Tribunal vacates ad-hoc disallowance of business expenses, upholds tax non-deduction under Section 40(a)(ia)

The tribunal vacated the ad-hoc disallowance of business expenses as it lacked specific findings or evidence, citing the illegality of ad-hoc disallowances without specific reasons. However, the disallowance under Section 40(a)(ia) for non-deduction of tax was upheld due to the appellant's failure to provide necessary certificates from a Chartered Accountant as required by the provisions. The appeal was partly allowed, with the order pronounced on April 1, 2022.

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Issues Involved:
1. Legality of ad-hoc disallowance of business expenses.
2. Application of Section 40(a)(ia) of the Income-tax Act, 1961 for non-deduction of tax.

Detailed Analysis:

1. Legality of Ad-hoc Disallowance of Business Expenses:

The appellant challenged the ad-hoc disallowance of Rs. 2,00,000/- made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO disallowed part of the total expenses on the basis of self-made cash vouchers and the presence of elements not related to business usage. The major business expenses included vehicle repairing, office expenses, diesel and lubricants, labor welfare, motorcycle running, and salary & wages, totaling Rs. 1,18,55,252/-.

The appellant argued that all business expenditures debited to the profit & loss account and claimed in the return of income had valid characteristics as laid out in Section 37(1) of the Income-tax Act. The appellant contended that the disallowance was arbitrary and lacked specific findings or evidence pointing to any bogus or fictitious expenses. The tribunal noted that neither the AO nor the CIT(A) identified any specific vouchers that lacked genuineness or were not incurred wholly and exclusively for business purposes.

The tribunal found that there was no provision in the Income-tax Statute authorizing such ad-hoc disallowances without any specific infirmity or evidence. The tribunal cited the judgment of the Hon'ble High Court of Madras in "V.C. Arunai Vadivelan Vs ACIT" which emphasized that ad-hoc disallowances without specific reasons are not legally tenable. Consequently, the tribunal vacated the ad-hoc disallowance in its entirety, allowing the appellant's ground number 2.

2. Application of Section 40(a)(ia) for Non-deduction of Tax:

The appellant challenged the disallowance of Rs. 8,30,975/- made under Section 40(a)(ia) for non-deduction of tax under Section 194A from payments made to NBFCs, namely Magma Leasing Finance Limited and SREI Infrastructure Limited. The appellant argued that the deductees were reputed NBFCs paying taxes and no amount was outstanding at the end of the year.

The tribunal noted that the appellant failed to provide certificates from a Chartered Accountant as required by the first proviso to Section 201(1) of the Act, which would prove that the payees had accounted for the interest as income and paid the due taxes. The tribunal emphasized the importance of the first proviso to Section 201(1) and the second proviso to Section 40(a)(ia) introduced by the Finance Act, 2012, which provide relief to the assessee if the payee has furnished their return of income, taken into account the sum for computing income, and paid the tax due.

In the case of Magma Leasing Finance Ltd, the appellant provided a copy of the ITR filed and a letter of confirmation of receipt, but failed to provide the necessary certificate from an accountant. For SREI Infrastructure Finance Ltd, the appellant relied on a copy of PAN and a certificate of lower deduction, but these documents alone did not satisfy the requirements of the provisions.

The tribunal referred to judgments by the Hon'ble Delhi High Court and the Hon'ble Apex Court, which emphasized that no recovery of tax demand should be enforced against the assessee if the payee has accounted for the amount as income and paid the due taxes. However, in the absence of the required certificates, the appellant was not entitled to the relief provided by the provisions. Consequently, the tribunal dismissed ground number 1.

Conclusion:

The appeal was partly allowed. The tribunal vacated the ad-hoc disallowance of business expenses, but upheld the disallowance under Section 40(a)(ia) for non-deduction of tax due to the absence of necessary certificates. The order was pronounced on April 1, 2022.

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