2026 (2) TMI 367 - AT - Income Tax

Adhoc disallowance of business expenses and treatment of corresponding interest expenditure - arbitrary cuts rejected, matching allowed.

Adhoc reduction of claimed business expenses cannot be sustained where the assessee produced supporting evidence and the assessing officer did not record ... Adhoc disallowance at 10% of the expenses - assessee submitted that though the assessee had furnished supporting evidences to justify the claim of expenses, without pointing out any deficiency in them, the A.O. has selectively disallowed certain expenses purely on adhoc basis without any valid reasons - CIT(A) deleted addition - HELD THAT:- On a reading of the assessment order, we have not noticed any adverse observation of the A.O. regarding the deficiency in supporting evidences furnished by the assessee qua the expenses. Merely because in respect of some items of expenditure there is increase in quantum in the impugned assessment year, that by itself cannot be a reason to disallow a part of such expenses, that too, on purely adhoc basis without establishing on record that such expenses were non genuine or have not been incurred for the purpose of business. No reason to interfere with the decision of ld. First appellate authority in deleting the disallowance. Ground no.1 is dismissed. Corresponding expenditure related to income offered in the impugned assessment year - interest expenditure accrued to the assessee - HELD THAT:- So far as the factual position relating to the issue in dispute is concerned, there is no dispute that the interest amount was received by the assessee in the impugned assessment year by virtue of an order of Hon'ble High Court. Thus, the interest expenditure accrued to the assessee in the impugned assessment year. It is also a fact on record that the assessee had to pay an amount to M/s. B.Vijaykumar & Co. who had advance the loan. The A.O. has not disputed the fact of payment made to M/s. B.Vijaykumar & Co. Thus, when the assessee has offered the income in the impugned assessment year, the corresponding expenditure related to such income has to be allowed. Decided in favour of assessee. Issues: (i) Whether the adhoc disallowance of Rs. 15,77,52,570 made by the Assessing Officer by disallowing 10% of certain expense heads was sustainable; (ii) Whether disallowance of Rs. 5,77,79,000 claimed to have been paid to a lender out of interest received in the year was sustainable.Issue (i): Whether the adhoc 10% disallowance of specified expense heads could be sustained where no deficiency in supporting evidence was recorded and comparative year analysis showed increases and decreases across different expense heads.Analysis: The assessment record does not disclose any adverse finding on the sufficiency or genuineness of the supporting evidences for the expenses disallowed. The comparative figures for the relevant assessment years show that while certain expense heads were higher in the impugned year, several other heads (including salary and wages, coordination charges, artiste fees, venue charges) were substantially higher in the subsequent year. The Assessing Officer selected only those heads where expenses were higher and applied a blanket 10% adhoc disallowance without establishing that the expenses were non-genuine or not incurred for business. Reliance on additional materials before the first appellate forum that were not before the Assessing Officer raises issues under Rule 46A but does not justify sustaining an adhoc disallowance in the absence of recorded deficiencies.Conclusion: The adhoc disallowance of Rs. 15,77,52,570 is not sustainable; decision of the first appellate authority deleting the disallowance is upheld in favour of the assessee.Issue (ii): Whether the disallowance of Rs. 5,77,79,000 paid to a lender was sustainable when corresponding interest income was offered in the impugned assessment year.Analysis: The interest amount was received and offered to tax in the impugned assessment year pursuant to a court order. The payment of Rs. 5,77,79,000 to the lender, who had advanced the original loan, is established on the record and is factually not disputed by the revenue. The corresponding expenditure is thus connected to the income offered in the same year and is allowable.Conclusion: The disallowance of Rs. 5,77,79,000 is not sustainable; decision of the first appellate authority deleting the disallowance is upheld in favour of the assessee.Final Conclusion: Both substantive issues decided by the Tribunal favour the assessee; the departmental appeal and the cross-objection are dismissed, leaving the first appellate authority's deletions intact.Ratio Decidendi: An adhoc percentage disallowance of expenses cannot be sustained in the absence of any recorded deficiency in supporting evidence or affirmative finding that expenses were not incurred for business; expenditures corresponding to income offered in the same assessment year are allowable when payment and receipt are established on record.