Bombay High Court Overturns Assessment, Criticizes AO's Lack Of Inquiry And CIT(A) & ITAT's Mechanical Endorsement Of Expense Disallowance
Bombay High Court Overturns Assessment, Criticizes AO's Lack of Inquiry and CIT(A) & ITAT's Mechanical Endorsement of Expense Disallowance
The Bombay High Court has quashed the Income Tax Appellate Tribunal's (ITAT) order that upheld an ad-hoc disallowance of 10% of expenses, which were alleged to be bogus purchases. The High Court criticized the ITAT's mechanical and tactically equitable approach, stating that such reasoning could not be endorsed, especially given the firm finding that the Assessing Officer's (AO) order lacked cogent and convincing evidence.
The Division Bench, comprising Justice G.S. Kulkarni and Justice Somasekhar Sundaresan, noted that when the ITAT, as the last fact-finding authority, rendered a categorical observation, any subsequent AO order not backed by solid evidence would be judicially untenable.
The assessee company approached the High Court to challenge the ITAT's decision, which upheld the Commissioner of Income Tax (Appeals) [CIT(A)]'s disallowance of 10% of total purchases that were claimed to be bogus. The addition was made to the assessee's income for the relevant assessment years. The assessee argued that all purchases were genuine and should be allowed as legitimate expenses, while the Revenue contended that all expenses should be treated as bogus and criticized the ITAT for only disallowing 10%.
The Bench emphasized that the ITAT's reasoning, which suggested that the assessee's failure to substantiate the alleged purchases with proper documentation and the opinion that goods could have been purchased in the grey market, represented an overly simplistic approach to affirm the CIT(A)'s order.
The High Court pointed out that the ITAT had accepted the indirect tax compliance indicated by the CIT(A), ultimately concluding that there was no convincing evidence supporting the AO's order. The Bench opined that, given a quasi-judicial finding of a lack of cogent and convincing evidence, it was unjust to expect the assessee to prove its innocence.
The Bench further criticized the absence of analysis in the ITAT's order regarding the rationale behind the 10% disallowance, questioning its plausibility and necessity. The Court noted that the AO failed to conduct the required inquiries, while the CIT(A) implemented a summary measure of disallowing 10% of the expenses, which was subsequently endorsed by the ITAT.
The High Court observed that simply adopting a 10% disallowance without substantiation would be arbitrary and unreasonable, particularly when the counter parties involved in these purchases could not be produced in later years.
In conclusion, the High Court deemed the ITAT's affirmation of the 10% disallowance repugnant, given its firm finding that the AO's order was untenable. As a result, the High Court allowed the assessee's appeals.
