Bestone Industries Private Limited Vs ITO (ITAT Delhi)
Three Disallowances, One Missing Ingredient: Evidence
An AO cannot disallow salary, reduce interest to a preferred rate, or add a percentage of creditors without establishing the facts that justify each adjustment. The Delhi Bench of the ITAT has deleted all three adjustments in Bestone Industries Private Limited v. ITO, ITA No. 4758/Del/2026, AY 2022–23, pronounced on 28 September 2026.
The additions in dispute totalled ₹1,47,37,019. They concerned employee benefit expenses of ₹88,34,678, interest of ₹41,50,312 on a director’s unsecured loan, and ₹17,52,029 representing 25% of outstanding creditors. The Tribunal allowed the assessee’s appeal on each issue.
Salary cannot be disallowed merely because TDS was not deducted
The AO had disallowed ₹88,34,678 of employee benefit expenses because the company had not deducted tax from the salary payments. The company’s explanation was straightforward: the salaries paid to the employees concerned did not give rise to a TDS obligation. It had also furnished an employee-wise salary chart during the assessment proceedings.
The Tribunal noted that the Department had not rebutted this factual position. If the salary paid to the relevant employees did not attract deduction of tax, failure to deduct TDS could not be used as a reason to disallow that salary expenditure. The AO had not properly considered the employee-wise details, and the CIT(A) had sustained the disallowance. The Tribunal reversed it.
This finding depends on the taxability and applicable withholding requirement for the employees’ salaries. It does not mean that salary is outside TDS simply because the employer labels it so. Here, the employee-wise material was available, and the Revenue did not show why tax ought to have been deducted on the amounts in question.
Can the AO substitute 12% for an agreed 18% interest rate?
The company had borrowed money from a director and paid interest at 18%. The lower authorities considered the rate excessive and restricted the allowable rate to 12%, resulting in a disallowance of ₹41,50,312, representing the six percentage point difference. The company explained that its financial requirements justified the borrowing and the rate paid.
The Tribunal found that the restriction rested on an estimate, without reasons or material showing why the interest was excessive. The Departmental Representative could not identify a basis for selecting 12% as the appropriate rate. The Tribunal therefore deleted the disallowance.
The important point is the missing comparison and finding, not a general declaration that 18% interest paid to a director must always be allowable. A related party payment can be examined under the applicable provisions. But an AO who proposes to restrict it must establish the relevant facts and explain the benchmark used. Choosing a lower rate without that exercise is an ad hoc adjustment.
The order contains an observation that, if the payment was unjustified, the authority should have disallowed the entire interest rather than an estimated portion. That sentence should be read in the context of this case’s unsupported estimation. The operative finding is that the authorities placed no reasoned basis on record for disallowing the six percentage point difference.
Why were exactly 25% of the creditors treated as doubtful?
The third adjustment concerned outstanding creditors. The AO added ₹17,52,029, calculated as 25% of the relevant balance, even though the company said it had supplied the details and documents sought in the format prescribed in the notice under Section 142(1). The CIT(A) confirmed the addition.
The Tribunal found no material establishing that 25% of the creditors were not genuine. Neither authority had explained why that particular fraction of the balance should be rejected. The Revenue could not remedy this evidentiary gap before the Tribunal. The addition was accordingly deleted.
The result should be understood precisely. The Tribunal did not hold that every creditor appearing in a ledger must be accepted without enquiry. Its objection was to an unexplained percentage applied to the balance after the assessee had furnished the requested particulars, without identification of the entries said to be false or unreliable.
What connects the three findings?
Each addition began with a legitimate subject for enquiry. The AO could examine whether TDS was required on salary, whether interest paid to a director was excessive, and whether creditors were genuine. What the assessment lacked was a finding supported by the material for the particular amount added.
For salary, the Revenue did not counter the employee-wise position that TDS was not required. For interest, it did not substantiate the 12% ceiling. For creditors, it did not show why one-fourth of the balance should be treated as non-genuine. The Tribunal declined to sustain additions based on those unproved assumptions.
