Ad Hoc Disallowance Without Rejecting Books Unsustainable: ITAT Delhi

Radcliffe Schools Education Ltd. Vs ACIT (ITAT Delhi)

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) heard the assessee’s appeal against the order of the CIT(A)/NFAC dated 17.11.2025, which had confirmed the Assessing Officer’s disallowance of business promotion expenses amounting to ₹73,78,079 for the relevant assessment year.

The assessee is engaged in the business of schooling, granting franchises to schools in Hyderabad, Allahabad and Kochi, and in the composite sale of courseware books and rentals for business and K-12 schools. The case was selected for scrutiny under Sections 143(2) and 142(1) of the Income-tax Act. During the assessment proceedings, the assessee furnished detailed particulars of its business promotion expenses. The Assessing Officer, however, concluded that the assessee was meeting the personal expenses of its directors under the guise of business promotion expenses and disallowed the entire amount of ₹73,78,079. The CIT(A) upheld the disallowance, observing that the principle of res judicata did not apply to income-tax proceedings.

Before the Tribunal, the assessee contended that similar business promotion expenses had been consistently allowed in Assessment Years 2013-14 to 2016-17. It was further submitted that an identical disallowance made for Assessment Year 2018-19 had been deleted by the CIT(A). The assessee explained that business promotion expenses were comparatively higher during the year under consideration and Assessment Year 2018-19 because turnover had declined, requiring greater efforts by the directors to generate business. It was also argued that the books of account were duly audited, had not been rejected by the Assessing Officer, and the documentary evidence supporting the expenditure had not been disputed. The assessee therefore sought application of the principle of consistency.

The Revenue submitted that the expenditure had been incurred through the personal credit cards of the directors and therefore represented personal expenditure not allowable under Section 37(1) of the Act.

The Tribunal examined the reply furnished by the assessee during the assessment proceedings, including the ledger account and details of the business promotion expenditure. It also considered the assessee’s submission that an identical disallowance for Assessment Year 2018-19, based on the same credit card transactions and supporting documents, had already been deleted by the CIT(A). The assessee relied on decisions including ACIT Vs. Merchant Agri Global Pvt. Ltd. and Axora Resources Ltd. Vs. ITO, wherein it was held that ad hoc disallowances are not sustainable where the books of account have not been rejected.

The Tribunal found that the authorities cited by the assessee were applicable because, in the present case also, the books of account had not been rejected and were duly audited. It held that the ad hoc disallowance made by the Assessing Officer without rejecting the books was contrary to settled legal principles. The Tribunal further observed that the Revenue had consistently accepted the same pattern of expenditure in earlier years and that a similar addition for Assessment Year 2018-19 had been deleted by the CIT(A). It found no satisfactory justification for departing from the principle of consistency merely because the proportion of business promotion expenses to turnover was higher during the relevant year. The Tribunal also noted the assessee’s explanation that higher expenditure resulted from reduced turnover and increased efforts to solicit business.

The Tribunal further observed that the Assessing Officer’s conclusion that the expenditure represented personal expenses of the directors was based on surmises. Holding that the principle of consistency ought to have been followed in the facts of the case, the Tribunal allowed the appeal and directed deletion of the addition of ₹73,78,079 made on account of disallowance of business promotion expenses.

Cases Discussed

• Axora Resources Ltd. Vs. ITO, ITA No. 1275/Kol/2025, order dated 16.09.2025
• ACIT Vs. Merchant Agri Global Pvt. Ltd., ITA No.1493/M/2023, order dated 27.03.2024
• CIT vs. Anil Kumar & Co., 386 ITR 702 (Karnataka)
• PCIT Vs. Marg Ltd., 396 ITR 580 (Mad.)

FULL TEXT OF THE ORDER OF ITAT DELHI

The appeal of the assessee is directed against the order of Id. CIT(A)/NFAC, Delhi dated 17.11.2025 u/s 250 of the of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) wherein addition made to the tune of Rs.73,78,079/-disallowing promotion expenses of the assessee for the relevant year made by Assessing Officer in assessment order dated 28.11.2019 were confirmed.

