ITAT Lucknow: Ad Hoc Disallowance Without Pinpointing Defects Unsustainable; GST/TDS Late Fee Held Compensatory and Remanded for Fresh Examination

Prime Cleaning Services Vs DCIT (ITAT Lucknow)

ITAT Lucknow: Ad Hoc Disallowance Without Pinpointing Defects Unsustainable; GST/TDS Late Fee Held Compensatory and Remanded for Fresh Examination

The Lucknow Bench of the ITAT held that an ad hoc disallowance of business expenditure cannot be sustained merely because the Assessing Officer considers certain expenses to be insufficiently substantiated, without identifying any specific bogus or inadmissible expenditure. Where the assessee expresses willingness to produce supporting evidence, the matter deserves fresh examination in the interest of justice.

The assessee, engaged in the business of professional cleaning, housekeeping and hospitality services, was subjected to scrutiny. The Assessing Officer, finding that documentary evidence was not produced for certain expenses aggregating ₹2.19 crore, disallowed 10% thereof (₹21.90 lakh) on an ad hoc basis. The CIT(A)/NFAC upheld the disallowance, holding that the assessee had failed to discharge the burden of substantiating the expenditure.

Before the Tribunal, the assessee contended that it had furnished sample details of the expenses and had specifically requested the Assessing Officer to seek any further documents required. However, instead of making a specific requisition or identifying any inadmissible claim, the Assessing Officer proceeded to make an estimated disallowance. The Tribunal found merit in this contention and observed that, since the assessee claimed to possess all supporting evidence, one more opportunity ought to be granted to substantiate the expenditure before the Assessing Officer. Accordingly, the issue relating to the ad hoc disallowance was restored to the Assessing Officer for fresh adjudication.

On the separate issue of late payment fee relating to GST and TDS, the Tribunal observed that such payments are compensatory in nature and cannot be disallowed merely on the ground that they arise from an infringement of law. With these observations, the Tribunal restored the matter to the Assessing Officer for passing a fresh order in accordance with law. The appeal was allowed for statistical purposes.

Cases Discussed:

• PCIT-II, Lucknow vs. Metal Seam Company (P.) Ltd., 2017-LL-0905-2, dated 5.09.2017
• PCIT-II, Lucknow vs. Motor Sales Limited, ITA No. 142 of 2015, dated 2.03.2017

FULL TEXT OF THE ORDER OF ITAT LUCKNOW

This is an appeal filed by the assessee against the orders of the ld. CIT(A), NFAC dated 8.08.2025, wherein the ld. CIT(A) has dismissed the appeals of the assessee against the order of the Assessing Officer under section 143(3) for the A.Y. 2023-24, that was passed on 25.03.2025. The grounds of appeal are as under:-

“1. That the Ld. CIT(Appeals), NFAC, has erred in law and on facts and circumstances of the case in confirming the addition of Rs.21,90,585/- made by the Ld. Assessing Officer on an adhoc basis.

2. That the Ld. CIT(Appeals), NFAC, has erred in law and on facts and circumstances of the case in not considering the fact that the Ld. Assessing Officer had made an adhoc disallowance of Rs.21,90,585/-being 10% of Rs.2,19,05,859/- out of various expenses such as, daily allowance, garbage expense, processing fee and rent etc.

3. That the Ld. CIT(Appeals), NFAC, has erred in law and on facts and circumstances of the case in confirming the adhoc addition without pinpointing any expense being of inadmissible nature.

4. That the Ld. CIT(Appeals), NFAC, has erred in law and on facts and circumstances of the case in not considering the written submissions alongwith Annexures containing bills etc. filed before the CIT(Appeals), NFAC, vide Acknowledgment No. 483509771280725.

5. That the Ld. CIT(Appeals), NFAC, has erred in law and on facts and circumstances of the case by giving a finding that the appeal is not maintainable as per facts available on record and thereby dismissing the appeal.

6. That the Ld. CIT(Appeals), NFAC, is not justified in rejecting the contention of the appellant and ignoring the evidence filed by the appellant with reference to the expenses on which an adhoc addition has been made by the Ld. Assessing Officer.

7. That in any view of the matter, the order passed by the Ld. CIT(Appeals), NFAC, is contrary to law and against the facts of the appellant’s case and, therefore, the same is not tenable in law and deserves to be quashed.

