Reduction in Gross/Net Profit rate no ipso facto a ground for making disallowance of expenses

Reduction in Gross/Net Profit rate not ipso facto a ground for making disallowance of expense but a triggering point for verification of expenses claimed.

ABCAUS Case Law Citation
ABCAUS 3493 (2021) (04) ITAT

Important case law relied referred:
ITO vs. Dr. Mahendra Kumar Agarwal

In the instant case, the assessee had challenged the disallowances of expenses confirmed by the CIT(A) to the extent of 5% as against 25% made by the Assessing Officer (AO).

During the course of the assessment proceedings, the AO made a disallowance of 25% of various expenses on adhoc basis on the ground that the assessee failed to furnish any satisfactory explanation for the downfall of the Gross Profit (GP) and Net Profit (NP) Rates during the year under consideration as well as supporting evidence of the expenses.

Before the Tribunal, the assessee submitted that the AO   had made adhoc disallowance without questioning the genuineness of the expenses and the purpose of incurring the expenses for business.

The Tribunal opined that the decrease in the G.P. and  N.P.  can be a triggering point for verification of the claim of  expenses booked by the assessee but the reduction in the  G.P. and N.P. cannot be ipso facto a ground for making  disallowance of expenses without verifying the genuineness  of the claim. 

However, the Tribunal stated that since the assessee had not produced the supporting bills and vouchers which can be verified by the Assessing Officer, whether the claim of the assessee was genuine or not therefore, a reasonable percentage of disallowance is not prohibited under law.

The Tribunal held that expenditure under the head shop  and office rent could not be doubted as it  was a recurring  expenditure and the amount claimed cannot be    disallowed  on  percentage  basis.

Since, the assessee had failed to produce the supporting bills and vouchers to establish that the said expenditure had been incurred wholly and exclusively for the business purpose, the Tribunal held that 5% disallowance was reasonable and proper.

Accordingly, the disallowance made by the CIT(A) was restricted to the expenses other than shop and office rent.

Thus the ground of appeal was partly allowed in favour of the assessee.

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