2025 (7) TMI 517 - AT - Income Tax

ITAT reduces adhoc disallowance from 30% to 10% for site maintenance expenditure lacking proper verification

ITAT Hyderabad reduced AO's adhoc disallowance from 30% to 10% of site maintenance expenditure. The tribunal found that AO made disallowance without ... Adhoc disallowance @30% of site maintenance expenditure - Non rejection of books of accounts - as per AO expenditure incurred under the head “site maintenance expenses” are supported only by internal self-made voucher and hence, not amenable for verification - HELD THAT:- The books of account maintained by the appellant are audited by an Accountant. AO did not reject the books of account before making the adhoc disallowance of 30% of site maintenance expenditure. AO made adhoc disallowance only on the ground that, the expenditure is supported only by an internal self-made voucher and not amenable for verification. Except this, there is no observation with regard to the incorrectness in the claim made by the assessee towards site maintenance expenditure. In case of expenditure incurred by the assessee which is nothing but wages payment to daily wage workers, except muster roll and cash payment vouchers, the assessee cannot maintain any other evidences as claimed by the AO. In case of payment of wages, only evidence that can be placed before the authorities is muster roll and the supporting attendance register. In the present case, the assessee has furnished the muster roll which contains the details of wages paid to various workers and the signatures of said employees. Therefore, in our considered view, when the assessee has furnished said evidences, the Assessing Officer ought not to have made 30% adhoc disallowance of expenditure for want of evidence. Assessee is also not fully supported its expenses with relevant evidences except furnishing a muster roll prepared for this purpose with signature of the employees. No other evidence including attendance register of the employees was furnished in support of the claim of the assessee. Since the assessee is also failed to substantiate the expenditure with relevant evidences, in our considered view, a reasonable amount of disallowances needs to be made towards the site maintenance expenditure. Therefore, in our considered view, disallowance of 10% of the expenditure incurred under the head site maintenance expenditure would meet the ends of justice. Appeal filed by the assessee is partly allowed. The core legal questions considered by the Tribunal in this appeal are:1. Whether the Assessing Officer was justified in making a 30% adhoc disallowance of site maintenance expenditure on the ground that the expenditure was supported only by internal self-made vouchers and thus not amenable to verification.2. Whether the assessee's evidence in the form of muster rolls and cash payment vouchers sufficed to substantiate the site maintenance expenditure claimed.3. To what extent, if any, a disallowance on site maintenance expenditure is warranted given the evidentiary material produced by the assessee.Issue-wise Detailed Analysis:1. Justification for 30% Adhoc Disallowance of Site Maintenance ExpenditureThe relevant legal framework includes provisions under the Income Tax Act, 1961, particularly the requirement for substantiation of claimed expenses and the Assessing Officer's power to disallow expenses if not properly evidenced. Precedents establish that disallowances must be based on tangible deficiencies in evidence or discrepancies in accounts.The Assessing Officer made a 30% adhoc disallowance solely on the basis that the expenditure was supported only by internal self-made vouchers, which were not verifiable externally. The Assessing Officer did not reject the assessee's books of account nor pointed out any discrepancy in the claimed expenditure. The Tribunal noted that the books of account were regularly maintained and audited, and no adverse finding was recorded against their correctness.The Tribunal observed that the Assessing Officer's disallowance was not founded on any irregularity in the accounts but rather on the nature of the vouchers supporting the expenditure. The Tribunal held that such a ground, without more, is insufficient to justify a 30% disallowance. The Court reasoned that when wages are paid to daily wage workers, the primary evidence available is the muster roll and cash payment vouchers, which the assessee had furnished.The Tribunal thus concluded that the Assessing Officer's adhoc disallowance of 30% was excessive and not justified solely on the basis that the vouchers were self-made.2. Sufficiency of the Assessee's Evidence (Muster Rolls and Cash Payment Vouchers)The assessee produced muster rolls containing details of daily wage workers, their signatures, and cash payment vouchers as evidence of site maintenance expenditure. The Assessing Officer and the CIT (A) contended that the muster rolls were not supported by attendance registers and hence unverifiable.The Tribunal acknowledged that in the context of wages paid to daily wage workers, the muster roll and payment vouchers constitute the primary and often the only available evidence. The Tribunal emphasized that the assessee cannot be expected to produce more evidence than what is reasonably available. It was noted that the muster rolls contained signatures of the employees, which corroborated the payment claims.However, the Tribunal also noted that the assessee did not furnish attendance registers or other corroborative evidence, which would have strengthened the claim. This partial deficiency in evidence was recognized as a factor affecting the credibility of the entire expenditure claim.3. Appropriate Quantum of DisallowanceBalancing the Assessing Officer's concern over unverifiable vouchers and the assessee's submission of muster rolls and payment evidence, the Tribunal adopted a middle path. It held that while the full 30% disallowance was not warranted, some disallowance was justified due to incomplete substantiation.The Tribunal directed that a 10% disallowance of the site maintenance expenditure be made to meet the ends of justice. This was an exercise of judicial discretion considering the facts that the books were regular and audited, no discrepancies were found, but evidentiary support was not fully complete.The Tribunal's approach reflects the principle that disallowances must be reasonable, proportionate, and based on evidentiary deficiencies rather than arbitrary assumptions.Treatment of Competing ArgumentsThe assessee argued that the Assessing Officer erred in making adhoc disallowance without rejecting the books or pointing out discrepancies and that the muster rolls and payment vouchers were sufficient evidence. The Revenue contended that the muster rolls were self-made and unverifiable without attendance registers and thus justified the disallowance.The Tribunal found merit in both arguments but sided more with the assessee on the point that the evidence produced was the primary and only feasible proof of expenditure. However, it agreed with the Revenue that the absence of attendance registers and other corroboration justified some disallowance. Hence, the Tribunal reduced the disallowance from 30% to 10%.Significant HoldingsThe Tribunal held:'In our considered view, in case of expenditure incurred by the assessee which is nothing but wages payment to daily wage workers, except muster roll and cash payment vouchers, the assessee cannot maintain any other evidences as claimed by the Assessing Officer.''When the assessee has furnished said evidences, the Assessing Officer ought not to have made 30% adhoc disallowance of expenditure for want of evidence.''Since the assessee is also failed to substantiate the expenditure with relevant evidences except furnishing a muster roll prepared for this purpose with signature of the employees... a reasonable amount of disallowances needs to be made towards the site maintenance expenditure.''Considering the facts of the case and also evidences furnished by the assessee, in our considered view, disallowance of 10% of the expenditure incurred under the head site maintenance expenditure would meet the ends of justice.'The core principles established include:Disallowance of expenses must be based on concrete evidentiary deficiencies, not merely on the nature of vouchers being self-made.For daily wage payments, muster rolls and cash payment vouchers are the primary and often sole evidence available; absence of attendance registers does not justify large adhoc disallowances.Judicial discretion must be exercised to balance incomplete evidentiary support with the assessee's right to claim legitimate expenses, resulting in proportionate disallowance.Final determinations on the issues are:The 30% adhoc disallowance of site maintenance expenditure was excessive and unjustified.The muster rolls and cash payment vouchers produced by the assessee sufficiently substantiate the expenditure to a large extent.A 10% disallowance is appropriate and directed to be made by the Assessing Officer.The appeal is partly allowed accordingly.