8. That in any view of the matter, the additions confirmed by the CIT(Appeals), NFAC, are without proper opportunity, contrary to law as well as the facts and circumstances the case and, therefore, the order of the CIT(Appeals), NFAC, deserves to be set aside.

9. That the appellant craves leave to add, alter, amend or withdraw any or all grounds of appeal at any time before or during the course of the hearing.”

2. It is observed that the appeal of the assessee is delayed by 56 days. A condonation petition has been filed by one of the partners Sh. Chandrashekhar Khosla, in which it has been submitted that day to day affairs of the partnership were being looked after by him. He was a senior citizen suffering from various age-related ailments and due to this he was unable to keep track of the matter therefore, the order passed on 8.08.2025 did not come to his knowledge. After recovery and on checking the email and Income Tax Portal, when it came to his knowledge that the appeal had been decided, the appeal was filed. An affidavit in support thereof was also enclosed and it was prayed that in view of the aforementioned facts, the delay may kindly be condoned. On consideration of the fact that the partner of the assessee firm is 74 years old and suffering from various ailments that inhibited his ability to effectively monitor his case, the delay of 56 days is condoned and the appeal is admitted for adjudication.

3. The facts of the case are that the case of the assessee firm, which is in the business of professional cleaning, housekeeping and hospitality services was selected for scrutiny on account of low net profit shown under specific business goods and high liabilities as compared to lower income / receipts. The Assessing Officer records that during the course of assessment proceedings, he issued notices under section 143(2), 142(1), centralized communication in non-responsive cases, SCN under section 143(3) and provided opportunity for personal hearing through video conferencing. He records the fact that the assessee submitted responses. In consideration of these responses, the Assessing Officer noted that no supporting documents had been provided by the assessee for expenses amounting to Rs. 89,05,96,777/-. It was asked to provided bills/vouchers/invoices but did not submit them. Therefore, in the absence of supporting documents, the Assessing Officer issued a show cause to the assessee asking why 10% of these total expenses should not be disallowed and added back to the income of the assessee in the assessment for the assessment year 2023-24. The assessee was also asked to show cause why Rs. 48,270/- late fee on GST payment and Rs. 13,68,500/- claimed as donation under section 80G of the Act should not be disallowed and added back. In response, the assessee attended a video conference. During the video conference, the assessee sought further time for submission of documents. It was given time upto 20.03.2025, when the Assessing Officer records the documents were submitted. The assessee conceded the need for disallowance of Rs. 48,270/-on account of late fee on GST payment and TDS. With regard to the other expenses, on perusal of the reply of the assessee, the Assessing Officer noted that the assessee could not submit documentary evidence in support of expenses of Rs. 2,19,05,859/- and therefore, the Id. Assessing Officer decided to add back 10% of this amount i.e. Rs. 21,90,585/-. Penalty proceedings were also initiated on account of these two additions.

4. The assessee went in appeal before the ld. CIT(A) against these additions. Before the ld. CIT(A), it was submitted that the Assessing Officer had erred in disallowing 10% of expenses amounting to Rs. 2.19 Crores on an adhoc basis. The assessee submitted that these expenses were genuine expenses incurred as per the books of accounts. It also contested the disallowance of late payment fee for GST / TDS. The assessee submitted that the Assessing Officer had not appreciated the assessee’s business activities / facts of the case and therefore, the addition as such was bad in law. The ld. CIT(A) considered the submissions of the assessee. He recorded the fact that the assessee had been asked to substantiate the expenses with all its ledger extracts/ bills/vouchers/invoices as incurred for these expenses as part of business activity during the year with the relevant supporting books of accounts etc., as audited per law. After considering the assessee’s submissions, the assessee had re-conciled such non-verifiable expenses and arrived at an estimated disallowance of Rs. 21.90 Lacs. With regard to late fee on GST / TDS, the AO had treated the same as akin to penalty / fine related expenses not attributable to business and brought the same to tax. The ld. CIT(A) held that the onus was on the assessee to substantiate the claims of expenses made by it and incurred for business purposes and therefore, there was no error on the part of the AO. Furthermore, he held that the payments/fine incurred for GST and TDS were in the nature of non-allowable expenses. He also observed that the citations referred to by the assessee were not comparable to the facts of the assessee’s case. He further pointed out that the assessee had not brought out any such comparative analysis and therefore, merely challenging the addition on the basis of its ad hoc nature was not sufficient therefore, the ld. CIT(A) held that there exists no infirmity in the order of the AO and accordingly he came to dismiss the appeal of the assessee.

