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Mokshstar International vs The Additional Commissioner of Income Tax - (Income Tax Appellate Tribunal) (27 Jul 2022)

Assessing Officer is not empowered to make disallowance on ad-hoc basis without assigning any reason


Direct Taxation

The assessee is a firm engaged in the business of import of plastic scrap from European countries, USA and countries situated in UAE. The AO noticed that, the assessee has not maintained log-book or any other document to separate business and non-business expenses. Therefore, it is not established that expenses were wholly and exclusively incurred for the business purposes. Further, the AO noted that many expenses were accounted on the basis of self-made vouchers. In some of the supporting evidences, addresses are of the recipient were missing and vouchers were lacking proper details about the expenditure made. Therefore, the AO disallowed a lump sum amount of 2 lakhs out of the above expenditure by treating it to be incurred for non-business use and added the same back to the total income of the assessee.

The assessee is in appeal against the addition of 2 lakh made during the assessment proceedings. The counsel for the assessee submitted that, the disallowance has been made on a purely ad-hoc basis, without finding any fault in the audited books submitted before the AO during the course of assessment proceedings. Accordingly, the AO has erred in law and on facts in making disallowance of 2 lakhs on a purely ad-hoc basis, which is impermissible law.

The AO has not disputed that, the accounts and records the assessee are audited under the provisions of Section 44AB of the Act. The AO has not rejected the books of the assessee. In the case of Katira Construction Ltd. v. ACIT, ITAT held that where books of account of assessee have not been rejected, onus is on Assessing Officer to point out specific expenses which were not incurred in connection with business and thereafter, he can make disallowance under provisions of Section 37 and there is no provision provided under Act empowering Assessing Officer to make disallowance on ad-hoc basis despite fact that assessee consents for such disallowance during assessment proceedings.

In the case of M.V.A. Seetharama Raju v. DCIT, the ITAT held that in respect of foreign travelling expenses unless Assessing Officer points out specific defects in expenditure claimed by assessee, no ad-hoc disallowance can be made for reason that assessee has not filed any evidence to justify said expenses.

In the case of Seal For Life India (P.) Ltd. v. DCIT , ITAT held that ad-hoc disallowance could not be made from total travel and conveyance expenses incurred by assessee company on ground that expenses were in respect of use of vehicles by directors of assessee company was personal in nature. In the case of ACIT v. Vanesa Cosmetics, Adhoc additions made by Assessing Officer on account of interest expenses on car having element of personal use, tour and travelling expenses and conveyance expenses respectively, without assigning any reason would not be sustainable in eyes of law.

In view of the consistent position taken by various Tribunals on the issue of disallowablility of expenses on purely ad- hoc basis, without the AO having rejected books of accounts, present Tribunal is allowing the assessee's appeal in respect of the ad-hoc disallowance. Appeal of the assessee is allowed.


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