ITAT Allows Appeal; Deletes Additions on Bogus Purchases and Adhoc Expense Disallowances

The assessee, engaged in a scrap dealer business, filed its return of income on 28/09/2018 reporting total income of Rs. 10,08,430/-, which was disposed of under Section 143(1) on 15/05/2019. The case was picked up for limited scrutiny through CASS on the parameter “Income from Scrap”. The AO issued notice under Section 143(2) dated 22/09/2019 through the ITBA portal. During assessment, the AO treated certain entries as unexplained, treating purchases of Rs. 88,092/- as bogus, and made ad hoc disallowances: 20% of total salary expenses amounting to Rs. 3,74,980/- and 25% of car-related expenses amounting to Rs. 98,528/-. The assessee had furnished replies and explanations, but the AO went ahead to make the additions, and the CIT(A)/NFAC, by order dated 13/12/2024, rejected the assessee’s appeal on merits as not being maintainable.

Before the Tribunal, the assessee explained that certain repair bills had been wrongly booked under purchases and had been reconciled before the AO; salary payments were actually made to employees and supported by records; and the vehicles were used exclusively for business purposes (directors having personal vehicles). The Tribunal examined the record and noted the absence of any material or contrary evidence placed by the department to rebut these explanations. On these facts, the Tribunal held that the addition of Rs. 88,092/- treated as a bogus purchase and the ad hoc disallowances of Rs. 3,74,980/- (salary) and Rs. 98,528/- (car expenses) were not sustainable.

Main Issue: Whether the addition of Rs. 88,092/- is treated as bogus purchase and ad hoc disallowances of Rs. 3,74,980/- (20% on salary) and Rs. 98,528/- (25% on car expenses) are sustainable when the assessee reconciled the entries, produced records of payment, and the department produced no contrary material.

ITAT Held: The Tribunal, after going through the documents on record and considering the submissions, approved the explanation of the assessee that some of the repair bills were incorrectly reflected as under purchases and reconciled before the AO. No material on record brought out by the department was found by the Bench to support the disallowance of a flat percentage on salary or car expenses. Observing that salary payments were made to identifiable personnel and records existed, the Tribunal ruled that an ad hoc disallowance on salary was not acceptable in the lack of cogent evidence.

Similarly, the assertion that vehicles were used solely for business purposes was not disputed. Therefore, the Tribunal ruled that the additions and ad hoc disallowances were not sustainable and arbitrary. The appeal was granted and the additions of Rs. 88,092/-, Rs. 3,74,980/- and Rs. 98,528/- were ordered to be deleted. The order was dated 10/10/2025

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