Disallowance of Salary and EB Charges on ad hoc basis not maintainable

The issue in this appeal of assessee is against the order of CIT(A) confirming the action of AO in estimating the disallowance of expenditure on adhoc basis @ 10% on salary and EB charges.

Brief facts are that the assessee firm is a retail trader of textile business. During the course of scrutiny assessment proceedings, the AO noticed from the ledger account that the assessee has paid salary and EB charges to the extent of Rs.17,34,000/- as against salary and Rs.17,06,647/- as EB charges claimed immediately preceding year i.e., year ended 31.03.2016 at Rs.6.60 lakhs. As the assessee has not furnished any supportive documents, the AO disallowed 10% of salary and EB charges and thereby worked out the disallowance at Rs.1,73,400/- from salary and Rs.1,70,600/- from EB charges. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) confirmed the action of AO. Aggrieved, assessee filed appeal before the Tribunal.

ITAT observed that the assessee in the relevant year 2016-17 i.e., financial year claimed salary and EB charges to the extent of Rs.17.34 lakhs and Rs.17.06 lakhs respectively on a total turnover of Rs.5,63,46,823/-. Further, it noted that in the immediate preceding year i.e., year ended 31.03.2016, the assessee has incurred salary expenses of Rs.6.60 lakhs and EB charges of Rs.2.88 lakhs as against total turnover of Rs.2,39,41,889/-. The turnover has increased more than double and consequently expenses have increased little more than doubt on both counts i.e., salary as well as EB charges. Alao, the AO has made estimated disallowance on the basis that the assessee has not furnished any separate documents like details of staff or details of electricity bills. Therefore, it held that this is purely adhoc disallowance made by AO and confirmed by CIT(A) and there is no itemized disallowance and based on specific invoice. Hence, deleted the disallowance and allowed the appeal of assessee.

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