Ad-hoc disallowance rejected; PF grace period verification remanded

Case I: Ad-hoc Disallowance of Expenses (Section 37(1))

Issue

Whether the Assessing Officer (AO) can make an ad-hoc disallowance (e.g., 10%) of travelling and telephone expenses solely because the assessee could not produce complete bills and vouchers, despite the books of account being duly audited.

Facts

The Claim: The assessee claimed deductions for travelling and telephone expenses for Assessment Year 2016-17.
AO’s Action: The AO noted that complete bills and vouchers were not produced for verification. Consequently, the AO made an estimative/ad-hoc disallowance of 10% of the total expenses.
Assessee’s Defense: The books of account were duly audited under Section 44AB, and the tax auditor pointed out no discrepancies.

Decision

Audited Books: The Tribunal/Court held that since the books were audited and no specific discrepancies were flagged by the auditor, the expenses are presumed genuine unless proven otherwise.
No Adverse Evidence: The Revenue failed to bring any cogent evidence on record to prove that the expenditure was:
1. Incurred for the benefit of a third person.
2. Personal in nature.
3. Irrelevant to the business activity.
Ruling: Ad-hoc disallowance based on suspicion without specific rejection of books is unsustainable. The disallowance was deleted.

Key Takeaway

Ad-hoc Disallowance: Tax authorities cannot arbitrarily disallow a percentage of expenses merely due to a lack of some vouchers if the books are audited and no specific instances of personal/non-business use are identified.

Case II: Employee’s PF Contribution & Grace Period (Section 36(1)(va))

Issue

Whether the disallowance of employee’s contribution to Provident Fund (PF) under Section 36(1)(va) is valid if the payment was made within the 5-day grace period allowed administratively under the PF scheme, even if it was after the statutory 15th of the month.

Facts

The Disallowance: The AO disallowed the employee’s share of PF contribution, alleging it was deposited after the “due date” prescribed under the PF Act.
Grace Period Argument: The auditor of the assessee had reported that the “due date” for PF contribution included a 5-day grace period allowed by the PF authorities.
Lack of Verification: The AO apparently did not verify if the payments fell within this extended grace period before making the addition.

Decision

Verification Required: The Tribunal noted that the issue of whether the deposits were actually delayed requires examination of the relevant PF statutes and circulars regarding the grace period.
Remand: The matter was restored to the AO. The AO is directed to examine if the payments were made within the grace period (if applicable during that year) and allow the assessee to explain why the deposits should not be treated as delayed.

Key Takeaway

Grace Period Validity: While the Supreme Court (in Checkmate Services) ruled that employee contributions must be paid by the “due date” under the respective Act, arguably, if the PF Act/Scheme itself defines “due date” to include a grace period, payments made within that extended window should be compliant.

Would you like me to help you create a calculation sheet to verify if your PF payments fall within the 5-day grace period for the relevant years?

IN THE ITAT DELHI BENCH ‘G’

Spectrum Talent Management

ACIT

ANUBHAV SHARMA, Judicial Member
and M. Balaganesh, Accountant Member

IT Appeal No.4000 (Del) of 2025
[Assessment year 2016-17]

NOVEMBER 12, 2025

A.K. Batra, CA for the Appellant. Rajesh Kumar Dhanesta, Sr. DR for the Respondent.

ORDER

Anubhav Sharma, Judicial Member.- This appeal is preferred by the assessee against the order dated 24.04.2025 of the Commissioner of Income-tax (Appeals), NFAC, Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No.CIT(A), Delhi-19/10265/2018-19 arising out of the appeal before it against the order dated 19.12.2018 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle 59(1), Delhi (hereinafter referred to as the Ld. AO).

2. Heard and perused the record. The appellant is a firm engaged to provide clients solutions for their staff and in the business of services sector having branch offices at Delhi, Noida and Chennai. During the year, appellant firms showed the total turnover of Rs.26,74,40,462/-. The case of assesse was selected for scrutiny and during assessment proceedings disallowances were made on account of travelling and telephone expenses u/s 36(1)(va) of the Act. Assesse succeeded partly before CIT(A), thus is in appeal before us.

