Anjali Singhal Vs ITO (ITAT Agra)
Cash Expenses Supported Mainly by Self-Made Vouchers Warrant Limited Disallowance: ITAT Reduces Addition to ₹2 Lakh
Background of the Case
The assessee, an LIC insurance agent, challenged an estimated disallowance of business expenditure confirmed by the CIT(A)/NFAC.
She filed her return of income on 29 August 2018, declaring total income of ₹10,25,740.
During the relevant year, she disclosed LIC commission receipts of ₹84,37,623 and interest income of ₹96,547. Against these receipts, total expenditure of ₹73,48,431 was claimed, resulting in a disclosed net profit of ₹11,85,738.
The return was selected for scrutiny. The Assessing Officer examined the expenses and considered that certain claims were insufficiently verifiable, particularly because the payments had been made in cash.
Assessing Officer Questions the Expenditure
The assessment discussion referred to expenses under heads including sales promotion and publicity, conveyance, other expenses and general expenses.
The Assessing Officer recognised that an insurance agent would incur expenditure of this nature. However, he considered that cash payments created a possibility of inflation of expenses to reduce taxable income.
He also observed that the total expenditure represented approximately 87.09% of the commission receipts, which he regarded as high.
According to the officer, the non-verifiability of the expenditure, cash payments and the manner in which the ledgers had been prepared justified an estimated disallowance.
The operative computation disallowed 25% of other expenses, general expenses and gifts to customers, resulting in a total addition of ₹5,89,869.
CIT(A) Upholds the Disallowance
The assessee challenged the addition before the CIT(A), arguing that the Assessing Officer had proceeded on general presumptions.
However, the first appellate authority agreed with the assessment findings and dismissed the appeal.
The assessee then approached the Tribunal, seeking deletion of the entire estimated disallowance.
Her principal objection was that the Department had not identified specific expenditure that was personal, unrelated to business or otherwise inadmissible.
Assessee Relies on Books, Bills and Vouchers
Before the Tribunal, the authorised representative submitted that the assessee maintained books of account and had furnished expense ledgers, cash memos, bills and vouchers.
It was contended that the addition was arbitrary and rested primarily on the Assessing Officer’s perception that the expenditure was excessive.
The assessee emphasised that the books had not been rejected, and argued that no specific discrepancy or defect had been identified to justify the percentage disallowance.
She further submitted that the Assessing Officer had not recorded any finding that the expenditure was incurred for personal or non-business purposes.
Accordingly, the assessee maintained that the entire addition deserved deletion.
Decisions Cited Against Ad Hoc Disallowance
The assessee relied on ACIT v. Modi Rubber Ltd., ITA No. 1952/Del/2014, concerning the need for specific defects rather than general observations when disallowing business expenditure.
Reliance was also placed on Danayya Shavaputrayya Math v. ACIT, ITA No. 1286/Bang/2024, in support of the objection to a percentage disallowance without rejection of the books.
The assessee additionally cited Godavari Sugar Mills Ltd. v. CIT, 155 ITR 306 (Bom.), while contesting rejection of business expenditure merely because it was considered excessive or unreasonable.
These authorities were presented as supporting deletion of the disallowance. The Tribunal, however, considered the evidentiary circumstances of the present case distinguishable.
Tribunal Distinguishes the Authorities on Facts
The Tribunal considered the submissions and the material available on record.
It noted that the expenditure under consideration had been incurred in cash and that most expenses were supported by self-made vouchers.
At the same time, it recognised that some expenses were supported by third-party invoices.
This mixed evidentiary position was central to the decision. The Tribunal did not accept the assessee’s request for complete deletion, but it also considered that the full disallowance sustained by the lower authority should be reduced.
The cited decisions were therefore distinguished on the facts, particularly the nature of the supporting vouchers.
Disallowance Restricted to ₹2 Lakh
Considering the circumstances, the Tribunal reduced the disallowance from ₹5,89,869 to ₹2,00,000.
The assessee consequently obtained relief of ₹3,89,869.
The appeal was partly allowed.
