Raj Quarry Vs DCIT (ITAT Ahmedabad)
Income Tax Appellate Tribunal (ITAT) Ahmedabad has significantly reduced the ad-hoc disallowance of business expenses for Raj Quarry for Assessment Year 2014-15, restricting it to 10% of the claimed amount. The Tribunal found that the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had failed to provide sufficient justification for the higher disallowances, especially when the assessee was already reporting a loss.
Raj Quarry had declared a total income of (-)₹1,35,40,922. During assessment, the AO disallowed one-third of expenses related to Mining, Site Carting, Labour & Providing, and Machinery Hire & Expenses for lack of proper substantiation. Additionally, one-fourth of the ₹45,77,900 claimed for diesel and petrol expenses was disallowed. The CIT(A) upheld these disallowances.
The ITAT, however, observed that the AO provided no clear justification for the specific disallowance percentages. Citing the assessee’s substantial current and brought-forward losses, the Tribunal concluded that even a 10% disallowance would result in no net tax payable. This decision aligns with judicial precedents where courts have often intervened to reduce arbitrary ad-hoc disallowances, particularly when books of accounts are not rejected and no specific defects are identified. For instance, various ITAT benches have held that disallowances on an estimated basis without rejecting books of accounts are not justified (e.g., Taxmann’s report on ITAT Delhi ruling, May 26, 2016). The ITAT partly allowed the appeal, emphasizing that without detailed justification from the revenue, a blanket disallowance is unsustainable.
