ITAT Slashes Baseless 10% Expense Disallowance to 4%

The assessee contested an ad hoc disallowance of Rs. 17,13,608, which represents 10% of the total costs for repairs and maintenance (Rs. 10.47 lakh), power and fuel (Rs. 48.37 lakh), and employee benefits (Rs. 1.12 crore). The Assessing Officer (AO), however, denied the request without considering the matter on merits. Aggrieved, the assessee company filed an appeal before CIT (A).

CIT (A)’s Decision: Due to the assessee’s failure to submit a revised Form 35 by the deadline, the CIT(A) dismissed the case as infructuous. The assessee appealed this decision. In violation of natural justice principles, the assessee contended that the updated form was submitted within the allotted time frame but was not taken into consideration.

Main Issue: Whether the ad hoc disallowance of 10% of the assessee’s claimed expenses, without any concrete evidence or comparable industry data, was justified.

ITAT Held: The ITAT Delhi partially accepted the assessee’s appeal. It was held that the AO’s 10% ad hoc disallowance was done solely on presumptions, without citing any supporting evidence or specific discrepancies in the books of account. No proper reasoning was provided. However, the ITAT also noted that the assessee had proceeded ex-parte and failed to provide sufficient documentation to support its expense claims fully.

The ITAT reduced the disallowance to 4% on a fair estimation basis, clarifying that this reduction would not be treated as a precedent for future assessments. Further, the Tribunal held that the CIT(A) was wrong in dismissing the appeal without examining the revised Form 35 and without granting the assessee a fair opportunity to be heard, thereby violating the principles of natural justice.

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