2. The facts in brief are that the assessee is engaged in the business of schooling and giving franchise to different schools in the city of Hyderabad, Allahabad and Kochi. It is further noticed that the assessee is engaged in composite sale of courseware books and rentals for business schools and K-12 schools. The case of the assessee was selected for scrutiny by issuing notice u/s 143(2) of the Act dated on 28.08.2019 and followed by notice u/s 142(1) of the Act with questionnaire. The assessee filed detailed reply to the questionnaire giving detail of promotion expenditure w.e.f. 20.04.2016 till 31.03.2017 as find recorded in para 3.1 of the assessment order. However, the Assessing Officer did not consider the said reply to be acceptable on the ground that assessee was making personal payments of its directors in the garb of business promotion expenses. Hence, the addition of Rs. 73,78,079/-was made by disallowing the promotion expenses claimed by the assessee in the relevant year.

3. Aggrieved by the impugned addition in the assessment order, the assessee filed appeal before the Id. CIT(A) who has dismissed the same by confirming the addition on the ground that the arguments of the appellant regarding not following the principle of consistency as the same expenses having been allowed earlier as well as in the subsequent year are not tenable because the principle of res-judicata was not applicable to the tax proceedings.

4. Aggrieved by the impugned order, the assessee is in appeal before us and has raised the following grounds of appeal:

“1. That the impugned order dated 19/12/2019 passed u/s 143(3) by the Ld. AO is bad in law, without jurisdiction and ultra-vires the provisions of the Act.

2. That as per facts of the case, the Ld. A.O. has erred in issuing notice u/s 143(2) without complying to the CBDT Instruction f.No.225/157/2017/ITA-II dated 23.06.2017 (as there was no mention of the type of scrutiny under which the case of the assessee has been selected) and the notice issued u/s 143(2) is not valid as per provisions of Act.

3. That the Ld. AO has erred on fact and in law, in making addition of Rs.73,78,079/- on account of disallowance of business promotion expenses without giving a show cause or giving an opportunity to explain the expenses

4. That the Ld. AO has erred on fact and in law, in making addition of Rs.73,78,079/- on account of disallowance of business promotion expenses on arbitrary basis without taking the cognizance of facts and records produced during the course of assessment which is against the provisions of law.

5. That in any case and in any view of the matter, Ld. AO has erred in law and in facts in making addition of Rs.73,78,079/- in the hands of the assessee.”

5. We have heard the Id. AR and the Id. DR and examined the record. The question to be determined by us is whether the Id. lower authorities were justified in not following the principle of consistency in the case of the assessee and disallowance of promotion expenses despite being allowed in previous 3-4 years and the subsequent year has resulted into miscarriage of justice or not? The Id. AR at the very outset submitted that the assessee has been claiming business expenses which have been allowed in the Assessment Years 2013-14, 2014-15, 2015-16 and 2016-17. It is further submitted that the addition made for assessment year 2018-19 has been deleted by the Id. CIT(A) by passing the order dated 22.03.2022 for A.Y. 18-19 placed at page 75-85 of the paper book. It is argued that the Id. Assessing Officer as well as the Id. CIT(A) misconceived the fact that the percentage of business promotion expenses vis-a-vis turnover were higher in this year and there was no justification for following the principle of consistency as each year is independently assessed in the given facts and circumstances. The Id. AR would submit that even the business promotion expenses for A.Y. 2018-19 were 53.74% of the total turnover and the same has been allowed by the Id. CIT(A). It is further submitted that in the previous assessment years 2013­14 to 2016-17, the business promotion expenses has been allowed continuously in the assessment proceedings. It is further submitted that there was an explanation as to why the business promotion expenses were higher for the assessment year 2017-18 (year under consideration) and for the A.Y. 2018­19 because the turnover was less for these two years as compared to earlier four assessment years and as a result the directors of the assessee were engaged in soliciting more business which has resulted into more business promotion expenses. It is further submitted that the Id. Assessing Officer has not doubted or rejected the books of accounts wherein the accounts has been duly audited containing the business promotion expenses and the proof of the spending expenses for business promotion has also not been rejected by the Id. AO or by the Id. CIT(A). It is therefore argued that in these given facts and circumstances, the principle of consistency need to be followed and the business promotion expenses has been wrongly added by disallowance of the same. It is therefore prayed that the appeal be allowed in the larger interest of justice.

6. The Id. DR on the other hand would submit that there is no explanation brought on record by the assessee/appellant as to why the business promotion expenses has been done from the personal credit cards of the directors and therefore the Id. Assessing Officer has rightly disallowed the said business promotion expenses as the same were personal expenses of the directors which were not permissible expenditure u/s 37(1) of the Act. The Id. DR therefore prayed that the Id. Assessing Officer has rightly made the addition and the same has been rightly confirmed by the Id. CIT(A).

