Ad Hoc Disallowance Without Rejection of Books of Account Is Legally Untenable — ITAT Delhi Directs Deletion of ₹73,78,079 Disallowance
Background and Overview
The Delhi Bench of the Income Tax Appellate Tribunal recently ruled in favour of the assessee in Radcliffe Schools Education Ltd. Vs ACIT (ITAT Delhi), delivering a significant pronouncement on the legal sustainability of ad hoc disallowances made by Assessing Officers without formally rejecting the books of account maintained by the assessee. The Tribunal directed deletion of the entire addition of ₹73,78,079 that had been made on account of disallowance of business promotion expenses for Assessment Year 2017-18.
This ruling reinforces a well-established principle in Indian taxation jurisprudence — that an Assessing Officer cannot make sweeping, estimate-based disallowances when the assessee's books of account are duly audited, remain unrejected, and the documentary evidence supporting the claimed expenditure has not been specifically disputed.
Profile of the Assessee and Nature of Business
Radcliffe Schools Education Ltd. is a company engaged in the business of schooling and franchise operations. Its commercial activities include granting franchises to educational institutions located in cities such as Hyderabad, Allahabad, and Kochi. Additionally, the assessee is involved in the composite sale of courseware books and collection of rentals from business schools and K-12 schools.
Given the nature of the business — which involves active solicitation of franchise partners, marketing of educational content, and maintaining relationships with institutional clients — the incurring of business promotion expenditure forms an integral part of operations.
Assessment Proceedings and the Disputed Disallowance
The assessee's case was selected for scrutiny under Section 143(2) of the Income-tax Act, 1961, with a notice issued on 28.08.2019, followed by a notice under Section 142(1) accompanied by a detailed questionnaire.
In response to the questionnaire, the assessee furnished comprehensive particulars of its business promotion expenses covering the period from 20.04.2016 to 31.03.2017. The details were duly set out in para 3.1 of the assessment order and included entries reflecting credit card payments made on behalf of directors for business promotion purposes.
Assessing Officer's Findings
The Assessing Officer took the view that the amounts claimed as business promotion expenses were in reality personal expenditure of the directors, paid through their individual credit cards and merely routed through the company's books under the label of business promotion. On this basis, the Assessing Officer disallowed the entire sum of ₹73,78,079 under the assessment order dated 28.11.2019.
The credit card transactions recorded in the books included multiple entries against the credit cards of two directors — Amit Rai and Meenakshi — totalling the disallowed amount. The Assessing Officer did not, however, formally reject the books of account or cast doubt on the audit conducted under Section 44AB of the Act.
First Appellate Stage: CIT(A)/NFAC Order
The assessee challenged the disallowance before the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre. The primary argument advanced was that identical business promotion expenses had been consistently allowed by the Revenue in Assessment Years 2013-14, 2014-15, 2015-16, and 2016-17, and that the principle of consistency therefore demanded that the same treatment be accorded in Assessment Year 2017-18 as well.
The CIT(A), however, dismissed the appeal and confirmed the Assessing Officer's addition. The basis for the CIT(A)'s rejection was that the principle of res judicata does not apply to income tax proceedings, and therefore the treatment accorded in earlier years could not bind the assessment for the year under consideration. The CIT(A) was of the view that each assessment year stands independently and must be evaluated on its own facts and circumstances.
Dissatisfied with this outcome, the assessee preferred an appeal before the ITAT Delhi.