Rectification orders, ad hoc expense disallowance, and loss set-off were addressed through separate appeal, deletion, and remand.
A rectification order that first fastened tax liability on a section 68 addition had to be challenged separately, and delay in filing that appeal was condoned so the grievance could be decided on merits. A 10% ad hoc disallowance of business expenses was unsustainable because the books were not rejected under section 145(3) and no material showed non-business use; the disallowance was deleted. The claim for set-off of unabsorbed depreciation and carried forward business loss, including current year loss, was treated as a verification-based matter and remitted for examination of the returns and loss figures before consequential allowance.
Issues: (i) Whether the addition of Rs. 12,10,00,000 under section 68, initially omitted from the computation but later brought to tax by rectification, required a separate appeal against the rectification order and whether the delay in filing such appeal deserved condonation; (ii) whether the ad hoc disallowance of 10% of various business expenses was sustainable; (iii) whether the assessee was entitled to set-off of unabsorbed depreciation and carried forward business loss of earlier years, including current year loss.
Issue (i): Whether the addition of Rs. 12,10,00,000 under section 68, initially omitted from the computation but later brought to tax by rectification, required a separate appeal against the rectification order and whether the delay in filing such appeal deserved condonation
Analysis: The assessment order discussed the share application money addition under section 68, but the amount was not carried into the computation and no demand was raised. The subsequent order under section 154 corrected that omission and made the addition effective in the assessed income. Since the rectification order was a separate appealable order, the challenge to the addition could not be effectively adjudicated in the appeal against the original assessment order alone. In the circumstances, the assessee ought not to suffer because of the omission in the original computation, and the delay in appealing the rectification order deserved condonation.
Conclusion: The issue was restored to the CIT(A) for de novo adjudication, with direction to condone the delay in filing the appeal against the rectification order and decide the matter on merits in favour of the assessee.
Issue (ii): Whether the ad hoc disallowance of 10% of various business expenses was sustainable
Analysis: The Assessing Officer made a percentage-based disallowance without rejecting the books of account under section 145(3) or making a best judgment assessment under section 144. The disallowance was founded on suspicion rather than item-wise examination of vouchers or proof of non-business use. In the absence of any material showing that the expenditure was not incurred for business purposes, an arbitrary ad hoc estimate could not be sustained.
Conclusion: The ad hoc disallowance of Rs. 80,97,725 was deleted in favour of the assessee.
Issue (iii): Whether the assessee was entitled to set-off of unabsorbed depreciation and carried forward business loss of earlier years, including current year loss
Analysis: The claim was consequential and supported by the returns and loss charts placed on record. The assessee's entitlement depended on verification of the returns and the loss figures in accordance with law. The matter therefore required examination of the record and allowance of eligible carry forward and set-off amounts on proper verification.
Conclusion: The matter was remitted to the Assessing Officer for verification and allowance of the claim in accordance with law, in favour of the assessee.
Final Conclusion: The appeal succeeded on the rectification-related grievance and the expense disallowance was deleted, while the loss set-off claim was sent back for verification and consequential allowance, resulting in only partial relief to the assessee.
Ratio Decidendi: A percentage-based disallowance of business expenditure cannot be sustained without rejecting the books or identifying material showing non-business use, and a rectification order that newly fastens tax liability must be challenged separately with delay condoned where justice so requires.