ITAT Mumbai rejects Revenue’s appeal on ad-hoc disallowance under Section 37(1)

The Income Tax Appellate Tribunal, Mumbai Bench, in the case of DCIT Vs NDX P2P Pvt. Ltd., has reaffirmed that a purely estimated disallowance of business expenditure under Section 37(1) cannot stand when the assessee’s books are audited, detailed records are produced, and no specific defects are identified by the Assessing Officer (AO). The Tribunal dismissed the Revenue’s appeal and confirmed the deletion of a 20% ad-hoc disallowance on “other expenses” made by the AO.

Background of the dispute

Business profile and return filing

The assessee, NDX P2P Pvt. Ltd., is a technology-enabled financial intermediary operating a Peer-to-Peer lending platform under the brand “Liquiloans”. Its core activity is facilitating borrowing and lending transactions between participants through an online technology platform.

• The assessee filed its return of income for Assessment Year 2022-23 on 07.11.2022, declaring a total income of ₹3,29,07,700/-.
• The return was picked up for scrutiny, and notice under Section 143(2) of the Income Tax Act 1961 was issued on **02.06.2023`.
• Subsequent notices under Section 142(1) were also issued for calling details and explanations.

According to the AO, the assessee initially did not respond adequately to the statutory notices, which became the starting point for the disallowance controversy.

AO’s examination of “other expenses”

On perusal of the profit and loss account, the AO noticed that the assessee had claimed “other expenses” amounting to ₹44,14,97,840/-.

The AO took the view that:

• The assessee had not satisfactorily demonstrated that the entire amount was incurred wholly and exclusively for the purposes of business as required under Section 37(1).
• The assessee allegedly failed to produce comprehensive ledger accounts and supporting documentation to the AO’s satisfaction for the entire block of expenses under this head.

Based on this perception, without identifying any particular item as non-genuine or not business-related, the AO:

• Disallowed 20% of the total “other expenses”
• Leading to a disallowance of ₹8,82,99,568/- under Section 37(1)
• Additionally, made an independent addition of ₹77,60,711/- under Section 41(1) of the Act (which is not the primary subject of the present discussion).

Thus, the central issue before the appellate authorities revolved around the ad-hoc disallowance of 20% of other expenses.

Assessee’s case before CIT(A)

Nature and support of expenses

In the appeal filed before the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi, the assessee contended that the AO had proceeded on an arbitrary basis, ignoring the extensive documentation already placed on record.

The assessee submitted that:

• All required details had been filed during assessment, including:

  • Party-wise break-up of the expenses
  • Nature of services obtained
  • Copies of ledger accounts
  • Invoices and bills
  • Proof of payments
  • TDS details, wherever tax was deductible and deducted

• The broad heads of “other expenses” included, among others:

  • Collection aggregator charges
  • Service fees and platform-related charges
  • Commission
  • Professional and legal fees
  • Rent
  • Software and technology-related expenses

All of these were asserted to be integral to the assessee’s P2P lending platform business.

Reliance on audited books under Section 44AB

The assessee further emphasized that: