ITAT: Disallowances made on Ad Hoc basis Without Specifying Particular Mistake Cannot Not Permitted

ITAT: Disallowances made on Ad Hoc basis Without Specifying Particular Mistake Cannot Not Permitted

The Income Tax Appellate Tribunal (ITAT), Mumbai by its two-member bench of Astha Chandra (Judicial Member) and Shamim Yahya (Accountant Member) while setting aside the orders of the authorities observed that disallowances made on ad hoc basis without specifying particular mistake cannot be permitted.

The assessee/appellant- Dynamix India Drill-Con Co., challenged the ad hoc disallowance on the issue of the disallowance of subcontractor charges. Assessing Officer in the assessment order had noted that the assessee has debited Rs. 6,37,62,122 as subcontractor expenses. Assessee was asked to submit vouchers, but AO noted that the assessee could not substantiate adequate supporting vouchers, hence he made an ad hoc disallowance of Rs. 3,00,000.

Subsequently, the Commissioner of Income Tax (Appeals) [CIT(A)], in the appeal filed by the assessee, compared the assessee's net profit and gross profit ratio for the Assessment Year’s (AYs) 2013–14 and 2014–15 and found that the assessee's net profit had decreased from 6.96% in the AY 2013–14 to 5.90% in the AY 2014–15. Hence, he proceeded to confirm the disallowances.

The contention of the assessee was that these additions were done on ad hoc basis without cogent reasoning. Assessing Officer had not pointed out specific documents which were missing. Assessee further submitted that just because ratio had fallen a little bit, it does not give blanket permission to make ad hoc disallowances.

The ITAT agreed with the contention of ld. Counsel of the assessee that the disallowances were done on ad hoc basis without specifying particular mistake. Such approach cannot be supported by noting that there was slight fall in the GP ratio as done by the ld. CIT(A).

Accordingly, ITAT set aside the orders of the authorities below and decided the issue in favor of the assessee.