Ad hoc disallowance of business must rest on fair estimate where neither side substantiates the claim fully.

Where expenditure is not fully substantiated, but the revenue also relies only on ad hoc estimates without comparable material or business trend data, the disallowance must be confined to a fair and reasonable basis. On the facts discussed, commission expenditure was reduced from a higher lump-sum estimate to 5%, and similar ad hoc disallowance of conveyance, telephone, travelling and shop expenses was also reduced to 5%. The article reflects that partial disallowance may survive where the claim lacks adequate evidence, but the estimate must remain proportionate and fact-based.

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Issues: (i) Whether the disallowance of commission expenditure required to be restricted from 20% to a lower estimate; (ii) Whether the ad hoc disallowance made out of conveyance, telephone, travelling and shop expenses for alleged personal use was sustainable.

Issue (i): Whether the disallowance of commission expenditure required to be restricted from 20% to a lower estimate.

Analysis: The assessment was framed under Section 143(3) of the Income-tax Act, 1961. The lower authorities had disallowed the commission expenditure on a lump sum basis without referring to any past trend, subsequent trend, or comparable instance in the assessee's line of business. At the same time, the assessee had not produced cogent supporting evidence to satisfactorily substantiate the claim. In that factual setting, the disallowance needed to be estimated on a fair and reasonable basis.

Conclusion: The disallowance of commission expenditure was reduced to 5% and was therefore partly in favour of the assessee.

Issue (ii): Whether the ad hoc disallowance made out of conveyance, telephone, travelling and shop expenses for alleged personal use was sustainable.

Analysis: The miscellaneous expenses were also disallowed on an ad hoc percentage basis. The lower authorities had not supported the estimate by any comparable material or business trend, while the assessee had likewise failed to prove the claim with adequate evidence. In these circumstances, a lower estimated disallowance was found appropriate rather than the higher percentage sustained below.

Conclusion: The disallowance out of the miscellaneous expenses was reduced to 5% and was therefore partly in favour of the assessee.

Final Conclusion: The overall relief was confined to substitution of the higher estimated disallowances by a lower reasonable percentage across both disputed expenditure heads, resulting in partial relief to the assessee.

Ratio Decidendi: Where expenditure is not fully substantiated but the authorities have also not relied on comparable material or business trend data, an ad hoc disallowance must be confined to a reasonable estimate on the facts of the case.

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