Karuppiah Meenachi Vs ITO (ITAT Chennai)
SEO Title: ITAT Chennai Restricts Ad Hoc Expense Disallowance to 5% for Petrol Dealer
SEO Description: ITAT Chennai reduces the ad hoc expense disallowance for a petrol/diesel outlet from 10% to 5%, directing recomputation of income.
Summary: This appeal by the assessee challenged the CIT(A)/NFAC, Delhi order dated 21.02.2026 for AY 2017-18. The assessee, an individual engaged in BPCL dealership and running a petrol/diesel outlet, had filed a return declaring total income of Rs.6,54,280/-. During scrutiny, the Assessing Officer found that the assessee could not properly substantiate certain expenses and made an ad hoc disallowance of 10% of total expenses of Rs.49,48,022/-, amounting to Rs.4,94,802/-. The AO also made an addition of Rs.3,08,028/- representing the difference between bank account credits and returned income. The CIT(A) deleted the Rs.3,08,028/- addition but sustained the 10% expense disallowance.
Before the Tribunal, the assessee submitted that its profit margin consistently ranged from 0.2% to 1.66% and its gross profit margin ranged from 1.92% to 2.40%. It was argued that, given the high volume of transactions involved in the business, a 10% ad hoc disallowance would result in an artificially high profit margin and was excessive merely because a small portion of the expenses could not be fully substantiated. The Departmental Representative relied upon the orders of the lower authorities.
The Tribunal found merit in the assessee’s contention. Considering the nature of the business, volume of transactions and the fact that the disallowance was made only on an ad hoc basis for want of complete substantiation of a portion of the expenses, it held that the 10% disallowance sustained by the CIT(A) was on the higher side. The Tribunal considered restriction of the disallowance to 5% reasonable to meet the ends of justice and directed the Assessing Officer to restrict the disallowance accordingly and recompute the assessee’s income. It clarified that the decision was based purely on the facts and circumstances peculiar to the assessee’s case and should not be treated as a precedent in any other case. The appeal was therefore partly allowed. The order was pronounced on 19.08.2026 at Chennai.
List of Cases Discussed / Relied Upon
- None were discussed or relied upon in the supplied material.
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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
This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, (in short “CIT(A)”) passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”) dated 21.02.2026 for Assessment Year (AY) 2017-18.
2. The assessee is an individual engaged in the business of BPCL dealership and running a petrol/diesel outlet. The assessee filed a return of income for AY 2017-18 on 20.10.2017 declaring total income of Rs.6,54,280/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The A.O called on the assessee to furnish details pertaining to the claim of expenses. Since the assessee could not substantiate the expenses properly, the AO treated 10% of the total expenses at Rs.49,48,022/- to make an addition of Rs. 4,94,802/-. The AO also treated the difference between the credits in the bank account and the income returned by the assessee to make an addition of Rs.3,08,028/-. Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) get partial relief to the assessee by deleting the addition made to the tune of Rs. 3,08,028/- and sustain the disallowance made an adhoc at 10%. The assessee is in appeal before the Tribunal against the order of the CIT(A).
3. The Ld. Authorized Representative (AR) of the assessee submitted that the profit margin of the assessee is consistently in the range of 0.2% to 1.66% and the GP of the assessee is in the range of 1.92% to 2.40%. The Ld. AR accordingly submitted that the disallowance of expenses on adhoc basis at 10% will result in higher margins which are not actually earned by the assessee. The Ld. AR also submitted that considering the nature of business the assessee is engaged in where volume of transactions is very high the A.O. is not correct in making the adhoc addition for the reason that the assessee has not be able to fully substantiate a small portion of the expenses..
4. The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.
5. We have considered the rival submissions and perused the material available on record. The assessee is engaged in the business of BPCL dealership and running a petrol/diesel outlet. The A.O. made an ad hoc disallowance of 10% of the total expenses of Rs.49,48,022/- on the ground that the assessee could not properly substantiate a portion of the expenses. The CIT(A) sustained the said disallowance. The contention of the Ld. AR is that the assessee’s business is characterized by high volume of transactions and that the assessee has consistently disclosed a profit margin ranging from 0.20% to 1.66% and GP ranging from 1.92% to 2.40%. It is, therefore, submitted that an ad hoc disallowance of 10% would result in an abnormal increase in the profit margin, which is not commensurate with the nature of business carried on by the assessee. We find merit in the said contention. Considering the nature of the business, the volume of transactions and the fact that the disallowance has been made only on an ad hoc basis for want of complete substantiation of a portion of the expenses, we are of the view that the disallowance sustained by the CIT(A) at 10% is on the higher side. In our view, restricting the disallowance to 5% would be reasonable to meet the ends of justice. Accordingly, we direct the A.O to restrict the disallowance to 5% and recomputed the income of the assessee. It is ordered accordingly.
6. Before parting we wish to clarify that the decision rendered in the present case is purely based on the facts and circumstances peculiar to the assessee’s case and therefore shall not be treated as precedence in any other case.
7. In the result, the appeal of the assessee is partly allowed.
Order pronounced on 19th day of August, 2026 at Chennai.
