Business expenditure disallowance under strain as Tribunal rejects ad hoc 5 per cent cut without defect in records

5-Second Takeaway

The Tribunal set aside the ad hoc disallowance of business expenses because the department accepted 95 per cent of the expenditure, found no specific defect in the records, and made no finding that the expenses were bogus or not for business use. It also held that the 5 per cent disallowance of foreign exchange loss could not stand without any finding that the loss was contrary to accounting standards or capital in nature.

The assessee challenged the sustained disallowance of a portion of its business expenditure for the assessment year 2022-23. The Assessing Officer had reduced the claim by 5 per cent on the ground that bills and vouchers were not fully foolproof, and the Commissioner (Appeals) upheld that approach.

On the material before it, the Tribunal found that the department had accepted 95 per cent of the expenses, which meant there was no real dispute about the genuineness of the expenditure as a whole. It also noted that no specific defect had been identified in the documentation, in any individual expense head, or in any major transaction that would justify further verification.

The Tribunal further held that the foreign exchange loss booked on year-end restatement of liabilities could not be disallowed on a blanket basis. In the absence of a finding that the loss was inconsistent with accounting standards or was capital in nature, the ad hoc reduction was unsupported.

Since the assessee had provided reasonable explanations and supporting documents for the remaining items, the Tribunal set aside the disallowance sustained by the Commissioner (Appeals) and allowed the appeal.