ITAT allows expenses and cash deposits, rejects adhoc disallowance without specific defects under section 145(3)

ITAT Delhi ruled in favor of the assessee regarding adhoc disallowance of expenses and cash deposits during demonetization. The court found that complete books of accounts, detailed expense records, and audited financials were properly produced. Lower authorities made general statements without pointing specific defects or invoking section 145(3) provisions. Regarding cash deposits, the entire cash book was produced establishing that deposits were properly explained by available cash balance, leaving no basis for additions.

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Issues Involved:
1. Adhoc disallowance of expenses.
2. Addition on account of cash deposits made during the demonetization period.

Detailed Analysis:

1. Adhoc Disallowance of Expenses:

The assessee challenged the confirmation of the Assessing Officer's (AO) action in disallowing various expenses on an adhoc basis. The disallowed expenses included Consumable expenses (Rs. 7,32,518/-), Wages and Salaries (Rs. 25,76,638/-), Miscellaneous Expenses (Rs. 2,27,755/-), and Other Expenses (Rs. 1,49,831/-).

The AO disallowed these expenses on the grounds that the assessee failed to provide supporting bills and vouchers, making the expenses unverifiable. Specifically, the AO disallowed 15% of wages and salaries, and certain other expenses, citing that the vouchers were not fully vouched and the personal element could not be ruled out.

The assessee argued before the National Faceless Appeal Centre (NFAC), Delhi, that all expenses were properly recorded and supported by documentary evidence. The assessee provided month-wise employee details and comparative figures for prior years to demonstrate consistency in expenses. The NFAC, however, upheld the disallowances but directed the AO to correct the figures for certain expenses and increased the adhoc disallowance for other expenses from 10% to 15%.

The Tribunal found that the assessee had produced complete books of accounts, supporting vouchers, and audited financials for multiple years. No specific defects were pointed out by the AO or NFAC. The Tribunal held that merely making general statements about unverifiable vouchers and personal elements was insufficient. Since the lower authorities did not reject the book results under section 145(3) of the Income Tax Act, adhoc disallowances were unwarranted. Therefore, the Tribunal allowed the assessee's grounds on this issue.

2. Addition on Account of Cash Deposits During Demonetization:

The assessee contested the addition of Rs. 39,80,500/- made by the AO for cash deposits during the demonetization period, which the AO treated as unexplained income. The AO had prepared a tabulation of cash withdrawals, deposits, and balances, concluding that the cash balance maintained by the assessee was not comparable with the preceding year and thus disbelieved the availability of cash balance.

The assessee provided month-wise details of cash balances, withdrawals, deposits, and closing balances for the relevant and preceding years, arguing that the cash deposits were sourced from the available cash balance. The NFAC, Delhi, did not provide a finding on the availability of cash balance but deleted the addition by considering the opening cash balance and disallowance of expenses as sources for the deposits.

The Tribunal found the NFAC's basis for deletion incorrect, noting that the assessee had sufficient cash balance to explain the deposits. The assessee's cash book, showing month-wise details of purchases and sales, was produced, and there were no cash sales. The Tribunal concluded that the cash deposits were properly explained by the available cash balance and thus allowed the assessee's ground on this issue.

Conclusion:

The Tribunal allowed the appeal of the assessee, concluding that the adhoc disallowances of expenses were unwarranted and the cash deposits during the demonetization period were adequately explained. The order was pronounced in the open court on 30.08.2024.

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