ITAT rules against arbitrary disallowance of Rs. 50 lakh, allows part of assessee's appeal.

The ITAT found the disallowance of Rs. 50,00,000 to be arbitrary and lacking basis. The disallowance was deleted, partially allowing the assessee's appeal.

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Issues Involved
1. Validity of the assessment order passed under Section 143(3).
2. Disallowance of depreciation amounting to Rs. 4,988,846.
3. Disallowance of revenue expenses amounting to Rs. 5,000,000.

Detailed Analysis

1. Validity of the Assessment Order Passed Under Section 143(3):
The appellant did not press this ground during the hearing. Consequently, this ground was dismissed.

2. Disallowance of Depreciation:
The appellant also chose not to press this ground. Therefore, this ground was dismissed as well.

3. Disallowance of Revenue Expenses:
The main issue remaining was the disallowance of Rs. 5,000,000 made by the Assessing Officer (AO) on a lump sum basis. The AO's observation was that the revenue expenses claimed by the appellant trust, amounting to Rs. 3,99,64,735, seemed excessive. The AO disallowed Rs. 70,00,000, but while computing the total assessed income, the disallowance was considered at Rs. 50,00,000.

Arguments by the Assessee:
- The appellant argued that the disallowance was made without pointing out any specific defects in the records or vouchers produced.
- The disallowance was termed as arbitrary and without any credible basis.
- The appellant trust maintained complete books of accounts, which were audited by an independent auditor who found no defects.
- The expenses were incurred for the objects of the trust, and the AO did not find any expenses that were not for the trust's purposes.
- The AO's approach was based on assumptions and lacked any comparative analysis with past expenses or similar entities.

Arguments by the Revenue:
- The AO, in the remand report, mentioned various expenses that seemed excessive or non-genuine, such as computer repairing, furniture repairing, photostat expenses, van repairing, conveyance, traveling, salary and daily wages, library expenses, and building repairing.
- The AO argued that the case was selected for limited scrutiny to examine large deductions against income from other sources.
- The AO justified the disallowance as approximately 11% of the total receipts of the appellant trust during the year under assessment.

Findings by the ITAT:
- The ITAT noted that the AO did not find any specific defects in the records or vouchers during the original assessment or remand proceedings.
- The disallowance was based on assumptions without any specific findings or comparative analysis.
- The ITAT found the approach of the AO and the CIT(A) to be arbitrary and lacking in merit.
- The ITAT emphasized that the income of the appellant trust was exempt from tax, and the disallowance of expenses without any specific defects was unjustified.
- The ITAT referred to previous judgments, such as the case of Soni Hospitals Pvt. Ltd. vs. ACIT, where it was held that disallowances should not be made on an ad hoc basis without specific findings.

Conclusion:
The ITAT concluded that the disallowance of Rs. 50,00,000 was arbitrary and without any basis. The disallowance was deleted, and the appeal of the assessee was partly allowed. The order was pronounced in the open court on 05/04/2022.

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