HEADSTRONG VENTURES,DELHI VS. ITO, WARD 45(1), NEW DELHI, ITA 3539/DEL/2024
In a noteworthy ruling the Delhi Bench “SMC” of the Income Tax Appellate Tribunal (ITAT) provided partial relief to Headstrong Ventures, a partnership firm, by reducing the ad-hoc disallowance of expenses to 10% of turnover. The Tribunal emphasized that in the absence of proper records, some estimation is warranted—but such estimation must also be fair and reasonable.
Background of the Case
Assessee: Headstrong Ventures (Partnership Firm) Assessment Year: 2017–18 Trigger: Information received via NMS portal showed income of Rs. 1.18 crore from commission, brokerage, professional fees, and contract receipts. Issue: No return filed originally, leading to reopening of assessment under Section 148. Return Filed: Rs. 24,110/- declared as total income.
Despite notices under Section 142(1), the assessee failed to submit key records such as the Tax Audit Report and Profit & Loss Account. As a result, the AO made a 25% ad-hoc disallowance, adding Rs. 30.45 lakh.
On appeal, the CIT(A) noted partial compliance and reduced disallowance to 15%, adding Rs. 18.27 lakh. Still dissatisfied, the assessee escalated the matter to ITAT.
Key Observations by ITAT
The assessee did respond to notices before CIT(A), and was granted partial relief, indicating adequate opportunity of hearing. However, the Tribunal noted that neither the AO nor the assessee provided adequate evidence to justify the claimed or disallowed expenditure. It was found that 15% disallowance was still on the higher side, given the facts and circumstances.
Ruling
The Tribunal, through Judicial Member Shri Vikas Awasthy, held that:
“Restricting disallowance to 10% of turnover would be fair and reasonable, considering the partial compliance and nature of business.”
Final Outcome
Appeal partly allowed Disallowance reduced to 10% of turnover Order pronounced on 12 February 2025.
Conclusion:
This judgment reiterates the principle that while ad-hoc disallowances may be necessary in absence of documentation, they must be grounded in fairness. Taxpayers must ensure timely and complete compliance, but authorities too must avoid excessive estimation in the absence of full records.