Appeal partly allowed; matter remanded for limited verification - audit fees and advocate fees allowed if bank proof confirms payment

ITAT Chennai set aside the AO's disallowance and partly allowed the assessee's appeal, remanding the matter to the JAO for limited verification. The tribunal found affidavit evidence that the audit fees were received and declared by the chartered accountant for AY 2018-19 and that bank statements support payment of advocate fees of Rs.5,10,000 claimed as litigation expenses relating to compensation received. If verification confirms payment of Rs.5,10,000 via banking channel, the advocate fees are to be allowed; the audit fees of Rs.1,47,500 are also to be allowed.

---

---

ISSUES PRESENTED AND CONSIDERED

1. Whether the Assessing Officer (AO) was justified in disallowing 50% of claimed advocate fees (Rs. 2,55,000) by way of an arbitrary/ad-hoc cut without recorded reasons or verification.

2. Whether the AO was justified in disallowing audit fees of Rs. 1,47,500 where the assessee produced an affidavit from the recipient Chartered Accountant acknowledging receipt and declaring the amount in his return.

3. What is the appropriate remedial course where payments are supported prima facie by bank records and/or affidavits but the AO did not verify the documentary evidence before making disallowances?

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Legality of arbitrary 50% disallowance of advocate fees

Legal framework: Expenditure is allowable if shown to be incurred wholly and exclusively for the purpose of the business or to the extent deductible under the Act; the AO must record reasons and may disallow only on relevant materials and proper verification; arbitrary percentage disallowance without enquiry is impermissible.

Precedent treatment: No precedents were cited or applied by the Tribunal in the text of the order; the Court relied on the principle that ad-hoc disallowance without reasons/verification is not acceptable.

Interpretation and reasoning: The Tribunal notes the AO restricted the advocate fees claim to 50% without assigning reasons or conducting verification despite the assessee producing bank statements showing payments. The Tribunal treats such a flat, unexplained cut as arbitrary and contrary to requirement of reasoned assessment. The proper course is verification of the payment trail through banking channels rather than summary disallowance.

Ratio vs. Obiter: Ratio - an ad-hoc percentage disallowance by the AO without reasoned findings or verification is unsustainable; where prima facie documentary evidence (bank statements) exists, the matter must be verified rather than disallowed summarily.

Conclusion: The Tribunal set aside the disallowance of half the advocate fees and remitted the matter to the file of the JAO with a direction to conduct limited verification of the bank payments of Rs. 5,10,000; if verification establishes payment through banking channels to the advocates, the fees are to be allowed as expenditure.

Issue 2 - Disallowance of audit fees despite affidavit of recipient CA

Legal framework: Deductibility of professional fees depends on proof of payment and genuineness; third-party acknowledgment and inclusion of the amount in the recipient's return is relevant evidence of payment/receipt.

Precedent treatment: No authorities were invoked; the Tribunal relied on the evidentiary value of an affidavit by the professional and the fact that the recipient declared the amount in his tax return.

Interpretation and reasoning: The assessee filed an affidavit from the Chartered Accountant confirming receipt of Rs. 1,47,500 and that the amount was declared in the CA's own return for the relevant year. The Tribunal found this evidence probative of payment and receipt and concluded that, in absence of any adverse finding or further verification by the AO, summary disallowance was not warranted. Because the AO had not verified documentary evidence before disallowing, the correct course is to allow the amount if verification corroborates the affidavit/receipt.

Ratio vs. Obiter: Ratio - where a recipient furnishes an affidavit acknowledging receipt and declares the income in his return, such evidence supports allowance of the fee unless independent verification contradicts it; absent verification and contrary materials, disallowance is not justified.

Conclusion: The Tribunal directed that the audit fee of Rs. 1,47,500 be allowed, subject to verification; finding that the CA had acknowledged receipt and included the income in his return, the amount ought to be allowed if the JAO's limited verification upholds those facts.

Issue 3 - Appropriate remedial procedure when AO fails to verify documentary evidence

Legal framework: Assessing authorities are required to conduct enquiries and verify material on record before rejecting claims; reassessment or adjudicatory action must be reasoned and based on record; where verification is lacking, remand for limited enquiries is appropriate.

Precedent treatment: No prior decisions were cited; Tribunal applied principles of fair procedure and natural justice in assessment proceedings.

Interpretation and reasoning: The Tribunal emphasized that the AO made disallowances without conducting verifications of bank statements or seeking confirmation from payees. Given the prima facie documentary evidence (bank statements for advocate fees and affidavit plus declaration by CA for audit fees), the Tribunal found it appropriate to set aside the impugned order and remit to the JAO to carry out a limited verification of the payment records. The Tribunal did not finally adjudicate allowance but specified the quantum and the standard of inquiry: verify payments through banking channel and corroborate recipient's return/acknowledgment; if verified, allow as expenditure.

Ratio vs. Obiter: Ratio - where an assessing officer disallows claimed expenses without verification despite existence of prima facie evidence, the appellate authority should remit for limited verification rather than uphold an arbitrary disallowance; remand is the correct remedial step.

Conclusion: The Tribunal set aside the AO's unexplained disallowances and restored the appeal to the JAO with directions to verify (i) the bank payments of Rs. 5,10,000 to advocates and (ii) the receipt and inclusion in return of Rs. 1,47,500 by the Chartered Accountant; if verification establishes payments/receipt, the respective fees are to be allowed as business/exemptible expenses.

Disposition

The appeal is partly allowed: impugned disallowances are set aside and the matter remanded for limited verification as directed; final allowance is contingent on the JAO's verification findings.

---