Author’s comment
Bestone Industries is a useful order against mechanical disallowances, particularly where the assessee has answered the AO’s specific information request. It also shows why a working paper should connect each proposed addition to its legal provision, the underlying transaction and the evidence establishing the precise amount.
The assessee’s success here should not obscure the need for proper records. An employee-wise salary and tax computation, the director’s loan terms and commercial justification for the interest rate, and creditor-wise confirmations or transaction documents give the AO facts to test. Where the Department still makes a flat-rate or percentage addition without confronting those facts, this decision supports a challenge to the basis and quantification of the disallowance.
FULL TEXT OF THE ORDER OF ITAT DELHI
Appeal in this case has been filed by the assessee against the order dated 13.02.2026 passed by the CIT(A)-24 Delhi for the A.Y. 2022-23. Grounds of appeal are as under :-
1. That the order of Ld. AO and CIT (A) is bad in Law and against facts of the case.
2. That the Ld. A.O. erred in making addition of Rs. 1,47,37,019/- without considering the submission of the assessee.
(1) Employees Benefits Expenses disallowed equal to Rs. 88,34,678/- for the reason tax not deducted at source despite the fact submitted during the course of proceeding that none of the employee’s salary was liable for TDS and a detail chart of employees wise salary submitted.
(2) On the facts and circumstances of the case, the AO has erred in disallowing interest paid on unsecured loans obtained from director holding that the same was excessive in nature without appreciating the commercial expediency of the same. Interest on unsecured loan paid to director @ 18% Rs. 1,24,50,936/- but allowed only 12% and disallowed balance 6% equal to Rs. 41,50,312/-
(3) The AO has erred in disallowing 25% of the outstanding creditors equal to of Rs. 17,52,029/- despite the fact that all required information furnished about creditors in format provided in notice u/s 142(1) of the Act.
3. That the Ld. CIT(A). erred in not considering the documents/details furnished during the course of proceedings.
4. That the appellant carves leave to add, alter, modify or delete any of the ground of appeal.
PRAYER
On the facts and in the circumstances of the case and in view of judicial precedents, it is humbly prayed that:
1. The order passed by the Ld. A.O. U/s 143(3) of the Act be quashed and set aside; and
2. Expenses claimed as above be allowed and demand be deleted.
2. Facts of the case as submitted by the Ld. Counsel of the assessee are as under :-
BESTONE INDUSTRIES PRIVATE LIMITED
House No. 19 Block-D Ground Floor Mansarover Garden New Delhi-110015
PAN NO-AAGCB4250N
Assessment Year- 2022-23
Facts of the Case
1. The Appellant is a company registered under the Companies Act, 2013 and engaged in the business of providing Information Technologies Services, Manufacturing and Retail Trading of Drinking Water and Healthcare Products.
2. The Appellant has filed its Income tax Return in ITR-6 for the AY 2022-23 vide acknowledgement No. 870231991271222 on 27th December 2022 by declaring the taxable income of Rs. 3,24,50,088.00 and paid tax due thereon Rs. 90,27,615.
3. The Return of the appellant was selected for scrutiny assessment U/s 143(3) of the I T Act, 1961 and assessment completed on 28th March 2024 with an addition of Rs. 1,47,37,019/- and a demand of Rs. 63,30,226/- was raised by denying certain expenditures and other amounts claimed.
4. The Ld. AO while processing the return u/s 143(3) of the Act didn’t allow expenditure in a part as detailed below:
| S.No. | Description | Expenses Claimed in P&L Statement | % of Expenses Disallowed | Amount Disallowed |
|---|---|---|---|---|
| 1 | Expenses on Which TDS was shown to be deducted | 2,94,48,927.00 | 30% | 88,34,678.00 |
| 2 | Interest on Loan Paid to Director @ 18% | 1,24,50,936.00 | 6% (18%-12%) |
41,50,312.00 |
| 3 | Sundry Creditors | 70,08,116.00 | 25% | 17,52,029.00 |
| Total Amount Disallowed | 1,47,37019.00 | |||
5. The Ld. CIT vide order dated 13.02.2026 under section 250 of the Act has dismissed the appeal and erred in not considering the documents submitted.
