2018 (9) TMI 2145 - AT - Income Tax

Adhoc disallowances on general expenses deleted without specific enquiry or merit examination being impermissible

M/s Bajaj Auto Centre Versus Income Tax Officer 2 (1), Kanpur.

ITAT Lucknow allowed the assessee's appeal against adhoc disallowances made by AO on general expenses, staff welfare expenses, sales promotion expenses, ... Adhoc disallowance of expenses - addition of general expenses and staff welfare expenses and disallowances on account of sales promotion expenses and freight expenses - expenses which are not verifiable - as argued absence of conducting any specific enquiry before making addition, these disallowances acquires the character and nature of ad-hoc disallowances, which are not permissible within the scope and realm of taxation laws - HELD THAT:- As coming out from assessment order itself, that from time to time assessee has provided answer to the questionnaire issued by the AO and has also produced books of account along with bills and vouchers, which were test checked. When all these documents were there before the Department, asking for further presentation of these documents before the CIT(A) seems to be a meaningless exercise. The power of the ld. CIT(A) being co-terminus with that of the AO has also not gone into the merits of the case regarding disallowances and has summarily disposed of the appeal confirming the additions made by the AO - We take guidance from the decision of J.J. Enterprises [2001 (9) TMI 6 - SUPREME COURT] wherein it has been categorically held that addition to the income of the assessee made on the basis of pure guess work was unsustainable. In the instant case, as we have examined, all the disallowances were made on adhoc basis and on the basis of pure guess work, therefore, relying on various judicial pronouncements on the issue, we set aside the order of the ld. CIT(A) and direct deletion of these adhoc disallowances thereby allowing the appeal of the assessee. Issues:Disallowance of expenses on ad-hoc basis by Assessing Officer for A.Y. 2014-15.Analysis:The appeal arose from the order of the ld. CIT(A)-I, Kanpur confirming various additions/disallowances made by the Assessing Officer for the assessment year 2014-15. The Assessing Officer disallowed Rs. 83,253 on account of personal use of telephone and mobiles, Rs. 10,000 out of general expenses and staff welfare expenses, and another Rs. 10,000 out of sales promotion and freight expenses on an ad-hoc basis. The assessee contended that these disallowances were made without specific evidence or proper inquiry, rendering them ad-hoc and impermissible under tax laws. The ld. CIT(A) upheld the additions as the assessee failed to produce books of account and vouchers for re-verification.During the proceedings, the assessee argued that the disallowances were arbitrary and lacked a factual basis, citing various judicial decisions to support their position. The Department, however, relied on the lower authorities' orders. Upon review, the ITAT found that the Assessing Officer had made the disallowances on an ad-hoc basis without conducting a specific inquiry or providing evidence. The ld. CIT(A) confirmed the additions solely due to the non-production of documents, overlooking the material already submitted during the assessment. The ITAT referenced the decision in J.J. Enterprises vs. CIT, emphasizing that additions based on guesswork are unsustainable. It also cited other ITAT decisions where ad-hoc disallowances were deleted, emphasizing the need for a factual basis for such actions.Consequently, the ITAT set aside the ld. CIT(A)'s order and directed the deletion of the ad-hoc disallowances, thereby allowing the assessee's appeal. The judgment highlighted the importance of factual basis and proper inquiry in making disallowances, emphasizing that arbitrary additions without substantiation are not permissible under tax laws.This detailed analysis of the judgment provides insights into the issues raised, arguments presented, legal principles applied, and the final decision rendered by the ITAT Lucknow.