Mumbai ITAT Deletes Ad Hoc 10% Disallowance of Business Expenses – No Addition Sustainable Without Specific Defects in Audited Books

ACIT Vs Balmer Lawrie Van Leer Limited (ITAT Mumbai)

Mumbai ITAT Deletes Ad Hoc 10% Disallowance of Business Expenses – No Addition Sustainable Without Specific Defects in Audited Books

The Mumbai ITAT upheld the deletion of an ad hoc disallowance of ₹6.61 crore, being 10% of “Other Expenses”, holding that such an addition cannot be sustained merely because the Assessing Officer sought more details. The Tribunal noted that the assessee had furnished extensive details, including ledgers, sample invoices, and other supporting documents, and its books of account were duly audited and accepted without any rejection or specific adverse finding. The Assessing Officer had not identified any particular bogus or non-business expenditure, nor pointed out any defect in the books. The Tribunal further observed that similar expenditure had been consistently allowed in earlier scrutiny assessments and that the expenses were commensurate with the turnover. Accordingly, the deletion of the ad hoc disallowance by the CIT(A) was affirmed.

However, on the issue of government grant of ₹2,29,300, claimed by the assessee as a capital subsidy for setting up a plant in Uttarakhand, the Tribunal found that the Assessing Officer had not examined the relevant subsidy scheme as the necessary documents were not produced during assessment. Since the assessee itself requested a fresh examination of the Central Capital Investment Scheme, the Tribunal restored the matter to the Assessing Officer to verify the nature of the subsidy and decide the issue in accordance with law. Consequently, the Revenue’s appeal was partly allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The instant appeal emanating from the appellate order dated 08.10.2025 is preferred by the Revenue against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) r.w.s. 144B of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 27.03.2024 for the Assessment Year [A.Y.] 2022-23.

2. The grounds of appeal are as under:

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 6,60,99,933/-, being 10% of total ‘other expenses’ incurred by the assessee, without appreciating that the assessee failed to discharge its primary onus of proving the genuineness and business exigency of the expenses under Section 37 of the Income Tax Act, 1961.

2. The Ld. CIT(A) erred in failing to consider that during the assessment proceedings, the assessee did not produce vital documentary evidence, including bank statement extracts, TDS details, PAN/GSTIN of parties, and vouchers/invoices, thereby failing to establish the identity and creditworthiness of the payees.

3. The Ld. CIT(A) erred in law by holding that expenditure commensurate with turnover in earlier years justifies the allowance of current year expenses, ignoring the settled legal principle that each Assessment Year is a separate unit and the allowability of an expense must be verified independently with actual bills and supporting documents for the year under consideration.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 2,29,300/- made by the AO on account of an unsubstantiated reduction in profits, despite the assessee’s failure to produce any documentary evidence (such as sanction letters, government notifications, or grant orders) to prove that the subsidy was ‘Capital’ in nature and not a revenue receipt.

5. The Ld. CIT(A) erred in shifting the burden of proof onto the Revenue, whereas the law mandates that any person claiming a deduction or an exemption (such as a capital subsidy) must prove the facts and conditions entitling them to such a claim with corroborative evidence.

