Audited books and lack of cogent evidence defeated ad hoc disallowance and estimated suppression additions in a hotel case.

Ad hoc disallowance of magazine and journal expenditure paid to a sister concern under section 40A(2)(b) was deleted because the hotel's audited books showed no specific defect and the Revenue brought no material to prove the was excessive or unreasonable. An estimated addition for alleged unaccounted sale of raddi and empty bottles was also deleted, as scrap generation was inherent in hotel operations and there was no cogent evidence of suppressed receipts. The ruling emphasises that neither related-party payment nor estimated suppression can justify addition without supporting evidence.

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Issues: (i) Whether disallowance of 10% of the magazine and journal expenditure paid to a sister concern was justified as excessive or unreasonable under section 40A(2)(b) of the Income-tax Act, 1961; (ii) Whether the addition on account of alleged unaccounted sale of raddi and empty bottles could be sustained on estimate.

Issue (i): Whether disallowance of 10% of the magazine and journal expenditure paid to a sister concern was justified as excessive or unreasonable under section 40A(2)(b) of the Income-tax Act, 1961.

Analysis: The expenditure was incurred for a running hotel business and the books were audited. No specific defect in the accounts or any material showing that the expenditure was excessive or unreasonable was brought on record. Mere payment to a sister concern, even where part of its income enjoyed a lower tax rate under section 80IB, was not enough to support an ad hoc disallowance in the absence of supporting evidence.

Conclusion: The disallowance was unjustified and was deleted in favour of the assessee.

Issue (ii): Whether the addition on account of alleged unaccounted sale of raddi and empty bottles could be sustained on estimate.

Analysis: The addition was founded on the same reasoning adopted for the magazine expenditure issue, which was not accepted. The record also showed that scrap generation and disposal were inherent in the hotel activity and that no cogent material was brought to show suppressed receipts. The estimate was therefore unsupported by evidence.

Conclusion: The addition was unsustainable and was deleted in favour of the assessee.

Final Conclusion: Both additions were set aside, and the assessee succeeded on the merits of the appeal.

Ratio Decidendi: An ad hoc disallowance of business expenditure or an estimated addition for alleged suppressed receipts cannot be sustained in the absence of specific defects in audited books or cogent material demonstrating that the expenditure or receipts were excessive, unreasonable, or unrecorded.

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