2010 (1) TMI 894 - AT - Income Tax

Income from house property - two bungalows owned by the assessee were occupied by the partners. No rent was shown from these partners. The AO by observing that since the assessee has not offered any income u/s 22/23 of the Act and also due to the fact that the assessee is a partnership firm and cannot have a self occupied property, income from the property has to be brought to tax under the head income from house property - Held that - value of the rental income has to be computed by taking into account the rental value as declared by NMMC rather taking the value by estimating the rent on the basis of investment made in the properties. - disallowance of reduced made by the AO, department are allowed in part. Adhoc disallowance of expenditure - held that - Various vouchers have not been maintained and almost all the payments have been made in cash; therefore, it is thought fit to restrict the disallowance to 10% against 20% disallowed by the AO and against 5% restricted by the CIT(A) as that will meet the end of justice to both sides.

Summary

Issues:
1. Assessment of property income based on rental value declared by NMMC
2. Restriction of addition on account of disallowance of site expenses
3. Reduction of addition made on account of sub-contract expenses

Analysis:
1. Assessment of Property Income:
The department appealed against the CIT(A)'s order directing the AO to assess property income based on the rental value declared by NMMC for two bungalows owned by the assessee. The AO had added income based on an estimated rate of 8% of the investment made in the property, as no rent was shown from the partners occupying the bungalows. The CIT(A) directed the AO to calculate rental income based on the rental value declared by NMMC. The ITAT upheld the CIT(A)'s decision, stating that the rental income should be determined based on the declared rental value rather than estimating rent based on investment.

2. Restriction of Site Expenses Disallowance:
The department challenged the CIT(A)'s decision to restrict the addition on account of disallowance of site expenses from 25% to 5% of the total expenses claimed. The AO had made an adhoc disallowance of 25% due to cash payments without proper vouchers. The CIT(A) reduced the disallowance to 5%, providing relief to the assessee. However, the ITAT found the relief excessive and directed the AO to recompute the disallowance at 10% to meet the ends of justice.

3. Reduction of Sub-Contract Expenses Addition:
The department also contested the reduction of additions made on account of sub-contract expenses. The AO disallowed 1% of the total sub-contract expenses, citing unverifiable cash payments. The CIT(A) restricted the disallowance to lower amounts for different assessment years. The ITAT upheld the CIT(A)'s decision for most years but increased the disallowance for one year, stating that it should be Rs.5 lakhs instead of Rs.3 lakhs to align with the total expenses incurred. The appeals of the department were allowed in part, with modifications made to the disallowances for certain years.

In conclusion, the ITAT's judgment addressed issues related to property income assessment, site expenses disallowance, and sub-contract expenses addition, providing detailed reasoning for each decision and ensuring a fair balance between the interests of the department and the assessee.