ITAT Mumbai: Ad-hoc Disallowance U/s 37(1) Unsustainable Without Specific Defects – Revenue Appeal Dismissed

DCIT Vs NDX P2P Pvt. Ltd. (ITAT Mumbai)

In the ITAT Mumbai dismissed the Revenue’s appeal and upheld deletion of an ad-hoc disallowance made by the AO on “other expenses”, holding that estimated disallowance cannot be sustained where books are audited and no specific defects are identified.

The assessee, operating a P2P lending platform (“Liquiloans”), claimed other expenses of ₹44.14 crore. The AO disallowed 20% (₹8.82 crore) u/s 37(1) alleging lack of proper substantiation. Before CIT(A), the assessee furnished detailed ledger accounts, party-wise break-ups, invoices, and TDS details, and the disallowance was deleted after remand proceedings.

The Tribunal held:

• Disallowance based on “rule of thumb” or suspicion is impermissible when books are audited and not rejected.

• AO failed to identify any specific non-genuine expense or defect in vouchers or records.

• Estimation of expenditure is justified only when accounts are unreliable, which was not the case here.

• A disallowance u/s 37(1) must rest on objective evidence, not conjectures.

Accordingly, the deletion of ₹8.82 crore disallowance was upheld and the Revenue’s appeal was dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the Revenue is directed against order dated 13.08.2025 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2022-23, raising following grounds:

1. On the facts and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 8,82.99.568/- (i.e., 20% of Rs. 44.14.97,840/-) made by the Assessing Officer out of “Other Expenses”, without appreciating that the assessee failed to furnish documentary evidence in support of the expenses claimed, despite specific opportunity provided during assessment proceedings.

2. The Ld. CIT(A) erred in holding that the disallowance was made on an ad-hoc basis without any basis, ignoring the fact that the disallowance was necessitated due to non-submission of verifiable supporting documents by the assessee, and was made on a reasonable and conservative estimation in the absence of proper justification of the expenditure.

2. Brief facts of the case are that the assessee is a technology- driven financial intermediary operating a Peer-to-Peer (P2P) lending platform under the brand “Liquiloans.” The assessee filed its return of income for the year under consideration on 07.11.2022, declaring a total income of ₹ 3,29,07,700/-. The return was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (“the Act”) was issued on 02.06.2023. Notices under section 142(1) of the Act were also issued. According to the Assessing Officer, the assessee did not initially respond to the notices.