Tax authority deletes entire ad hoc disallowance, applies consistency with sister concern on purchases, cost of sales, expenses

ITAT Pune allowed the assessee's appeal, holding that the CIT(A)/NFAC was not justified in sustaining an ad hoc disallowance of the assessee's total claim of purchases, cost of sales and various expenses. The Tribunal noted that, in the case of the assessee's sister concern, it had already upheld deletion of a similar disallowance by the CIT(A)/NFAC under identical facts. Following the principle of consistency and finding no basis for arbitrary estimation, ITAT set aside the CIT(A)/NFAC order and directed the AO to delete the entire ad hoc disallowance.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether an ad hoc disallowance of a lump sum amount from purchases, cost of sales and other expenses is sustainable when the assessee has furnished supporting details and no specific defects or instances of non-genuineness are identified by the tax authorities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Sustainability of ad hoc disallowance from purchases and expenses

Legal framework (as discussed)

2.1 The assessment was made under scrutiny pursuant to notices under sections 143(2) and 142(1) of the Income-tax Act, 1961. The Assessing Officer relied on the assessee's alleged failure to discharge the onus of proving the genuineness of purchases and expenses and consequently made an ad hoc disallowance of Rs. 50,00,000. Penalty proceedings under section 270A were also initiated for underreporting of income. The Tribunal also considered its own coordinate bench decision in the case of a sister concern, where under similar facts disallowances had been deleted.

Interpretation and reasoning

2.2 The Assessing Officer held that the assessee did not provide party-wise details of local purchases and other expenses, did not produce books of account, bills and vouchers, and failed to furnish confirmations from sundry creditors exceeding Rs. 1 lakh, resulting in inability to issue notices under section 133(6). On this basis, the entire claim of purchases and expenses was treated as unverifiable, and a lump sum disallowance of Rs. 50 lakhs was made.

2.3 The first appellate authority accepted the Assessing Officer's version that complete details were not filed, specifically observing that alleged details of parties for expenses exceeding Rs. 1 lakh stated to have been filed on 05.09.2019 were not found on record, and consequently upheld the ad hoc disallowance.

2.4 The Tribunal examined the paper book and the assessee's replies to the notices issued under section 142(1). It found that, contrary to the Revenue's contention, the assessee had, in fact, furnished various details during the assessment proceedings, including: details of purchases (inter-state, local and imports), purchase register, creditors list with names, addresses and PAN, ledger accounts, and sample bills; and details and ledger accounts of major expenses such as job work and clearing and forwarding charges.

2.5 The Tribunal noted that the authorities below had not pointed out any specific defect, inconsistency or instance of non-genuineness in the books of account or in the supporting documents furnished. The disallowance was purely on an ad hoc basis without identification of particular items of expenditure or purchase found to be bogus or unverifiable.

2.6 The Tribunal also took note that in the case of a sister concern, on similar facts and circumstances, disallowances made on such grounds had been deleted and the Revenue's appeal was dismissed, indicating that where supporting details are on record and no concrete defects are found, ad hoc additions are not justified.

Conclusions

2.7 The Tribunal held that the assertion that the assessee had not filed any details was factually incorrect in view of the material on record. Once relevant details such as purchase registers, creditors' details, ledger accounts and sample invoices were furnished and no specific defects were pointed out therein, an ad hoc disallowance of Rs. 50,00,000 could not be sustained.

2.8 The order of the first appellate authority upholding the ad hoc disallowance was set aside. The Assessing Officer was directed to delete the disallowance of Rs. 50,00,000 made out of purchases, cost of sales and various expenses. The assessee's appeal was allowed.

---