2026 (3) TMI 1666 - AT - Income Tax

Ad hoc disallowance and accounted incentive receipts cannot be sustained without defects in books or evidence of concealment.

ITAT Hyderabad notes that an ad hoc disallowance of business expenditure cannot be sustained merely for want of supporting bills or vouchers when the ... Ad hoc disallowance of expenditure - Allowability of licence fee - Addition of incentive income already accounted Ad hoc disallowance of expenditure - Non-rejection of books of account - as alleged assessee has not furnished supporting bills and vouchers - 50% ad hoc disallowance of depot transport, hamali charges, change commission, salary expenses and repairs and maintenance - HELD THAT: - The Tribunal found that the expenditure under the disputed heads was minimal when compared with the assessee's business turnover and largely comprised day-to-day business outgoings. It further held that the Assessing Officer had neither pointed out any discrepancy in the books of account nor rejected them. In the absence of any finding as to incorrectness of the books, ad hoc disallowance could not be made merely because supporting bills and vouchers were not furnished for such expenses. [Paras 8] The addition made by way of 50% ad hoc disallowance of the various expenses was directed to be deleted. Allowability of licence fee - Year of deduction - A.O. disallowed licence fee charges on the ground that payment made on 18.03.2021 pertains to financial year 2020-21 - HELD THAT: - On examining the licence and challans, the Tribunal held that the licence covered the period from 01.11.2019 to 31.10.2021 and that the payment made on 18.03.2021 related to the quarter from 01.04.2021 to 30.06.2021. Since that period fell in Financial Year 2021-22 relevant to AY 2022-23, the deduction had been rightly claimed for the year under consideration. The disallowance was held to have been made without proper appreciation of the material evidencing the period to which the payment related. [Paras 10, 12] The disallowance of the licence fee was deleted. Disallowance under the head business and profession - incentives received by the assessee from certain parties for displaying various brands in front of its shop - addition on the ground that the assessee has received incentives on which TDS u/s 194C has been deducted and the same has not been accounted in the books of accounts of the assessee - as argued incentives received by the assessee has been accounted in the books of accounts under the head “Sales and Incentives” and the same has been offered to tax and further, the assessee has already claimed deduction for TDS deducted by the payer - HELD THAT: - The Tribunal recorded that the assessee had produced the sales registers for the relevant period showing that the incentives formed part of the head 'Sales and Incentives'. It also noted that the TDS deducted u/s 194C on those receipts had been considered in the return of income for the assessment year under consideration. Since the incentive receipts had already been taken into account, a further addition of the same amount under business income could not be sustained. [Paras 15] The addition made towards incentives under the head business and profession was directed to be deleted. Final Conclusion: The Tribunal allowed the assessee's appeal in full. It deleted the ad hoc disallowance of expenses, the disallowance of licence fee, and the addition made towards incentive income already accounted for in the books. Issues: (i) Whether 50% ad hoc disallowance of expenditure could be sustained without pointing out any defect in the books of account or rejecting them; (ii) Whether licence fee paid on 18.03.2021 was deductible in the assessment year 2022-23; (iii) Whether incentives received from parties for displaying brands were liable to be added as unaccounted business income.Issue (i): Whether 50% ad hoc disallowance of expenditure could be sustained without pointing out any defect in the books of account or rejecting them.Analysis: The expenditure disallowed related to day-to-day business expenses of small quantum in relation to turnover. No discrepancy in the books of account was found and the books were not rejected. A mere absence of supporting bills and vouchers, without any finding that the accounts were incorrect or unreliable, was held insufficient to justify an ad hoc disallowance.Conclusion: The disallowance of 50% of the expenditure was not sustainable and was deleted in favour of the assessee.Issue (ii): Whether licence fee paid on 18.03.2021 was deductible in the assessment year 2022-23.Analysis: The licence covered the period 01.11.2019 to 31.10.2021, and the payment in question related to the period 01.04.2021 to 30.06.2021. The payment was therefore attributable to the relevant previous year for assessment year 2022-23. The disallowance based only on the date of payment, without considering the licence period and supporting challans, was held to be erroneous.Conclusion: The licence fee deduction was allowable in the year under consideration and the addition was deleted in favour of the assessee.Issue (iii): Whether incentives received from parties for displaying brands were liable to be added as unaccounted business income.Analysis: The assessee produced sales registers and related evidence showing that the incentives were recorded under sales and incentives and had been offered to tax. TDS had also been reflected in the return. Since the amount was already accounted for, the further addition as undisclosed business income could not be sustained.Conclusion: The addition of incentives as business income was deleted in favour of the assessee.Final Conclusion: All disputed additions were found unsustainable on the facts and evidence, and the assessment was relieved of the impugned disallowances and additions.Ratio Decidendi: An ad hoc disallowance cannot be sustained in the absence of a defect in the books of account, and a payment is deductible in the relevant year when the evidence shows that it pertains to that year and has already been accounted for.