3. The assessee filed return declaring total income of Rs. 49,15,30,900/-. Thereafter, the case of the assessee was selected for scrutiny through CASS. Ground nos. 1 to 3 pertain to the ad hoc disallowance of various expenses. As per CASS reasons, the assessee had claimed deduction of large ^„Other Expenses‟ amounting to Rs. 66,09,99,325/- which comprised of expenses relating to various kinds i.e. Screen Printing Charges Rs. 2,01,33,692/-,Repairs & Maintenance Others Rs. 1,43,78,263/-,Bank Charges Rs.82,84,016/-, Printing & Stationery Rs.20,81,2975/-, System & Software Rs.1,13,21,159/-,Security & Safety,Rs.1,67,55,125/-,Corporate Social Responsibility,Rs.68,79,417/-, Contractual Services Rs. 15,06,16,630/-,Freight and transportation expenses Rs.41,10,13,756/-,Export Processing Charges Rs. 25,76,660/-, Books News Papers & Periodicals Rs. 26,207/-,Subscription Others Rs.11,24,354/-, Postage Telegrams Courier Charges Rs.12,62,610/-, Selling Expenses Samples Rs.23,44,408/-,Meetings & Conferences Rs.1,56,577/-, ISO Expenses Rs.2,80,058/-,General Expenses Rs.24,71,861/-,Staff Training Rs.2,63,610/-,Recruitment Expenses Rs.9,94,656 20/-, Courses & Conferences Expenses Rs.2,12,000/-, Gifts & presentation Rs.1,54,879/-,Office Maintenance Rs.2,171/-,Other Expenses Rs.1,36,176/-, Travelling expenses Rs.75,29,743/-,totaling Rs. 66,09,99,325/-.

3.1 In this regard, the assessee was requested by the AO to provide detailed breakup of the ^„Other expenses‟, head-wise, reasons for not including such expenses in the regular heads of expenses, details of expenses booked and turnover in 2 years preceding along with audited P&L statements of those years, name, PAN, GST of vendor, details of item/service alongwith copy of bills and invoices on sample basis payment made during year with bank statement, opening and closing balances, details of TDS deducted thereon etc. In response, the assesse had submitted its reply alongwith details sought for. However, the reply filed was found not tenable on the ground that assessee had provided copy of invoices on sample basis which were very minuscule in comparison to the quantum of expenses, failed to provide the details of all heads of expenses covered under the ^„Other Expenses‟. On perusal of invoices, it was found that only 03 bills pertained to the relevant financial year, as most of the bills pertained to FY 2018- 19, 2019-20 and 2020-21. The assessee also failed to provide any documentary evidence i.e. extract of bank statement highlighting the related transaction, in support of payment of the expenses. Even the assessee failed to substantiate that the aforementioned expenses were incurred only for the purpose of the business activities. Therefore, the AO concluded that the sum of Rs. 66,09,99,325/- remained unverified for want of complete documentary evidences for establishing the genuineness of the claim. On account of failure on part of the assessee to furnish the relevant evidences, an amount of Rs. 6,60,99,933/-, being 10% of Rs. 66,09,99,325/- was disallowed and added back to the total income.

4. In the subsequent appeal before the ld. CIT(A),the assessee contested the addition making various submissions stating that it had provided details to the AO on sample basis. It was also stated that it operated six plants at various places in India and all the data was collated and presented to the AO. It also provided the comparison of income and expenditure of the last 4 years from which it was noted that that the expenses were commensurate with the turnover. The AO had agreed that the assessee had furnished requisite details on sample basis. No discrepancy had been pointed out by the AO in the details of expenses provided including ledgers, invoices etc. In view of the large volume of data, it was not possible to present all the details. Further, the accounts of assessee company were audited and no discrepancy had been pointed out by the auditor in his report. No additions in respect of disallowance of expenses had been made by the AO in the earlier years. In view of the foregoing, the ld.CIT(A) held that such the adhoc disallowance made was not sustainable which was directed to be deleted.

5. The ld.DR has assailed the deletion of the addition made by the appellate authority replying on the assessment order. It is claimed that all relevant details were not provided leading to the addition on ad hoc basis which was fully justified.

6. Before us, the ld.AR has submitted that the assessee company is a joint venture of a Public sector undertaking Balmer Lawrie & Company Ltd. and Van Leer Royal Packagings of Netherlands. Van Leers have worldwide manufacturing units and are recognized as world dealers. Despite providing the relevant details ad hoc addition was made without appreciating that the assessee company maintains all requisite books of accounts and the same are audited by statutory auditors and u/s 44AB of the act as well. The book results have been accepted by the A.O. Similar expenses had been incurred in the earlier years as well and no such ad hoc disallowance has been made although the assessment has been u/s 143(3) of the act. Further, there was nothing discernible basis for the AO to observe that all such expenses had not been incurred wholly exclusively for the purpose of business.

