operation of the cargo/courier service business. The assessee emphasized that many of the expenses were paid through account payee cheques, thereby negating any suspicion of personal expenditure. She further asserted that the AO's disallowance was arbitrary and lacked any scientific basis or specific findings to justify the 10% rate. In support of her submissions, the assessee relied on judicial precedents which establish that expenditure incurred out of business expediency is allowable as a deduction even if there is no direct profit motive, provided the expenditure is for the benefit or facilitation of the business. The assessee cited several decisions wherein ad-hoc disallowances were held to be unjustified in the absence of specific evidence showing that expenses were not incurred for business purposes. These cases underscored that the reasonableness of expenditure must be judged from the viewpoint of the businessman and that mere general observations or surmises by the Revenue cannot sustain disallowances. The Revenue, on the other hand, maintained that the onus was on the assessee to prove the genuineness and business nexus of the expenses. The AO's inability to verify the expenses due to lack of supporting documents warranted an ad-hoc disallowance, which was rightly confirmed by the CIT(A). The Revenue emphasized that the disallowance was not arbitrary but a necessary measure in the absence of adequate evidence. The Tribunal examined the relevant legal framework, including Section 37(1) of the Income Tax Act, 1961, which permits deduction of any expenditure (not being capital expenditure or personal expenses) laid out wholly and exclusively for the purpose of business. The Tribunal also referred to the principle that the initial burden lies on the assessee to establish that the expenses were incurred for business purposes. The Tribunal noted the Bangalore ITAT's ruling that mere bald assertions without establishing nexus between expenditure and business are insufficient for deduction. Applying these principles to the facts, the Tribunal found that the AO's disallowance was prompted by the assessee's failure to produce supporting evidence to substantiate the claimed expenses. This failure justified some level of disallowance. However, the Tribunal observed that the AO had not explained the basis for selecting the 10% rate of disallowance, nor had the AO compared the expenses with previous years or with other similar businesses to arrive at a scientific or reasonable estimate. The absence of any such basis rendered the quantum of disallowance arbitrary. The Tribunal further noted that neither the Revenue nor the assessee provided any historical data or comparable cases to justify or contest the rate of disallowance. Given this lack of assistance from both sides, the Tribunal held that some disallowance was warranted due to the absence of documentary evidence, but the rate should be moderated to a reasonable level. In balancing these considerations, the Tribunal reduced the ad-hoc disallowance from 10% to 5% of the total expenses claimed. The Tribunal declined to remit the matter back to the AO for fresh adjudication, citing the need for speedy justice and the absence of any new evidence or material to be produced. This adjustment effectively granted the assessee relief of 5% of the expenses previously disallowed. The Tribunal's approach reflects the principle that while the assessee must substantiate expenses, the Revenue's power to disallow on an ad-hoc basis must be exercised on a rational and reasoned basis supported by evidence or comparative analysis. Arbitrary disallowances without such basis are not sustainable. In conclusion, the Tribunal partly allowed the appeal by reducing the ad-hoc disallowance to 5%, condoned the delay in filing the appeal, and dismissed the appeal to the extent of the remaining disallowance. Significant holdings include the following verbatim excerpts: "But the onus lies on the assessee to prove that the expenditure was incurred for the purpose of business. Once the assessee discharges this onus, assessee would be entitled to deduction u/s 37(1). In the present case, no factual condition was laid by the assessee to establish that this expenditure was incurred business purpose nor any attempt is discernible before the lower authorities. Mere bald assertion that the expenditure was incurred for promoting business cannot be accepted without establishing the nexus between expenditure and business." "Mere production of vouchers in support of the claim for deduction of the expenditure by way of commission paid to Ramkumar would not prove the claim made by the assessee. It was its duty to prove payment to Ramkumarspecially when the ITO doubted genuineness thereof." "In our considered view even the assessee failed to furnish the supporting evidence, the ad-hoc disallowance must be made on a scientific basis. The rate of ad-hoc disallowance cannot be decided arbitrarily." "We are in agreement with the submission of the learned counsel for the assessee that there was no justification in making such ad hoc disallowance to the extent of 1/4th of the total tour expenditure without any basis. We, therefore, direct the ITO to delete the entire disallowance." "In the instant case, we note that the AO has not specified any basis for adopting the ad-hoc disallowance at the rate of 10% which in our considered view is not correct. There has to be some basis even for making the ad-hoc disallowances." "To put an end to this ongoing dispute and for speedy justice, to the assessee, we are not inclined to restore the issue to the file of AO for fresh adjudication in the light of above discussion. Accordingly, we restrict the ad- hoc disallowance made by the authorities below by 5% of the total expenses as discussed above." The core principles established are:
Final determinations on the issues are:
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