Ad hoc disallowance of business expenses cannot stand without specific defects; audited accounts led to major relief.

An ad hoc disallowance of business expenditure cannot be sustained without specific defects, incriminating material, or distinguishing facts, especially where the accounts are audited and the expenditure pattern is broadly consistent with earlier years. On labour and site expenses, the disallowance was reduced to 5% because self-made vouchers and incomplete supporting details left scope for some inflation. On travelling expenses, a complete disallowance was considered unwarranted and was restricted to Rs. 50,000. On miscellaneous expenditure, the disallowance was deleted for lack of a specific finding of defect, and the revenue's challenge failed.

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Issues: (i) Whether the disallowance of labour and site expenses could be sustained in full or to a reduced extent; (ii) whether the disallowance out of travelling expenses was justified; (iii) whether the disallowance out of miscellaneous expenditure was sustainable.

Issue (i): Whether the disallowance of labour and site expenses could be sustained in full or to a reduced extent.

Analysis: The assessee was engaged in subcontract works at multiple sites and the expenditure was supported by self-made vouchers. The accounts were audited and the auditor's certificate under section 44AB was available. The lower authorities had proceeded on an ad hoc basis without any specific incriminating material or a comparative analysis with earlier years. At the same time, the absence of complete supporting details meant that some inflation could not be ruled out.

Conclusion: The disallowance was restricted to 5% of labour and site expenses, partly in favour of the assessee.

Issue (ii): Whether the disallowance out of travelling expenses was justified.

Analysis: The travelling claim was rejected by the lower authorities for want of supporting evidence, but no clear finding was recorded as to the exact particulars missing. Considering the nature of the expenses and the audited accounts, a complete disallowance was not warranted.

Conclusion: The disallowance out of travelling expenses was restricted to Rs. 50,000, partly in favour of the assessee.

Issue (iii): Whether the disallowance out of miscellaneous expenditure was sustainable.

Analysis: The miscellaneous expenses were disallowed on the ground of non-verifiability, but the assessee's accounts were audited and similar expenses had not been disallowed in other years. In the absence of a specific finding of defect or distinguishing facts, an ad hoc disallowance could not be sustained.

Conclusion: The disallowance out of miscellaneous expenditure was deleted, in favour of the assessee.

Final Conclusion: The common order substantially accepted the assessee's challenge to ad hoc expenditure disallowances, while sustaining a reduced disallowance where supporting material was inadequate; the revenue's appeals were rejected.

Ratio Decidendi: An ad hoc disallowance of business expenditure cannot be sustained in the absence of specific defects or distinguishing facts, particularly where the accounts are audited and the expenditure pattern is broadly consistent with other years.

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