Ad hoc disallowance of business expenditure fails without rejected books, specific defects, or proof the payments were bogus.

An ad hoc disallowance of alleged inflated business expenditure was held unsustainable where the accounts were not rejected, no specific defects were identified, and there was no finding that the expenditure was not wholly and exclusively for business. The tribunal also held that a challenge to the genuineness of payments to a foreign service provider could not be entertained where that issue did not arise from the operative appellate order and no material showed the payments were bogus. The assessee's substantive relief was therefore upheld, while the Revenue's challenge failed.

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Issues: (i) Whether the ad hoc disallowance of alleged inflated expenditure was sustainable in the absence of rejection of books, specific defects in the accounts, or a finding that the expenditure was not wholly and exclusively for business; (ii) Whether the Revenue could challenge the genuineness of payments made to the foreign service provider when that issue did not arise from the CIT(A)'s operative order and there was no material to show that the payments were bogus.

Issue (i): Whether the ad hoc disallowance of alleged inflated expenditure was sustainable in the absence of rejection of books, specific defects in the accounts, or a finding that the expenditure was not wholly and exclusively for business.

Analysis: The Assessing Officer had resorted to backward calculations and percentage-based comparisons to estimate what the expenditure should have been, without identifying any particular item as bogus, without rejecting the books of account, and without finding that the expenditure failed the business-purpose test under the Act. The assessee had furnished accounts, vouchers, bank statements, payroll details and other supporting material, and the increase in turnover and change in business profile were not properly examined. An estimate of expenditure could not be sustained merely on a mathematical comparison or on the basis of an assumed profit pattern.

Conclusion: The disallowance of alleged inflated expenditure was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the Revenue could challenge the genuineness of payments made to the foreign service provider when that issue did not arise from the CIT(A)'s operative order and there was no material to show that the payments were bogus.

Analysis: The Revenue's grievance was founded on remand observations that only expressed inability to fully verify the transactions, but no positive finding was recorded that the payments were not genuine. The payments had already been examined in parallel proceedings and were treated as business transactions. In the absence of any finding that the expenditure was bogus, and since the issue sought to be raised was not arising from the CIT(A)'s order, the Revenue's challenge could not be entertained.

Conclusion: The Revenue's grounds were rejected and the relief granted to the assessee was upheld.

Final Conclusion: The assessee succeeded on the substantive disallowance issue and the Revenue failed on its challenge to genuineness, resulting in allowance of the assessee's appeals and dismissal of the Revenue's appeals.

Ratio Decidendi: An ad hoc disallowance of business expenditure cannot be sustained on or backward calculation in the absence of specific defects in the accounts or a finding that the expenditure was not genuine or not incurred wholly and exclusively for business.

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