2024 (8) TMI 1599 - AT - Income Tax

Disallowance of expenditure claimed in profit and loss account on estimated bases at 25% - non rejection of books of accounts - main reason for disallowance is that the expenditure is that this expenditure is only supported by self-made vouchers and there was every chance of inflating the expenditure - As submitted AO has accepted the books of account of the assessee during previous year and subsequent year. Though res-judicata does not apply to income tax proceedings even then if the same facts of the case are there consistency has to be maintained by the AO before completing the assessment. HELD THAT - We find that assessee s books of accounts are duly audited by qualified Chartered Accountant u/s 44AB of the Act. The books of accounts of assessee have not been rejected by the ld. AO. Without rejecting the books of accounts AO cannot make any adhoc disallowance of any expenditure. The rate of net profit declared by assessee has been increased to 6.09% from 3.01% as compared to AY 2014-15 and 2013-14 which is higher in assessment year 2014-15. We are inclined to hold that the adhoc disallowance is not justified without rejecting the books of accounts of the assessee. Accordingly the grounds of assessee are allowed.

Summary

ISSUES:

Whether the Assessing Officer (AO) can make disallowance of expenditure on an estimated or adhoc basis without rejecting the books of account under section 145 of the Income Tax Act.Whether disallowance of labour payment and hire and water charges supported only by self-made vouchers without recipient confirmations is justified.Whether the appellant's books of account, audited under section 44AB of the Act, can be disregarded solely on the basis of self-made vouchers.Whether the Commissioner of Income Tax (Appeals) erred in confirming additions made by AO without affording proper opportunity to the appellant.Whether interest levied by AO on the disallowed amount is justified.Whether adhoc disallowance without specific infirmities or rejection of books is sustainable in law.

RULINGS / HOLDINGS:

The AO cannot make any adhoc disallowance of expenditure without first rejecting the books of account under section 145 of the Act; "without rejecting the books of accounts, the ld. AO cannot make any adhoc disallowance."Disallowance of labour charges and related expenses supported by self-made vouchers is not justified merely because the vouchers lack signatures of recipients, especially when the nature of business and volume of transactions are considered; such expenditure is "wholly and exclusively for the purpose of its business."Audited books of account maintained under the mercantile system and audited under section 44AB cannot be disregarded solely on the basis of self-made vouchers; the AO must specify entries considered bogus or unverifiable after rejecting books.The CIT (A) erred in confirming the addition without giving proper opportunity and without conducting any enquiry; the adhoc disallowance "is not legally sustainable."The interest levied by AO on the disallowed amount is not specifically upheld or discussed, but the disallowance itself being deleted implies that interest thereon is also not justified.Adhoc disallowance without rejection of books and without specific infirmities is arbitrary and excessive; "to estimate any disallowance the first and foremost thing is that the A.O. has to reject the books of accounts."

RATIONALE:

The Tribunal applied the legal framework under the Income Tax Act, particularly sections 143(3), 145, and 44AB, emphasizing that estimation of income or disallowance of expenses is permissible only after rejection of books of account.Reliance was placed on precedents including the jurisdictional High Court's decision in CIT Vs. Anil Kumar & Co., which held that "jurisdiction to estimate assessee's income is not available when books of account have not been rejected."The Tribunal also relied on its own earlier decisions and the Karnataka High Court's ruling in Shri Ganesh Shipping Agency, which recognized the legitimacy of business expenditures supported by self-made vouchers in certain trades and rejected adhoc disallowance without proper basis.The Tribunal noted that the AO's disallowance was based on conjectures and surmises without any specific infirmity in the books or vouchers and without conducting sample verification or enquiry.The Tribunal underscored the principle that the AO must reject the books of account after finding them unreliable before making any disallowance, and must specify entries considered bogus or unverifiable.The Tribunal highlighted the commercial realities of the appellant's business, acknowledging that obtaining signatures from casual or illiterate labourers is impractical and that such payments are a normal business practice.The Tribunal noted that the CIT (A)'s confirmation of adhoc disallowance at reduced percentages also lacked legal sanction and was not justified.No dissenting or concurring opinions were noted in the judgment.