2022 (9) TMI 1311 - AT - Income Tax

Addition of expenditure out of the income disclosed during the survey proceedings - AO also found that the impugned amount of expenditure was incurred in cash and therefore, the same cannot be allowed as deduction by virtue of the provision of Section 40A(3) - AO disallowed the same and added to the total income of the assessee - HELD THAT - We find that the genuineness of the construction expenses has nowhere been doubted by the authorities below. What has been doubted is this that the assessee will claim the WIP as an express in the subsequent year against the sales. Thus, effectively the assessee will get the benefit representing the construction expenses. Once the undisclosed income of the assessee has been admitted by the revenue then the corresponding expenses incurred out of such income should also be allowed as deduction until and unless claim of the assessee is bogus. However, the case before us is not of bogus expenses. Disallowance made under the provisions of Section 40A(3) - We note that expenses claimed by the assessee were incurred out of the unaccounted income which has already been suffered to tax. Therefore, any further disallowance under the provisions of Section 40A(3) of the Act would lead to the double addition to the total income of the assessee which is unwanted under the provisions of law. Furthermore, if the assessee claims the expenses but at the same time the assessee has also increased its WIP by the said amount which makes the same as tax neutral. Thus, the claim as such was not made by the assessee for any deduction in the year under consideration. In view of the above and after considering the facts in totality, we are not inclined to uphold the finding of the authorities below. Accordingly, we set-aside the order of the Ld. CIT-A and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.

Summary

Issues:
1. Confirmation of addition of expenditure out of disclosed income during survey proceedings.

Analysis:
The appeal was filed by the assessee against the order of the Ld. Commissioner of Income Tax-(Appeals) concerning the assessment order passed under Section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2012-13. The primary issue raised by the assessee was the confirmation of the addition of Rs. 1,35,80,000 representing the expenditure out of the income disclosed during survey proceedings. The facts revealed that the assessee, a partnership firm engaged in the real estate business, disclosed unaccounted income of Rs. 2,01,50,000 during a survey under Section 133A. The assessee also claimed an expense of Rs. 1,35,80,000 for construction, which was added to the work-in-progress. The Assessing Officer (AO) disallowed this expense citing it was incurred in cash and hence not allowable under Section 40A(3) of the Act.

The Ld. CIT(A) confirmed the AO's decision, stating that the issue raised by the appellant was not relevant for the current assessment year, as no impact on the profit was noted. The Ld. CIT(A) suggested that any grievance could be addressed in the subsequent year when the benefit of the expenditure was denied. The assessee contended that the expenses were genuine and should be allowed as a deduction since they were incurred out of unaccounted income. The Delhi Tribunal's decision in a similar case favored the assessee, emphasizing the genuineness of expenses incurred out of undisclosed income.

The Tribunal noted that the expenses' genuineness was not in question, and the denial was based on the assumption that the assessee would claim the expenses in the subsequent year. As the undisclosed income was admitted, corresponding expenses should be allowed unless proven bogus. Referring to the Delhi Tribunal's decision, the Tribunal concluded that disallowing the expenses under Section 40A(3) would lead to double taxation and that the claim was not made for deduction in the current year. Consequently, the Tribunal set aside the Ld. CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal.