AO disallowed 25% of expenses claimed by assessee-company on the ground that assessee failed to substantiate its claim with supporting documents. Assessee filed additional evidence before CIT(A) justifying the expenses with ledgers, invoices, and supporting documents. CIT(A) forwarded additional evidence to AO for verification and called for remand report. AO remand report accepted certain expenses such as bank charges, interest, labour expenses, etc. However, he raised concerns about expenses paid in cash, and certain expenses related to rent, salary, insurance, etc. CIT(A) observed that AO neither rejected books of account, nor pointed out any bogus or non-genuine expenses. He also observed that assesse accounts were audited and no adverse remarks were given in tax audit report. Accordingly, he deleted the entire disallowance. On appeal the Tribunal held that the AO did not reject assessee’s books of account under section 145(3). Further, tax audit report did not highlight any discrepancies in assessee’s expense claims. Further, remand report did not identify specific defects in the expenses. No bogus or non-genuine expenditure was identified by AO. Moreover, the same nature of expenses was allowed in previous and subsequent years, indicating consistency. It is well settled by various judicial precedents that an ad-hoc disallowance without identifying specific defects is legally unsustainable. Since AO’s own remand report did not justify the ad-hoc disallowance, the CIT(A) rightly deleted the same.

[ITA No. 1034/Ahd/2023 dated 06/02/2025]  [AY. 2016-17]