7. We have considered the rival submissions. The reply given by assessee to the questionnaire accompanied u/s 142(1) is relevant for deciding the controversy and for that reason, we find it expedient to extract para 3.1 of the assessment order as under:

“3.1 Assessee submitted its reply in which assessee submitted ledger account of business promotion. On perusal of business promotion account, it is found that most of the bills were booked towards credit card of Amit Rai, card no. 74431490043002 & 4617970100188342 and 2 payments towards Meenakshi credit card. Following entries were booked against payments of business promotion, by other than company credit/debit card, details given by assessee reproduced as under:

8. It is argued in the written submissions by the Id. AR that the identical disallowance on the same ground was made by Id. AO for A.Y. 2018-19 by passing order u/s 143(3) dated 11.03.2021 and the detail of the credit card are identical to those year under consideration placed at page 70-71 of the paper and a verbatim order was passed as in the subject year. It is further submitted that the said disallowance was deleted by the Id. CIT(A) vide order dated 22.03.2022 placed at page 75-78. It is further submitted that the documents placed at page 84 of the paper book would clearly show that on the same set of facts, documents and submissions reproduced at page 80-82 of the paper book, the Id. CIT(A) has deleted the addition in entirety. It is further submitted that the books of accounts has not been rejected while making the ad-hoc disallowance and the books of the assessee were duly audited u/s 44AB of the Act.

9. In that regard, the Id. AR has relied the case of ACIT Vs. Merchant Agri Global Pvt. Ltd., ITA No.1493/M/2023, order dated 27.03.2024. The Id. AR further relied the case of Axora Resources Ltd. Vs. ITO, ITA No. 1275/Kol/2025, order dated 16.09.2025. The relevant extract of the said case are as under:

“After hearing the rival contentions and perusing the materials available on record, we find that the Id. AO has made the disallowance at 10% of the total expenses under various heads on the ground that there was huge increase of expenses during the year and the assessee has not furnished any details/ evidences qua these expenses. Whereas as a matter of fact the assessee requested the Id. AO vide letter dated 12.03.2024, to allow some time to reply to the said query. However, the Id. AO passed the assessment order on 18.03.2024. We note that these expenses incurred by the assessee are on account of insurance of Rs.10,93,252/-, legal and professional charges of Rs.57,11,025/-, Rent of Rs.62,39,101/-, selling expenses of Rs.2,53,45,188/-. We note that the Id. AO has made a disallowance on estimated basis by simply stating an ad-hoc disallowance is not sustainable in the eyes of law. Moreover, there has been no rejection of books of account by the Id. AO. We also note that the books of account were duly audited and no adverse inference was drawn by the Id. AO. In our opinion, no ad-hoc disallowance can be made without rejecting the books of account. The case of the assessee find support from series of decisions namely; CIT vs. Anil Kumar & Co. 386 ITR 702 (Karnataka), PCIT Vs. Marg Ltd. 396 ITR 580 (Mad.). Accordingly, we set aside the order of Id. CIT (A) and direct the Id. AO to delete the addition. The ground no. 6 is allowed.”

10. We have noticed that the cases relied by the appellant are perfectly covering the case in hand because in this case also assessee’s books of accounts has not been rejected which were duly audited and the ad-hoc disallowance made by the Id. AO without rejecting the books of account is contrary to the settled legal principles and the taxation jurisprudence. We do not find force in the arguments of the Id. DR wherein he has argued that the Assessing Officer has rightly declined to follow the principle of consistency in this case as the principle of res-judicata is not applicable in taxation matters. In that regard, we are of the considered opinion that principle of consistency cannot be ignored in this case because there is no satisfactory justification for not following the principle of consistency merely on the ground that the percentage of business promotion expenses was comparatively higher than the previous 4-5 years. In that regard, the assessee has already given an explanation that since there was less turnover, the assessee/appellant lawfully incurred more expenses on business promotion. Further, the Assessing Officer has made the disallowance on the basis of surmises wherein it is observed that the assessee was involved in making the payment of the personal expenses of the directors. The similar pattern of expenses has been continuously allowed by the Revenue to the assessee and the same pattern has been followed while the Id. CIT(A) for the year 2018-19 has allowed the appeal of the assessee wherein similar addition has been made by the AO. For these reasons, we are of the considered opinion that in the given facts and circumstances, the principle of consistency should have been followed by the revenue authority for this concerned year also. The grounds raised in the appeal are accordingly allowed. The addition made by the Assessing Officer is accordingly ordered to be deleted.

11. In the result, the appeal of the assessee is allowed in above terms.

Order Pronounced in the Open Court on 08/07/2026.