Delhi HC Rejected Ad Hoc Expense Disallowance as Books of Account Were Not Rejected

PCIT Vs R.G. Buildwell Engineers Ltd. (Delhi High Court)

The Revenue challenged the orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT), which had deleted additions made by the Assessing Officer (AO) in Assessment Year 2010-11.

The additions related to two categories of expenses: (i) expenses towards bricks, machinery repair, cartage, etc., amounting to approximately Rs. 1.1 crore, and (ii) labour expenses amounting to approximately Rs. 2.3 crore.

For the first category, the AO held that insufficient evidence had been furnished and consequently disallowed 10% of the claimed expenditure. The Commissioner (Appeals) reduced the disallowance by half. The ITAT subsequently deleted the disallowance on two grounds: first, that the books of account had not been rejected; and second, that similar expenses had consistently been allowed in earlier scrutiny assessments.

With respect to labour expenses, the AO made additions on similar reasoning. These additions were also ultimately deleted by the ITAT based on the same considerations.

The Delhi High Court observed that the principal reasoning adopted by the ITAT—namely, that the books of account had not been rejected and that there was a consistent history of allowing such expenses in scrutiny assessments—could not be regarded as unreasonable. The Court found the ITAT’s reasoning sufficient to support its conclusion.