The Tribunal did not prescribe a replacement percentage or provide a separate mathematical computation for the ₹2 lakh figure. It restricted the addition through an overall assessment of the available evidence.
Author’s Comments
The decision illustrates that maintaining books and furnishing vouchers may not secure complete relief where the underlying expenditure remains supported predominantly by self-generated records.
Equally, the presence of third-party invoices was relevant in reducing the disallowance. The Tribunal’s approach reflects the quality of the evidence available for the particular expense claims.
The ruling does not establish a standard ₹2 lakh disallowance or a universal percentage for insurance agents. The relief was specific to this record.
Nor did the Tribunal hold that cash payment alone makes business expenditure inadmissible. Its reasoning considered cash payments together with the predominance of self-made vouchers, while acknowledging stronger documentary support for part of the expenditure.
List of Cases Discussed:
1. ACIT New Delhi Vs M/s Modi Rubber Ltd. (ITAT Delhi); ITA No. 1952/Del/2014; 15/05/2018. Relied upon by the assessee for the proposition that business expenditure should not be disallowed merely on general observations without identifying specific defects in the books or vouchers. The Tribunal distinguished the authorities cited on the facts.
2. Danayya Shavaputrayya Math D S Math Vs ACIT (ITAT Bangalore); ITA No. 1286/Bang/2024. Relied upon against ad hoc percentage disallowance without rejection of books of account. Distinguished on the facts of the assessee’s supporting vouchers.
3. Godavari Sugar Mills Ltd. Vs CIT (Bombay High Court); [1985] 155 ITR 306. Cited by the assessee against disallowance of expenditure actually incurred for business merely because it was considered excessive or unreasonable. The Tribunal distinguished the cited authorities on the evidentiary facts.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT AGRA
This appeal is directed against the impugned order dated 24.04.2026 passed in appeal No NFAC/2017-18/10032597 by the Commissioner of Income-tax (Appeals), NFAC Delhi (hereinafter referred to as the “CIT(A)), u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) for the A.Y. 2018-19, wherein ld. CIT (A) has dismissed assessee’s appeal.
2. The assessee is a LIC agent and filed her return of income on 29.08.2018 declaring total income of Rs.10,25,740/-. The case was selected for scrutiny and accordingly statutory notices were issued. The AO noted that during the year under consideration, the assesee had declared LIC commission receipt at Rs.84,37,623/- and interest income at Rs.96,547/-. The AO further noted that during the accounting period, the total expenses were shown at Rs.73,48,431/- and net profit was disclosed at Rs.11,85,738/-. The AO noted that the assessee had claimed following expenses in her return of income :
| 1. | Sales promotion/publicity | Rs.8,90,600/- |
| 2. | Conveyance | Rs.6,54,948/- |
| 3. | Other Expenses | Rs.8,43,380/- |
| 4. | General Expenses | Rs.7,66,096/- |
2.1 The AO after analysing the details filed by the assessee, disallowed 25% of the expenditure under the above heads after the assessee reconciled the details under the above head. The relevant extract of the assessment order in para No. 5 is reproduced as under :
“5. As the assessee is an insurance agent, she might have incurred certain amount under above heads. Since the entire amounts are made in cash possibility of inflation of expenses to reduce the tax incidence cannot be over ruled. It is also seen that during the year the assessee received Rs. 8437623/- as commission out of which Rs. 7348431/- has been deducted as expenditure which is 87.09% of the commission. The expenses claimed by the assessee are on a higher side. Considering the non-verifiability of the expenses, cash expenditure made for them and the improper manner in which the ledgers were prepared, disallowance out of the above all expenses on reasonable estimate is warranted in this case. Hence twenty five percent of expenditure under each heads as mentioned here under are disallowed and added to the total income of the assessee.
| 25% of Other Exp. | Rs. 210845/- |
| 25% of General Expenses | Rs. 191524/- |
| 25% of Gift to customers | Rs. 187500/- |
| Total disallowance | Rs. 589869/- |
“
2.2 Aggrieved with the said order, the assessee filed an appeal before the learned CIT(A) who agreed with the findings of the AO and dismissed the appeal of the assesee.
