ITAT Deletes Expense Disallowance Based on Mere Suspicion:

The assessee is an individual engaged in the business of purchasing and selling raw hides and skins of animals, had filed his return of income declaring total income of Rs 9,75,610 for AY 2013-14. The AO had initiated reassessment proceedings under Section 147 of the Act. The original assessment, completed on 27 September 2021, included an addition of Rs 3,98,667 towards gross profit and Rs 38,44,000 under Section 69A. The assessment was subsequently set aside by the CIT(A) for fresh assessment.

In the fresh assessment completed on 6 March 2026, the AO made, among other additions, a disallowance of Rs 10,76,000 towards expenses, a disallowance of Rs 17,66,159 under Section 40A(3) for cash expenditure, and an addition of Rs 3,98,668 on account of alleged suppression of sales. The CIT(A) upheld these additions.

The assessee submitted that complete details of expenses, including books of accounts, cash book, ledger extracts, vouchers and supporting documents, had been furnished before the AO. The discrepancies arose because the accountant had incorrectly recorded certain expenses under different heads in the cash book, ledger and profit and loss account. The assessee had also provided clarifications and revised details to explain these differences.

The Tribunal observed that the AO had not identified any expenditure as bogus or unsupported by vouchers. Nor had the officer pointed out any defect in the assessee’s explanations or revised details. Significantly, the audited books of accounts had not been rejected. The Tribunal held that an ad hoc disallowance of 20% of the claimed expenses, based merely on conjecture and without establishing that the expenditure was not genuine, was unjustified. Accordingly, it directed the AO to delete the disallowance of Rs 10,76,759.

Regarding the disallowance of Rs 17,66,159 under Section 40A(3), the Tribunal noted that the AO had not adequately examined these explanations before confirming the disallowance. It therefore considered the issue to require further verification rather than outright deletion.

Accordingly, the Tribunal set aside the disallowance under Section 40A(3) and remitted the matter to the AO to verify whether the payments were made to different persons, examine the business expediency behind payments exceeding Rs 20,000, and determine whether the payments qualified for any applicable exception under Rule 6DD.