Ad hoc expense disallowance fails without identified defects, proper verification opportunity, or evidence that foreign-exchange loss is capital.

Ad hoc disallowance of business expenses, including foreign-exchange loss, requires identified defects, non-genuine claims, inadequate evidence, or a demonstrated non-business purpose. The notes state that acceptance of most expenditure indicated that genuineness was not disputed, while no specific expense head or transaction was identified for verification. Where faceless assessment requires further document verification, the taxpayer must receive notice and adequate opportunity. Year-end restatement loss on foreign-currency liabilities was not shown to breach accounting standards or to be capital in nature. On the stated analysis, the disallowance was set aside in favour of the taxpayer.

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Issues: Whether a 5% ad hoc disallowance of business expenses, including foreign-exchange loss, could be sustained without identifying any specific defect, non-genuine expenditure, or inadequate supporting documentation.

Analysis: Acceptance of 95% of the expenditure indicated that the genuineness of the expenses was not in dispute. No finding established that any expense was bogus, not incurred for business purposes, or unsupported by deficient documentation; nor was any particular expense head or substantial transaction identified for further verification. If complete verification of documents was required in faceless assessment, the assessee had to be notified and afforded sufficient opportunity, which was not evident from the record. The foreign-exchange loss arose on year-end restatement of foreign-currency liabilities, and no finding showed that it was contrary to applicable accounting standards or capital in nature. The explanations and documents furnished also supported the remaining expenditure claims.

Conclusion: The ad hoc disallowance sustained in respect of the expenses was set aside in favour of the assessee.

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