3. Aggrieved with the order of learned CIT(A), the assesee is in appeal before us on the following grounds:
“1. That the Ld. CIT (Appeals) NFAC has erred both on facts and in law in confirming the adhoc disallowance of Rs.5,89,869/- made by the AO, NFAC out of certain expenses as mentioned in the assessment order.
2. That the Ld. CIT (Appeals) NFAC while confirming the adhoc disallowance of Rs.5,89,869/- has totally ignored the specific submission that:-
-
- The addition made by AO, NFAC is on general and arbitrary presumption;
- All the ledger accounts, bills and vouchers for the expenses claimed were filed;
- The addition has been made without pointing out any specific defects in the books of accounts maintained and further without pointing out any expense which was not for business purpose.
3. That under the facts and circumstance of the case, the adhoc disallowance out of expenses claimed, confirmed by ld. CIT (Appeals), deserve to be deleted.”
4. At the time of hearing, the learned AR filed a written submission which is reproduced as under:
“1. The present appeal is against the ad-hoc disallowance out of expenses, as mentioned in the Assessment Order (Page 2).
2. The assesse is an insurance agent. Commission receipt has been declared at Rs 84,37,623/- out of which expenses of Rs 73,48,431/- has been claimed and net profit has been show at Rs 11,85,738/-.
3. Kindly refer page 10 Para 5 of the Assessment Order.
4. Disallowance made is arbitrary and on own presumption of the Assessing Officer. Books of accounts have been maintained, ledger account of expenses were filed along with cash memos, bills and vouchers for expenses.
5. Disallowance has been made only for the reason that the expenses claimed by the assesse are on higher side and considering the non-verifiability of the expenses, cash expenditure made.
6. Ad-hoc disallowance is unjustified considering the fact that books of accounts maintained have not been rejected. No discrepancy or defect pointed out. No finding of the AO that the expenses claimed and disallowed are of personal nature or are incurred for non-business purpose.
7. Reliance is placed on: –
ACIT New Delhi vs. M/s Modi Rubber Ltd. (ITA No. 1952/Del/ 2014, decided on May 15, 2018), The Tribunal ruled that Assessing Officer (AO) cannot reject business expenses or make ad-hoc additions simply based on general observations. To disallow an expense, the AO must point out specific, verifiable defects in the assesse’s books of accounts or vouchers.
Danayya Shavaputrayya Math v. ACIT (ITAT Bangalore) ITA No. 1286/Bang/2024 the tribunal ruled that an ad-hoc disallowance of a percentage of expenses is unjustified without a prior rejection of the books of accounts.
Godavari Sugar Mills Ltd. v. CIT [1985] 155 ITR 306 (Bom)
The High Court ruled that an Income Tax Officer (ITO) cannot disallow an expenditure that has actually been incurred by an assessee for the purpose of their business purely on the grounds that the expense is “excessive or unreasonable”
To disallow such expenses, the taxing authorities must explicitly prove that the transaction in question is a sham, non-bona fide, or that the price recorded in the books of account is incorrect
It is thus prayed that the appeal be allowed and the addition made by AO and confirmed by Ld. CIT (A) be deleted.”
5. We have heard both the parties and perused the material on record. The assessee submits that books of accounts have been maintained, ledger account of expenses were filed along with cash memos, bills and vouchers for expenses. Relying upon the above case laws the Ld. AR submitted that where no defects are pointed out in the books of account, no ad hoc disallowance can be made. However, the facts are distinguishable in this case, as the entire expenses are incurred by the assessee in cash, which were supported by self-supporting vouchers in majority of expenses. However, certain expenses are supported by invoices of third parties also. Therefore, considering the facts of the present case, we deem it appropriate to reduce the disallowance of Rs.5,89,869/- to Rs.2,00,000/- and the assessee gets a relief of Rs.3,89,869/-. Accordingly, grounds of appeal are partly allowed.
6. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 12/10/2026.