3. It is coming that the ground no. 1 is regarding the ad hoc disallowance of Travelling Expenses of Rs. 1,93,420/- (i.e., 10% of total expenses of Rs. 19,34,201/-). While ground no. 2 is regarding the Ad Hoc disallowance of Telephone Expenses Rs. 265202/- (i.e., 10% of Total Expense of Rs. 26,52,025/-). The A.O discussed both the ground of disallowances together. The A.O. observed that the assessee has claimed following expenses but could not produce complete bills and vouchers in respect of these expenses :

1. Travelling expenses =Rs. 19,34,201/

2. Telephone expenses =Rs. 26,52,025/-

Total =Rs. 45,86.226/

4. The A.O has made the disallowance by taking the view that in order to prevent any leakage of Tax, 10% of this total expenditure amounting to Rs. 4,58,622/- (i.e. 10% of above total expenses Rs, 45,86,226/- disallowed. In appeal, the CIT(A), NFAC, Delhi has sustained the disallowance of travelling of Rs. 1,80,245/- instead of Rs. 1,93,420/-. Further, sustained the disallowance of telephone expenses of Rs. 2,21,001/- instead of Rs. 2,65,202/-.

5. The contention of ld. AR is that the AO has not asked the appellant to produce the specific bills/vouchers of these expense. Copy of details of travelling expenses along with the sample major bills vouchers are on record at page no. 56 to 77 of paper book. Then copy of extract travelling expenses maintained as per books of accounts are filed at page no. 78 to 116 of paper book). Copy of details of telephone expenses along with the major bills vouchers for the different months refer are there at page no. 140 to 158 of the paper book. Copy of extract telephone expenses maintained as per books of accounts are there at page no. 159 to 176 of the paper book.

6. Thought ld. DR defends the impugned additions alleging that same are disproportionate and not befitting nature of business, we find that the A.O as well as the CIT(A) has not pointed out any discrepancies in the books of accounts duly audited under the Tax audit as required under the provisions of section 44AB of the Act. The AO has not recorded any cogent reasons for making the ad-hoc disallowance of travelling & telephone expenses. The appellant has relied on the judgments of various courts to contend that the ad-hoc disallowances are not sustainable. His specific reliance was on in the case of ACITv. Vanesa Cosmetics ITD 787 (Delhi – Trib.) which is also followed by Rajkot bench in Mokshstar International v. ACIT [ITAppeal No. 397(Rjt) of 2017, dated 27-7-2022]/, to hold that without disturbing books ad-hoc disallowances of such expenses, which may have some personal, component is not justified.

7. We are also of same view, that expenses like travelling, hospitality or telephone use will always have some personal component but to disallow any part of same there should be specific enquiry and cogent evidence establishing that from very inception the expenditure was intended to be for benefit or on account of any person other than assessee, and same had no bearing on business activity of assesse. Specially, the nature of business should be examined to allege that such expenditure has no bearing on business activity of assesse. Thus we allow these ground no. 1 and 2. Impugned disallowances are directed to be deleted.

8. Ground no. 3, 3.1 & 3.2 are common and relate to the disallowance u/s 36(1)(va) of the Act of Rs. 45,14.758/- made by the A.O on finding that payment of employees contributions were not made within the time allowed under the relevant Act. The CIT (A), NFAC, Delhi following the decision of Hon’ble Supreme Court of India in the case of Checkmate Services (P.) Ltd. v. Commissioner of Income-tax- /[2022] 448 ITR 518 (SC) dismissed the ground. In connection with above, it come sup that Auditor reported vide sr. no. 8 ‘Others Clause 20(b)’ Due date in respect of Contribution to provident fund is inclusive of 5 days of grace period. (Copy of tax audit report is filed at Pages no. 200 to 215 along with brief note on Page no. 216). It appears that issue has not been examined sufficiently by ld. CIT(A), as to if deposit were actually delayed in terms of due date falling in relevant statues. Thus this issue is restored to files of AO, to give opportunity to assesse to explain how the deposits are not delayed and not hit by decision of Checkmate (supra). Grounds are allowed for statistical purposes.

9. Resultantly the appeal is allowed partly with consequences to follow as per determination of grounds as above.