The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that ad-hoc disallowance of transportation-related expenditure cannot be sustained merely because complete original vouchers for every petty expense were not maintained, especially when the payments were made through banking channels and the department failed to establish that the expenditure was bogus or had returned to the assessee. 

The bench of Soundararajan K (Judicial Member) and Waseem Ahmed (Accountant Member) the transportation business inherently involved coordination through local agents and coordinators at different locations and that operational expenses such as fuel charges, toll charges, driver expenses and travelling expenses were necessarily incurred during transportation activities. 

The appeal was filed by a Hindu Undivided Family (HUF) engaged in the business of transportation of chassis from manufacturers to dealers across the country. During the assessment proceedings for AY 2021-22, the assessee had disclosed gross transportation receipts of over Rs. 22.34 crore and claimed expenditure under various heads including enroute expenses, transportation charges, travelling expenses and sundry expenses. 

The Assessing Officer (AO) observed that substantial expenses were incurred through local agents and coordinators and reimbursed by the assessee. According to the AO, proper original bills and vouchers supporting the claims were not produced. The AO therefore invoked Section 145(3) of the Income Tax Act and disallowed 10% of the total expenditure amounting to over Rs. 2.10 crore on the ground that the expenses could not be fully verified. 

Before the tax authorities, the assessee argued that transportation business operations were spread throughout the country and it was practically difficult to preserve every small fuel bill, toll receipt or petty expense voucher generated during transit. It was submitted that local agents incurred such operational expenses on behalf of the assessee and later sought reimbursement through banking channels. The assessee also furnished bank statements, reimbursement statements, sample fuel bills, driver sheets and ledger accounts in support of the claim. 

The assessee further contended that transportation activity itself could not have been carried out without incurring such expenses and complete disallowance would result in an absurd situation where business income was taxed without allowing corresponding operational expenditure. It was also emphasized that all reimbursements were made through account payee cheques and no evidence existed to suggest that the money had returned back to the assessee. 

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the rejection of books under Section 145(3) but reduced the disallowance from 10% to 8%, holding that although deficiencies existed in supporting documentation, the rate adopted by the AO was excessive considering the nature of business and the fact that payments were made through banking channels. 

The Tribunal noted that the department had not disputed the actual movement of funds through banking channels nor produced any evidence to establish that the reimbursements were fictitious, inflated or routed back to the assessee. The Bench held that mere non-availability of complete vouchers for every petty expenditure could not justify substantial ad-hoc disallowance in the absence of evidence showing bogus expenditure or siphoning of funds. 

Importantly, the Tribunal observed that suspicion, however strong, cannot replace evidence. It further noted that the Revenue had failed to bring on record any comparable case demonstrating abnormal inflation of expenditure or lower profitability. On the contrary, the assessee had disclosed a net profit ratio of 1.64%, which was higher than the average net profit ratio declared in earlier and subsequent assessment years. 

The ITAT also reiterated the settled principle that tax authorities cannot sit in the armchair of a businessman and dictate how business operations should be conducted. Referring to the Supreme Court’s ruling in S.A. Builders Ltd. v. CIT, the Tribunal stated that commercial decisions taken by a businessman cannot be disregarded unless the Revenue proves that the arrangement is sham or lacks business purpose. 

Holding that the disallowance sustained by the CIT(A) was purely ad-hoc and unsupported by comparative analysis or material evidence, the Tribunal directed deletion of the entire addition and allowed the assessee’s appeal. 

Case Details

Case Title: A Kishore Rao and Others Versus The Dy. Commissioner of Income Tax

Citation: JURISHOUR-1437-HC-2026(Ker) 

Case No.: ITA No.517/Bang/2026

Date: 27.05.2026 

Counsel For Appellant: Siddesh N Gaddi, CA

Counsel For Respondent:  N Balusamy, JCIT (DR)

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