7. In this regard, the ld.AR has relied on the decision of the Hon’ble Delhi High Court’s decision rendered in the case of PCIT V. R.G. Buildwell Engineers Ltd. 99 taxmann.com 283 (Del) wherein the Court approved the decision rendered by the Delhi Tribunal setting aside ad hoc addition on the grounds that books had not been rejected and such expenses were being allowed consistently in scrutiny assessments. The SLP filed by the Department was dismissed by the Hon’ble Supreme Court in 99 taxmann.com 284 (SC).With regard to the consistent action of the Department in allowing these expenses till the AY 2019-20 that too in scrutiny assessments reliance is placed on Hon’ble Supreme Court’s decision rendered in the case of Excel Industries Ltd. 358 ITR 295 (SC) wherein it has been held that a consistent view taken in favour of the assessee, a different view cannot be taken without convincing reasons.

8. We have carefully considered the relevant facts of the case, perused the records and heard rival submission. A Paper book submitted by the ld.AR giving details of compliance made by the assessee before the AO during assessment proceedings has also been persued. It appears that the assessee has made several submissions from time to time answering queries and filing details sought for by the AO. The ld.CIT(A) has duly taken consideration of the relevant facts of the case including comparative figures of expense qua the turnover which does not show any major variation and also the past assessment order in concluding that such ad hoc addition was not justified. We also find that no specific infirmity in the evidences and details submitted by the assessee has not been pointed out in the assessment order. The books of account which are duly audited have also been accepted without pointing out any deficiency therein as well. In view of such observations, we find no merit in the disallowance made in adhoc manner. The ld.CIT(A) was justified in deleting the same. Accordingly, the grounds as above are dismissed.

9. Ground nos. 4 and 5 relate to the addition of certain Government Grant of Rs. 2,29,300/-.It was noticed by the AO on perusal of clause 13(e) of form 3CD that there was reduction in profit because of application of Income Computation & Disclosure Standards amounting to Rs. 2,29,300/-. In response to the query made in this regard, the assessee failed to provide any supporting documentary evidence in support of its claim of deduction on account of ICDS VII as also in respect of the government grant. The assessee also failed to justify as to how the same was notional in nature. Hence, the said amount of Rs. 2,29,300/-was added to the income. The addition made was however, deleted by the ld.CIT(A) on the ground that the impugned amount was the benefit granted to the company for setting up plant in Uttarakhand and was a subsidy in nature of a capital receipt. Hence, the assessee had reduced the same from the taxable income.

10. The ld.DR contested the action of the ld.CIT(A) claiming that the assessee did not furnish necessary evidences before the AO during the assessment proceedings from which its exact nature could be ascertained. The ld.CIT(A) suo moto deleted the addition without allowing any opportunity to the AO to examine the same.

11. Before us, the ld.AR has submitted a Paper book containing details pertaining to the Central Capital Investment Scheme notification to demonstrate that the impugned sum received was a capital subsidy and could not be taxed being in the nature of capital receipt. The subsidy scheme would reveal that this is a benefit granted to the company for setting up plant in Uttarakhand and is in the nature of capital receipt. However, he was fair enough to admit that the issue was not examined by the AO as such details were not provided to him. He made a request that the entire matter may be sent back to him examine the scheme of Capital subsidy and act as per law.

12. We have carefully considered the above facts and find that the issue was not at all examined by the AO in the absence of relevant details furnished before the ld.CIT(A) claiming the receipt to be in the nature of capital receipt. Therefore, we are of the considered view that the entire matter requires proper examination by the AO. Accordingly, the appellate order is set aside and the ground of the Revenue is allowed for statistical purposes.

13. In the result, appeal filed by Revenue is partly allowed.

Order pronounced in the open court on 24/06/2026.