Karnataka HC Rejects Ad Hoc Expenditure Disallowance as Books of Account were accepted

Mukesh Gupta Vs DCIT (Karnataka High Court)

The assessee filed two appeals before the Karnataka High Court raising two questions of law: (i) whetherher the Income Tax Appellate Tribunal (ITAT) was justified in holding that there was no business income for Assessment Year (AY) 2012-13 despite the assessee having returned professional income and offered creditors to tax, and (ii) whether the ITAT was justified in upholding an ad hoc disallowance of 10% of expenditure.

The assessee contended that the ITAT had arbitrarily held that there was no business income without recording cogent reasons. Regarding the expenditure disallowance, it was argued that the Assessing Officer (AO) had arbitrarily disallowed 10% of the expenditure even though the books of account had not been rejected. Reliance was placed on the decision in R.G. Buildwell Engineers Ltd.

The Revenue argued that the assessee had not declared any business income and had only declared professional income. It further submitted that the AO had disallowed 10% of the expenditure because the assessee’s authorized representative was unable to establish all bills and vouchers.

The High Court examined the record and noted that the ITAT had observed that there was no business income during the relevant year and, therefore, expenditure could not be allowed. However, the Court referred to the assessment order for AY 2012-13 and found that the statement of income disclosed income chargeable under the head “Business and profession” amounting to Rs.14,16,985.

The Court held that the ITAT’s finding that there was no business income was contrary to the record and therefore perverse.

On the issue of the 10% disallowance, the Court noted that the AO had made an ad hoc deduction because all bills and vouchers were not established. The Court referred to the decision in R.G. Buildwell Engineers Ltd., where it was held that ad hoc disallowance of expenditure was not sustainable when the books of account had not been rejected.

The High Court observed that, in the present case as well, the assessee’s books of account had not been rejected and the deduction had been made on an ad hoc basis.

Accordingly, both appeals were allowed, the ITAT orders dated 20.07.2018 and 25.01.2019 were set aside, and the questions of law were answered in favour of the assessee and against the Revenue.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

These two appeals by the assessee have been filed to consider the following questions of law:

“1. Whether the Tribunal was justified in holding that there was no business income for the AY 2012-13 without appreciating that the appellant had returned professional income and also offered creditors to tax, arrived at a perverse finding on the facts and circumstances of the case.

2. Whether the Tribunal was justified in upholding the adhoc disallowance of 10% of the expenditure without appreciating that the expenditure incurred were in the regular course of profession of the appellant on the facts and circumstances of the case.”

2. ITA No.343/2019 is filed against order dated July 20, 2018 in ITA No.1453/Bang/2018 for the A.Y. 2012-13 and ITA No.342/2019 is filed against order dated January 25, 2019 in M.P.No.3/Bang/2019 in ITA No.1453/Bang/2018. We have considered ITA No.343/2019 at the outset.

3. Heard Shri Annamalai, learned advocate for the assessee and Shri M.Dilip, learned standing counsel for the Revenue.

4. Shri Annamalai for the assessee, adverting to Para 11 of the order passed by ITAT¹, submitted that ITAT has arbitrarily held that there was no business income by the assessee without recording any cogent reasons.

5. With regard to the second question of law namely, disallowance of 10%, Shri Annamalai submitted that the Assessing Officer has arbitrarily disallowed 10% of the expenditure claimed by the assessee. He submitted that the books of accounts have not been rejected. Therefore, arbitrary disallowance is contrary to the law laid down in Principal Commissioner of Income Tax vs. R.G.Buildwell Engineers Ltd².

6. Shri Dilip for the Revenue supporting the impugned orders submitted as follows;

• that with regard to the first question that there was no business income for the A.Y.2012-13, he submitted that the assessee had not declared any business income and the income declared was by profession. Therefore, ITAT has rightly recorded the above finding; and
• Adverting to Para 6 of the Assessment order, he submitted that since authorized representative of the assessee was not able to establish bills and vouchers, Assessing Officer has disallowed 10% of the expenditure.

7. We have carefully considered rival contentions and perused the records.

8. First question is with regard to the finding recorded by the ITAT in Para 11 of its order. ITAT has noted that as per its observations, there was no business income in the present year. Therefore, expenditure could not have been allowed in that year.

9. Shri Annamalai has made available a copy of assessment order for A.Y. 2012-13. In the statement of income, the income chargeable under the head “Business and profession” is mentioned as Rs.14,16,985/-. Therefore, in our view, the finding recorded by the ITAT is contrary to record and hence, perverse. So far as the deduction of 10% of expenditure is concerned, Assessing Officer has recorded that authorized representative of the assessee was not able to establish all bills and vouchers. Accordingly, he has made adhoc deduction of 10% of the expenditure.

10. In G.Buildwell Engineers Ltd case, the Hon’ble Supreme Court of India has dismissed revenue’s SLP filed against the judgment of the Delhi High Court in ITAs No.1183 & 1187 of 2017. Delhi High Court in identical circumstances, has held thus,

“3. In respect of the first item, i.e. expenses for bricks, machinery repair, cartage etc., the A.O. concluded that insufficient evidence was adduced. He, therefore, disallowed 10% of the claim. This was reduced by half by the C.I.T.(Appeals). The ITAT gave two reasons to set aside the findings of the A.O. – C.I.T.(Appeals). Firstly, that the books  of account were not rejected and secondly, that in  the past, consistently such expenses were allowed in scrutiny assessments. Likewise, in the case of labour cases too, identical reasons were adduced by the A.O. to bring to tax a sum of Rs.2.2 crores. The same were set aside ultimately by the ITAT.”

(Emphasis supplied)

11. In the instant case also, the assessee’s books of accounts have not been rejected and the deduction is made on adhoc

12. In view of the above, these appeals merit consideration and hence, the following;

ORDER

i. Both appeals are allowed;

ii. Order dated 20.07.2018 in ITA No.1453/Bang/2018 and order dated 25.01.2019 in M.P.No.3/Bang/2019 in ITA No.1453/Bang/2018 are set-aside; and

(iii) Questions of law is answered in favour of the assessee and against the Revenue. No costs.

Notes:

1 Income Tax Appellate Tribunal

2 [2018] 99 taxmann.com 284 (SC)