Provision reversal not taxable as income, and ad hoc expenditure disallowance fails without specific defects in accounts.

A provision released in a later year was held not taxable as income where the provision had been created in an earlier year and had not been claimed as a deduction then; its credit to profit and loss account merely reflected reversal of a balance-sheet item. A blanket 5% disallowance of other expenditure was also deleted because the assessee produced ledger extracts and sample vouchers, the books were audited, and no specific defect in the accounts or supporting evidence was identified to justify an ad hoc reduction. The appeal therefore succeeded and the additions were deleted.

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Issues: (i) Whether the addition made on account of provision released was sustainable. (ii) Whether the ad hoc disallowance of 5% of other expenditure was sustainable.

Issue (i): Whether the addition made on account of provision released was sustainable.

Analysis: The assessee had created the relevant provision in the earlier assessment year and had not claimed it as a deduction in that year. In the year under appeal, only a part of that provision was released and credited to the profit and loss account by reducing the carried-forward provision shown in the balance sheet. On these facts, the release did not represent a fresh taxable inflow warranting addition as income.

Conclusion: The addition on account of provision released was deleted in favour of the assessee.

Issue (ii): Whether the ad hoc disallowance of 5% of other expenditure was sustainable.

Analysis: The expenditure related to multiple routine administrative heads and the assessee furnished ledger extracts and sample vouchers. The books were audited, and no specific defect or infirmity was identified by the lower authorities to justify a blanket percentage disallowance.

Conclusion: The ad hoc disallowance of 5% of other expenditure was deleted in favour of the assessee.

Final Conclusion: The appeal succeeded in full and the additions made by the lower authorities were deleted.

Ratio Decidendi: A release of a provision created in an earlier year, when not earlier claimed as a deduction, cannot be taxed as income merely because it is credited in the year of reversal, and an ad hoc disallowance of expenditure cannot be sustained without identifying specific defects in the accounts or supporting evidence.

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