Asst. CIT vs. Smt. Shashi Mehta, ITA No.271/Del/2015
The Income Tax Appellate Tribunal (ITAT), Delhi has upheld the deletion of an ad hoc disallowance of ₹45,96,845/- made by the Assessing Officer (AO) out of total contract expenses claimed by the assessee. The ruling came in a case concerning Assessment Year (AY) 2010–11, where the AO had disallowed 5% of the total contract expenditure amounting to ₹9.19 crore on grounds of inadequate documentary evidence. The ITAT found no merit in the Revenue’s appeal and affirmed the findings of the CIT(A), who had granted full relief to the assessee.
Background of the Case
The assessee, a civil contractor operating multiple sites across India, had declared total contract receipts of ₹14.51 crore and claimed ₹9.19 crore as contract expenses in its profit and loss account. These expenses included payments towards labor charges and other site-related operational costs.
The AO noted that the supporting documentation—mostly hand-written self-made slips—lacked proper authentication such as signatures from recipients. Observing this, and despite already disallowing certain payments under section 40A(3), the AO proceeded to make a further ad hoc disallowance of 5%, amounting to ₹45,96,845, on the basis that the evidence was insufficient.
Findings of CIT(A)
On appeal, the CIT(A) deleted the disallowance in full. Key reasons cited were:
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No specific instance of non-genuine or excessive expenditure was pointed out by the AO.
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Labor expenses shown as “payable” at year-end were part of a regular accounting entry and not unexplained liabilities.
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In a contracting business operating across remote sites, centralized and uniform record-keeping is operationally difficult.
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All expenses were authenticated at the site level and later consolidated at the head office.
Revenue’s Contentions
During the ITAT hearing, the Departmental Representative (DR) contended that:
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Many expense vouchers lacked proper third-party authentication.
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The absence of recipient signatures raised the possibility of inflated or fictitious expenses.
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The disallowance was reasonable given the quantum and nature of the expenses.
Assessee’s Response
The assessee defended the claim by highlighting that:
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All payments were made for business purposes.
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The entries flagged by the AO were standard accounting practices.
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No evidence was brought by the AO to prove that the expenses were not genuine or were excessive.
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Site-level documentation was reviewed and verified before incorporation into books.
ITAT’s Observations and Verdict
The Tribunal rejected the Revenue’s appeal and upheld the CIT(A)’s deletion of the disallowance. It observed:
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The AO made a general, ad hoc disallowance without citing any specific instances of inflated or non-genuine expenses.
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Given the scale and nature of the contracting business, the Tribunal acknowledged that perfect documentation is not always feasible.
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The expenses were found to be genuine, wholly and exclusively for business purposes.
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The Revenue failed to rebut the factual findings and reasoned conclusions drawn by the CIT(A).
Accordingly, the ITAT dismissed Ground No. 4 of the Revenue, providing complete relief to the assessee.
Key Takeaway
This ruling underscores the importance of substance over form in expense disallowance cases. Where business realities support the genuineness of expenditures and no specific defects are identified, ad hoc disallowances without substantive basis may not withstand appellate scrutiny.