AO lacks jurisdiction for ad-hoc 50% disallowance under section 57(iii) without challenging genuineness or document defects

ITAT Pune allowed the appeal, directing AO to delete the addition. The tribunal held that AO had no jurisdiction to make ad-hoc 50% disallowance of expenditure under section 57(iii) without challenging genuineness or pointing out defects in supporting documents. Since bills and vouchers were submitted, expenditure was incurred wholly and exclusively for earning income from dispensing medicines, and AO admitted it was not capital expenditure, the disallowance was unjustified. The tribunal relied on Petroleum Sports Promotion Board precedent.

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Issues:
- Disallowance of expenditure claimed by the assessee under section 57(iii) of the Income Tax Act, 1961
- Jurisdiction of the Assessing Officer in making ad-hoc disallowance without pointing out any defect in the bills, vouchers, or ledgers pertaining to the expenditure

Analysis:

Issue 1: Disallowance of Expenditure
The appeal was filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeal) regarding the disallowance of Rs. 53,56,317 being 50% of the expenditure claimed. The assessee, a charitable trust, explained that the expenditure was incurred for charitable healthcare facilities, mainly from the cost of medicines dispensed. The Assessing Officer disallowed the expenditure as the return was filed in ITR-5 instead of ITR-7 and claimed deduction under the wrong section. The Ld.CIT(A) upheld the disallowance, leading to the appeal before the Tribunal.

Issue 2: Jurisdiction of the Assessing Officer
The Tribunal found that the Assessing Officer disallowed the expenditure on an ad-hoc basis without challenging the genuineness of the expenditure. The expenditure was claimed under section 57(iii) of the Act, which allows deductions for expenses incurred wholly and exclusively for earning income. The Tribunal noted that the expenditure was related to the income earned from dispensing medicines and was not capital expenditure. Referring to a decision of the Hon'ble Delhi High Court, the Tribunal held that the AO had no jurisdiction to make the ad-hoc disallowance without pointing out any defects in the bills or vouchers. Consequently, the Tribunal directed the Assessing Officer to delete the addition made, allowing Ground No. 1 of the assessee.

In conclusion, the Tribunal dismissed the appeal and ordered the deletion of the disallowed expenditure, emphasizing the need for Assessing Officers to establish defects in expenditure documentation before making ad-hoc disallowances. Ground No. 2, being general in nature, did not require adjudication.

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