Ad hoc disallowance from cash expenses is unsustainable where books are accepted and no proper enquiry is made.

Ad hoc disallowance from cash expenses was found unsustainable where the assessee's forest-based tendu leaf required cash payments, the books and underlying transactions were accepted as genuine, and no rejection of books under section 145(3) was made. In those circumstances, an estimated addition over recorded results could not be justified. The appellate authority also failed to make the independent enquiry contemplated by sections 250(4) and 250(6) before sustaining part of the disallowance. The disallowance was directed to be deleted, granting relief to the assessee.

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Issues: Whether an ad hoc disallowance out of cash expenses could be sustained where the assessee's business was carried on in forest areas with practical difficulty in using banking channels, the books of account were not rejected under section 145(3), and no independent enquiry was made at the appellate stage.

Analysis: The assessee was engaged in trade of tendu leaves in forest and tribal where cash payments to labourers and others were stated to be unavoidable due to absence of banking facilities. The authorities accepted the genuineness of the books and the underlying transactions, yet made and sustained an estimated disallowance without invoking rejection of books. In such circumstances, an ad hoc addition over and above the recorded transactions was held impermissible. The appellate authority was also found not to have conducted the necessary independent enquiry contemplated by section 250(4) and section 250(6), while still confirming part of the disallowance.

Conclusion: The ad hoc disallowance was not sustainable and was directed to be deleted, resulting in relief to the assessee.

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