2025 (8) TMI 1648 - AT - Income Tax

Unilateral 50% disallowance of business expenses overturned where books accepted and Section 145(3) not invoked

Nitesh Kumar Jakhar Versus Assessment Unit, Income Tax Department, Delhi

Nitesh Kumar Jakhar Versus Assessment Unit, Income Tax Department, Delhi - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the sustaining by the first appellate authority of a 50% disallowance of claimed business expenses (total Rs.12,14,284) was justified where the assessee produced ledgers, vouchers, salary confirmations, bank statements, Form 26AS and affidavits, and books of account were not rejected under section 145(3) of the Act. 2. Whether the reassessment addition of undisclosed commission income (Rs.6,66,144) following reopening under section 147/148 was sustainable where documentary evidence including original ITR, computation, profit & loss account, balance sheet, ledger of the payer and bank statement showing credit after TDS were filed. 3. Whether the addition of agricultural income (Rs.70,000) was sustainable in the absence of adverse findings when supporting details were placed before the appellate authority. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of 50% disallowance of business expenses Legal framework: Section 37(1) allows deduction of business expenditures laid out wholly and exclusively for business. Assessment proceedings under section 147 read with section 144 (and r.w.s. 144B) permit reassessment where income has escaped assessment. Section 145(3) permits rejection of books; where books are not rejected, entries and documents in books carry evidentiary weight. Precedent Treatment: The Court/Tribunal did not cite or apply any external precedent in the order; decision is grounded on statutory provisions and facts on record. Interpretation and reasoning: The Tribunal noted that the assessee produced comprehensive supporting material - ledger copies, vouchers, salaried employees' affidavits confirming salary payments, professional bills, bank statements and profit & loss accounts - and that the books of account were not rejected under section 145(3). The first appellate authority (ld. CIT(A)) accepted the business purpose of the expenses to the extent of granting a 50% allowance but nonetheless sustained a 50% disallowance without identifying specific defects, contradictions or documentary insufficiencies in particular heads of expense. The Tribunal emphasised that where books are maintained and not rejected, and supporting documents are furnished showing expenditure incurred for business purposes, wholesale disallowance or arbitrary percentage disallowance is unsustainable unless the revenue points to concrete deficiencies, improbabilities or nondisclosure justifying such restriction. Ratio vs. Obiter: Ratio - Where the assessee furnishes ledgers, vouchers, corroborative bank entries and affidavits and the books are not rejected under section 145(3), section 37(1) operates to allow the claimed business expenses unless the revenue records specific adverse findings or contradictions; arbitrary percentage disallowance without recorded grounds is not justified. Obiter - Implicit observation that a declared net profit margin (33%) and head-wise details support genuineness of expenses. Conclusion: The Tribunal concluded that no part of the business expenditure ought to be disallowed on the facts of the case; grounds challenging the 50% disallowance were allowed and the disallowance deleted. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Validity of reassessment addition of undisclosed commission income Legal framework: Sections 147/148 permit reopening where income has escaped assessment; the AO must establish that income chargeable to tax was omitted or understated. Documentary proof such as Form 26AS, bank credits, ledgers and original ITR/computations are relevant to show receipt and tax treatment. Precedent Treatment: No authorities were cited; Tribunal's determination was fact-driven. Interpretation and reasoning: The AO reopened the assessment relying on ITBA information indicating receipt of commission income of Rs.25,38,144 and added the difference between that amount and the commission declared (Rs.6,66,144). The assessee, however, produced the original filed ITR, computation, profit & loss and balance sheet, Form 26AS evidencing TDS, a ledger account of the payer and bank statement showing the commission credited after TDS. Upon perusal, the ld. CIT(A) found that the assessee had in fact received commission only to the extent declared (Rs.18.72 lacs) and deleted the addition. The Tribunal accepted the appellate authority's fact-finding because the documentary record corroborated the declared amount and demonstrated TDS and bank credits corresponding to declared income, undermining the AO's basis for reopening/addition. Ratio vs. Obiter: Ratio - Reassessment additions under section 147/148 cannot be sustained where the assessee produces contemporaneous documentary evidence (ITR, computation, ledgers, Form 26AS and bank statements) that reasonably establish the correctness of declared receipts; the AO's contrary ITBA record without reconciling the documentary proof is insufficient. Obiter - Reopening based on external system information must be tested against documentary proof provided by the assessee. Conclusion: The addition of Rs.6,66,144 as undisclosed commission income was deleted by the ld. CIT(A), and the Tribunal upheld that deletion. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Validity of addition of agricultural income Legal framework: Income classification (agricultural vs. non-agricultural) and its inclusion/exclusion from total income depends on nature and evidentiary support; assessing authorities must record reasons for disallowance/addition. Precedent Treatment: No judicial precedents were applied in the order; determination was based on facts and submissions. Interpretation and reasoning: The AO made an addition of Rs.70,000 as agricultural income. The assessee furnished supporting particulars during proceedings and the ld. CIT(A) deleted the addition. The Tribunal recorded that the ld. CIT(A)'s deletion was based on supplied details and there being no adverse findings recorded by the revenue to sustain the addition. Ratio vs. Obiter: Ratio - Where the assessee places supporting details and the revenue records no adverse findings, an addition of agricultural income is not maintainable. Obiter - The absence of recorded defects in the supporting material undermines the basis for the AO's addition. Conclusion: The addition of Rs.70,000 as agricultural income was deleted and that deletion was upheld. CROSS-REFERENCES AND FINAL DETERMINATION All issues are fact-sensitive and interrelated: the Tribunal's findings on disallowance (Issue 1) are reinforced by the acceptance of documentary evidence that also disposed of the reassessment addition (Issue 2) and the agricultural income addition (Issue 3). The Court/Tribunal emphasised that absent rejection of books under section 145(3) and absent specific adverse findings, arbitrary or blanket percentage disallowances and additions cannot be sustained.