6. Aggrieved by the action of Ld. CIT in dismissing the appeal, this appeal has been preferred.
3. During proceedings before us the Ld. Counsel argued that AO disallowed expenses of Rs.88,34,678/- for the reason that tax was not deducted at source. In this regard the Ld. Counsel argued that these expenses were related to payment of salary to employees whose total income was not liable for TDS.
4. The Ld. Counsel also submitted that a detailed chart of employees wise salary was also submitted to the AO but the AO did not consider the chart and made the addition on this issue.
5. During proceedings before us the Ld. Counsel repeated the same arguments on this issue.
6. The Ld. DR could not rebut the factual position, therefore, keeping in view the fact that the employees whose salary were not liable for TDS was salary expenses disallowed by the AO without considering the details and the documents filed by the assessee and the Ld. CIT(A) also did not take cognizance of the Act. Therefore, we are of this considered view that since total salary of the employees did not attract TDS, therefore, the assessee was justified in not deducting TDS from their salary. Accordingly, the disallowance of expenses on this ground by the AO and its confirmation by the Ld. CIT(A) cannot be sustained. Accordingly, assessee’s appeal on this issue is allowed.
7. Appeal on the second ground is regarding disallowance interest on unsecured loan on estimate basis. In the assessment proceedings the Ld. AO disallowed interest paid to the director on loan from director of the company and made ad-hoc disallowance of interest @18% during appellate proceedings the Ld. CIT(A) made it on 12% on estimate basis.
8. The Ld. Counsel of the assessee argued that the interest was paid to the director on loan taken by the company. Keeping in view the financial exigency but both lower authorities have restricted interest payment on the estimate basis only.
9. Per contra the Ld. DR relied on the order of the authorities below.
10. We have considered the findings given by the authorities below on this issue and we find that the disallowance of interest by both the authorities have been made on estimate basis without brining any reason on record. Even during proceedings before us the Ld. DR could not rebut the allegation of the Ld. Counsel of the assessee that the disallowance of interest on estimate basis has no legal or financial legs. Accordingly, in our considered view if the payment of interest was not justified then the lower authority should have disallowed the entire interest payment but disallowance made on ad-hoc /estimate basis is not justified. Accordingly, assessee’s appeal on this issue is also allowed.
11. The first and last ground of appeal is regarding disallowance of 25% of outstanding creditors equal to Rs.17,52,029/- despite the fact that all required information were furnished by the creditors in the format provided in notice u/s.142(1) of the Act.
12. During proceedings before us the Ld. Counsel submitted that the AO had given format to provide details of creditors in the notice issued u/s.142(1) of the Act and the assessee complied all the requirements and all necessary details and documents were filed. But here again the AO disallowed 25% of outstanding creditors and the Ld. CIT(A) confirmed this disallowance.
13. Per contra the Ld. DR again relied on the order of the lower authorities on this issue.
14. We have considered the findings given by the lower authorities below on this issue and we find that the disallowance of 25% of the outstanding creditors made by the AO in the assessment order and confirmed by the Ld. CIT(A) in the appellate order are just on ad-hoc / estimate basis nothing either by the AO or by the Ld. CIT(A) to prove that 25% of the creditors were not genuine.
15. During proceedings before us even the Ld. DR could also not rebut it. Accordingly, we are of this considered view that ad-hoc disallowance of 25% of the outstanding creditors on estimate basis is not justified without bringing any material on record to prove it. Accordingly, the assessee’s appeal on this issue is allowed.
16. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 28.09.2026.
