Ad hoc disallowance of business expenses fails where audited books and supporting records show no specific defect.

Ad hoc disallowance of business expenditure under section 37(1) is unsustainable where the assessee produced audited books, detailed ledgers, party-wise break-ups, invoices, payment proof and TDS particulars, and the Assessing Officer neither identified specific defects nor rejected the books of account. A blanket estimate cannot replace concrete verification unless the accounts are shown to be unreliable or incomplete. On these facts, the 20% disallowance of other expenses was deleted and the Revenue's appeal failed.

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Issues: Whether the Assessing Officer's ad-hoc disallowance of 20% of "other expenses" under Section 37(1) of the Income-tax Act, 1961 is sustainable in the absence of any specific defect, infirmity, or rejection of books of account where the assessee furnished detailed ledger accounts, party-wise break-up and TDS particulars and maintained audited books under Section 44AB.

Analysis: The legal framework requires the Revenue to point out specific defects in vouchers or demonstrate that particular expenditures are not incurred wholly and exclusively for business purposes before making disallowances. Estimation or rule-of-thumb disallowances are permissible only where accounts are unreliable, incomplete, or books are rejected. On the facts, the assessee produced detailed ledger entries, party-wise details, invoices, proof of payment, and TDS particulars; the books of account were audited under Section 44AB and were not rejected by the Assessing Officer. The Assessing Officer made a blanket 20% disallowance without identifying any specific unverifiable transaction or defect and the Revenue failed to impeach the 477-page ledger or supporting records even after remand.

Conclusion: The ad-hoc disallowance of 20% of the other expenses is unsustainable and is deleted; the Revenue's appeal is dismissed and the Assessing Officer's disallowance is not confirmed in favour of the assessee.

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