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Legal precedents on Ad- Hoc Disallowances

CA Adityavikram Banka

Legal precedents on Ad- Hoc Disallowances:

A. Examples of ad hoc disallowances made by the Assessing Officer:

1. Disallowances of 10 % of miscellaneous expenses merely because no break up / supporting voucher of miscellaneous expenses have been provided. Relevant Case: Dresser-Rand India Private Limited (I.T.A. No. 3558/Mum/2010)

2. Disallowances of a portion of expenditure by applying ad hoc percentile on the ground that some of the expenditures were in cash and were supported only by self-made vouchers- Relevant Case: Kailas Chand Agrawal v. DCIT – [2022] 139 taxmann 462 (Raipur – Trib.)

3. Ad hoc disallowance was made out of establishment expenses & allowances. AO further made ad hoc disallowance of 10% of the business promotion expenses on the ground that proper vouchers were not available. Relevant Case: Dynamix India Drill-Con Co. Vs ACIT (ITAT Delhi) (ITA No. 6110/Del./2018)

4. Disallowances were made of various expenditure incurred by the assessee under different heads of expenses which expenses aggregated to Rs. 27,65,18,354/- , which stood disallowed by the AO on ad-hoc basis @ 10% of the aforesaid expenses. Relevant Case: TUV India Pvt. Ltd. Vs DCIT (ITAT  Mumbai) (ITA No. 6628/Mum/2017)

5. The AO noticed that, the assessee has not maintained log-book or any other document to separate business and non-business expenses. Further, the AO noted that many expenses were accounted on the basis of self-made vouchers. 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. Relevant Case: Mokshstar International (ITA No. 397/Rjt/2017)

6. The Assessing Officer had made an addition of Rs. 15,00,000 as estimated expenses on an estimated basis towards the probable guest house expenses. The appellant claimed that the guest house was being run as a training center and justified the estimated expenses. Relevant Case: Commissioner of Income tax, meerut vs Modi Xerox [2014] 50 taxmann 201 (Allahabad) (Allahabad High court)

B. In all of these cases, the Courts have held that:

1. The Assessing Officer has not rejected the books of account of the assessee and without making this as a base, it could not be said that the expenditure has been inflated.

2. The AO has not given the basis for making ad hoc disallowance. The very concept of token disallowance is bad in law, because such a disallowance is inherently based on ‘surmises and conjectures’ and devoid of a legally sustainable foundation.

3. Therefore, we direct the Assessing Officer to delete the disallowance.

CA Adityavikram Banka
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