ITAT Mumbai Strikes Down Ad-Hoc Disallowance Based on Selective Year-on-Year Expense Comparison
In a significant ruling concerning assessment procedures and the validity of discretionary disallowances, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has delivered a verdict in favor of the assessee in the case of Wizcraft Entertainment Agency Private Limited Vs ITO. The Tribunal held that an Assessing Officer (AO) cannot resort to ad-hoc disallowances merely by comparing expenses with a subsequent year on a selective basis, absent any concrete evidence of non-genuineness.
The order, pronounced on 05.02.2026, addresses two pivotal issues: the arbitrary disallowance of business expenses based on quantum comparison and the deductibility of expenditure linked to income recognized pursuant to a Court order.
Case Background and Procedural History
The dispute pertains to the Assessment Year (AY) 2022-23. The assessee, a prominent corporate entity resident in India, is engaged in the business of organizing entertainment events, theatrical productions, and concerts. For the year under consideration, the assessee filed a return of income declaring ₹23,04,51,260.
Following the scrutiny assessment, the Department filed an appeal, and the assessee filed a cross-objection against the order dated 30.06.2025 passed by the National Faceless Appeal Centre (NFAC). The primary contention arose from the AO's decision to disallow a substantial portion of claimed expenses and a specific payment made to a lender.
Issue 1: Ad-Hoc Disallowance of Business Expenses
The Assessing Officer's Approach
During the assessment proceedings, the AO undertook a comparative analysis of the financial statements for the impugned AY 2022-23 against the subsequent AY 2023-24. The AO noted the following financial data:
- AY 2022-23: Gross Receipts of ₹248,67,04,940 against expenses of ₹238,00,00,613.
- AY 2023-24: Gross Receipts of ₹239,37,99,322 against expenses of ₹215,16,31,304.