5. The assessee is aggrieved at such dismissal of its appeal and has accordingly come before us. Sh. Devashish Mehrotra, Advocate (hereinafter referred to as the ld. AR) appearing on behalf of the assessee pointed out that the ld. AO had made an adhoc disallowance of 10% on the grounds that the expenses were not substantiated by any documentary evidences. The ld. CIT(A) had held it to be a just percentage on account of the fact that the documentary evidence was not forthcoming. The ld. AR pointed out that the Assessing Officer had proceeded to make an addition on adhoc basis without pointing out any item as being bogus in nature or inadmissible and therefore, the assessee failed to understand how such addition could be made. It was submitted that in its reply post video conferencing and during video conferencing, the assessee had duly mentioned that it was providing the details of expenses on an exemplar manner. Furthermore, the assessee had filed replies to the specific queries raised by the ld. AO during video conferencing and also submitted that if any other detail with regard to expenses were required by the AO, the same would be submitted by the assessee if and when a notice for the same was issued. However, the AO had gone on to make the disallowance on an adhoc basis without pin pointing any defect in the books of accounts whereas all the expenses incurred by the assessee were duly verifiable. The ld. AR invited our attention various judgments contained in the paper book filed by him wherein it had been pointed out that no adhoc disallowance / addition could be made without pin pointing any item of inadmissible nature and the Hon’ble Allahabad High Court had upheld the deletion of adhoc disallowances by the ITAT Lucknow Bench in the cases of PCIT-II, Lucknow vs. Metal Seam Company (P.) Ltd. 2017-LL-0905-2 dated 5.09.2017 and PCIT-II, Lucknow vs. Motor Sales Limited in ITA No. 142 of 2015 dated 2.03.2017. It was further submitted that these case laws had been invited to the attention of the ld. CIT(A) but the Id. CIT(A) had held that they do not apply to the facts of the assessee’s case without pointing out why the same were inapplicable. The ld. AR submitted that the assessee was prepared to submit all documents as necessary to substantiate the expenses claimed by it and he therefore, prayed that the matter may be restored to the file of the Assessing Officer for one more opportunity in this regard.

6. On the other hand, Sh. Deepak Yadav, Addl CIT DR (hereinafter referred to as the ld. DR) submitted that the assessee had been given a number of opportunities to submit his response and because he was unable to substantiate the expenses, the Assessing Officer had made a disallowance. He submitted that the Assessing Officer had been quite reasonable in disallowing only 10% of the expenses which could not be substantiated by documentary evidence and unless the assessee could demonstrate that these expenses had actually incurred for the purposes of business, it was a fair disallowance. Accordingly, he prayed that the order of the Assessing Officer may kindly be upheld.

7. We have duly considered the facts and circumstances of the case and the arguments advanced by both parties. We noticed that Assessing Officer asked the assessee to substantiate certain expenses that were claimed by it in its accounts that were submitted before him. We further note that the assessee was, in the opinion of the Assessing Officer, not able to substantiate certain expenses before the Assessing Officer. However, we note that the assessee submitted responses wherein it provided details of certain expenses on example basis and further requested that in case the Assessing Officer wanted anymore information, the assessee was willing to supply the same upon receipt of specific requisition. It appears that the Assessing Officer passed the order without making specific requisition. Be that as it may, as the assessee claims to be in possession of necessary evidences to substantiate its returned income, we believe it to be in the interest of justice to restore the matter to the file of the Assessing Officer so as to give the assessee an opportunity to present these evidences before the Assessing Officer to substantiate its expenses and the Assessing Officer may consider these evidences and thereafter pass a fresh order in accordance with law. On the issue of allowability/disallowability of late payment fee of GST and TDS, we observe that the same being in the nature of compensatory payments, would not be disallowable as an infringement of law. Accordingly, with the aforesaid comments, we restore the matter back to the file of the Assessing Officer for a fresh order in accordance with law.

8. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced on 14.07.2026 in the Open Court.