2025 (6) TMI 1951 - HC - Income Tax

Ad-hoc disallowance of expenses - addition being 5% of various expenses debited to the profit and loss account as not incurred wholly and exclusively for business purposes - ground on which these expenses were disallowed is basically that not only these expenses have a certain personal element but also no log book was maintained of the the above expenditure - HELD THAT - We find that the findings of the Assessing Officer CIT (Appeals) or ITAT on this aspect are purely factual in nature and therefore do not give rise to any substantial Question of Law which needs to be answered by this Court. Disallowance of commission paid by the Assessee to two individuals - AO as well as the CIT (Appeals) came to the conclusion that these persons could never have rendered the alleged services to the Assessee for the kind of business that the Assessee is engaged in because they have absolutely no knowledge of the said business - HELD THAT - After perusing the said order we find that even on the issue of disallowance of the commission paid to two individuals the findings given by the Authorities below are purely factual in nature and this disallowance has been made after recording the statements of these individuals and examining all the facts and circumstances of the case. Hence even this issue does not give rise to any substantial Question of Law that needs to be answered by this Court.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions arising from the appeal against the Income Tax Appellate Tribunal (ITAT) order:

• Whether each assessment year must be treated distinctly and separately for income computation, such that disallowance of an expense in one assessment year cannot be automatically applied to subsequent years based on the facts of the prior year.
• Whether a portion of expenses can be disallowed arbitrarily or on an ad hoc basis on the ground that they are of a personal nature, merely because such disallowance was made in earlier assessment periods.
• Whether, when documentary evidence has been furnished, statements of certain persons can be relied upon to hold a transaction as not genuine and thereby disallow commission paid.
• Whether oral evidence can be preferred over documentary evidence in determining the genuineness of transactions.
• Whether third party statements can be relied upon to disallow commission payments without corroborating evidence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Treatment of Assessment Years and Ad Hoc Disallowance of Expenses

The questions regarding whether each assessment year should be treated distinctly and whether ad hoc disallowance of expenses is permissible arose from the challenge to the ITAT's confirmation of a 5% disallowance of various expenses as not wholly and exclusively for business purposes. The Assessing Officer had disallowed Rs. 4,32,541/- (5% of expenses) on the basis that these expenses had a personal element and no log book was maintained to distinguish business from personal expenditure.

The CIT (Appeals) upheld this disallowance, and the ITAT confirmed the same.

The Court noted that the findings of the Assessing Officer, CIT (Appeals), and ITAT on this issue were purely factual. The disallowance was based on the absence of proper records and the presence of a personal element in expenses. The Court held that such factual determinations do not raise substantial questions of law warranting interference. Thus, the Court declined to entertain the legal questions regarding separate treatment of assessment years and arbitrary disallowance, effectively affirming that the factual basis for disallowance was sufficient and lawful.

Issue 3, 4 & 5: Reliance on Oral Evidence and Third Party Statements to Disallow Commission Payments

These issues pertained to the disallowance of commission payments made by the Assessee to two individuals alleged to have rendered services-Mrs. Nivedita Singh and Mr. Srikant Saratchandra. The Assessing Officer and CIT (Appeals) concluded that these individuals could not have provided the claimed services as they lacked knowledge of the Assessee's business.

The Assessing Officer recorded statements from these individuals, which were considered in the proceedings. The question arose whether such oral evidence and third party statements could override documentary evidence furnished by the Assessee, and whether reliance on such statements without corroboration was permissible.

The Court observed that the findings of the lower authorities were again factual in nature, based on examination of all facts and circumstances, including recorded statements of the individuals concerned. The Court did not find any legal infirmity in preferring such oral evidence or third party statements over documentary evidence where the facts warranted. The Court held that these factual findings do not raise substantial questions of law requiring adjudication.

3. SIGNIFICANT HOLDINGS

The Court's key determinations include the following:

• "The findings of the Assessing Officer, CIT (Appeals) or ITAT on this aspect are purely factual in nature and therefore do not give rise to any substantial Question of Law which needs to be answered by this Court."
• Regarding the disallowance of commission payments, "the findings given by the Authorities below are purely factual in nature and this disallowance has been made after recording the statements of these individuals, and examining all the facts and circumstances of the case."
• The Court emphasized that factual conclusions based on evidence and examination of circumstances do not constitute substantial questions of law.
• The Court declined to interfere with the ITAT order, dismissing the appeal in entirety without costs.

Core principles established include the affirmation that assessment year determinations are fact-specific and that prior year disallowances do not automatically dictate treatment in subsequent years absent fresh factual findings. Further, the Court recognized the legitimacy of relying on oral evidence and third party statements when documentary evidence is insufficient or questionable, provided such reliance is based on a thorough factual inquiry.