Karuppiah Meenachi Vs ITO (ITAT Chennai)
Chennai ITAT Cuts Ad Hoc Expense Disallowance From 10% to 5%: Higher Disallowance Would Artificially Inflate Petrol Dealer’s Profit Margin
In Karuppiah Meenachi v. ITO, ITA No. 2096/Chny/2026 (AY 2017-18), order dated 19.08.2026, the Chennai ITAT considered an ad hoc disallowance of business expenditure in the case of an assessee engaged in BPCL dealership and running a petrol/diesel outlet. The assessee had returned total income of ₹6.54 lakh.
During scrutiny, the AO held that the assessee had not properly substantiated certain expenses and therefore disallowed 10% of total expenses of ₹49,48,022, resulting in an addition of ₹4,94,802. A separate addition of ₹3,08,028, representing the difference between bank credits and returned income, was deleted by the CIT(A), but the 10% expense disallowance was sustained.
Before the Tribunal, the assessee pointed out that a petrol outlet is a high-volume, low-margin business. His profit margin had consistently ranged between 0.20% and 1.66%, while the gross-profit margin ranged between 1.92% and 2.40%. A blanket 10% disallowance of expenditure would therefore produce an abnormally high profit margin which was commercially inconsistent with the nature of the business.
The ITAT found merit in this contention. Considering the nature of the petrol-pump business, high volume of transactions, and the fact that the disallowance was made purely on an ad hoc basis because only a portion of the expenses was not completely substantiated, the Tribunal held that 10% was excessive. It restricted the disallowance to 5% of the expenses and directed the AO to recompute the assessee’s income accordingly.
Importantly, the Tribunal expressly clarified that its decision was based purely on the peculiar facts and circumstances of this assessee’s case and “shall not be treated as precedent in any other case.” The appeal was accordingly partly allowed.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
