Ad-hoc expense disallowance cut to 5% due to lack of evidence; arbitrary higher rate overturned and no remand

ITAT AHMEDABAD upheld an ad-hoc disallowance for lack of supporting evidence but found the AO's arbitrary rate unsustainable. Because neither Revenue nor the assessee produced historical or comparable data, the Tribunal reduced the disallowance to 5% of total expenses as a reasonable estimated figure and declined to remit the matter for fresh adjudication. The appeal is partly allowed.

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Issues: Whether the ad-hoc disallowance of 10% of claimed business expenses, made by the Assessing Officer and confirmed by the Commissioner (Appeals) in the absence of supporting documents, is justified and whether the quantum of such ad-hoc disallowance is sustainable.

Analysis: The assessee failed to furnish the documentary evidence sought by the Assessing Officer to verify the expenses claimed in the profit and loss account; therefore some disallowance is necessitated by lack of verification. However, even where supporting evidence is absent, an ad-hoc disallowance must be based on a rational or scientific basis rather than arbitrary selection of a percentage. Acceptable bases include comparison with the assessee's historical expense patterns or comparison with comparable assessees in the same business; absent such basis being placed on record by either party, the Tribunal must determine a reasonable quantification to reflect inability to verify the full claim while avoiding conjectural penalisation.

Conclusion: The ad-hoc disallowance is partly justified due to non-production of supporting evidence, but the specific rate of 10% adopted by the authorities was not shown to be based on a scientific or rational basis; accordingly the disallowance is restricted to 5% of the total expenses, thereby partly allowing the appeal of the assessee.

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