2023 (4) TMI 1382 - AT - Income Tax

Disallowance of expenses - AO observed that the assessee did not produce books of account i.e. ledger, cash-book, bills, vouchers, evidence or explanation, etc. regarding the development expenses and labour charges - AO disallowed 10% of the total expenditure and also made a reference to TDS wing of the department for non-filing of TDS returns - CIT (A) has deleted the disallowance to the extent of 10% and granted part-relief to assessee - HELD THAT - The objection of Ld. AO qua this part is very limited i.e. the assessee has not filed TDS return. But for that objection, the AO has taken a separate action and referred the matter to TDS wing which is very clear from the assessment-order. In the circumstance, we agree with CIT (A) that the AO is not justified to make disallowance qua the payment for which the assessee has supplied party wise details and also deducted TDS. Thus, there is nothing wrong in the part-relief granted by Ld. CIT(A). We approve his action. This ground of revenue is, thus, dismissed. Addition on account of determination of cost of goods sold - CIT(A) deleted addition - HELD THAT - We agree to his submission that the Ld. CIT (A) has accepted a newer submission of assessee that the impugned expenditure @ Rs. 110/- per square feet was in the nature of land filling expenditure whereas the assessee himself claimed the same as brokerage expenditure before AO. We find weightage in the submission of Ld. DR that the CIT (A) has accepted this newer submission of assessee without calling any remand-report from Ld. AO. Going further, we agree to Ld. DR s submission that the CIT (A) has not made any working or calculation to arrive at a finding that claiming higher expenditure in the current year, would reduce the claim of assessee in later years and thereby the exercise would become revenue-neutral. Thorough working of the closing stock / cost of goods sold is required to be made/verified by Ld. CIT (A) and the Ld. AO must be given an opportunity of hearing on this issue. Hence, it would be most appropriate to remand this issue back to the file of Ld. CIT (A) to decide afresh. Disallowance u/s 40A(3) - payments in cash violating prescribed limit - CIT(A) deleted addition - HELD THAT - CIT (A) has not uttered any voice on the original claim of clause (g) of Rule 6DD raised by assessee before AO. The Ld. CIT (A) has simply recorded the newer stand of assessee, cited the judicial rulings thereon and deleted the disallowance. In fact, the Ld. CIT (A) has not taken pains to consider (i) that the assessee made a different claim before Ld. AO which was turned down by Ld. AO; and (ii) that the assessee has not given any evidence in support of newer stand taken for the first time before him. That brings us to conclude that the assessee miserably failed to prove on facts as to how the section 40A(3) is not applicable to it. We do not have quarrel with the decisions cited by Ld. CIT (A) but since we do not find credence / strength in the claims of assessee on facts, we do not hesitate in concluding that the assessee has failed to prove the circumstances to come out of the clutches of section 40A(3). Therefore, we are of the view that the disallowance u/s 40A(3) is attracted in this case. We uphold the action of Ld. AO and so also the disallowance made by him. Thus, this ground is allowed.

Summary

Issues Involved:

1. Restriction of disallowance of expenses by the CIT (A).
2. Deletion of addition regarding the determination of cost of goods sold.
3. Deletion of addition under section 40A(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Restriction of Disallowance of Expenses:

The primary issue is whether the CIT (A) erred in restricting the disallowance of Rs. 23,26,323/- made by the Assessing Officer (AO) to Rs. 8,63,293/-. The AO disallowed 10% of the total expenses claimed by the assessee due to the non-production of books of account, bills, vouchers, or any evidence to substantiate the expenses. The CIT (A) reduced the disallowance by observing that the AO made the disallowance without any basis and noted that the assessee had shown a reasonable net profit margin of 21% on total sales, which was fair in the real estate business. The CIT (A) further stated that the AO should have applied Section 145 if there was doubt about the correctness of the expenditure claimed, rather than making an arbitrary disallowance. The Tribunal found merit in the CIT (A)'s decision to grant partial relief because the assessee provided party-wise details and deducted TDS on payments, which justified the reduction in disallowance.

2. Deletion of Addition Regarding Cost of Goods Sold:

The second issue concerns the deletion of an addition of Rs. 96,30,181/- made by the AO on account of the determination of the cost of goods sold. The AO found anomalies in the valuation of closing stock and cost of goods sold, particularly regarding brokerage expenses, which were claimed as part of the cost of goods sold. The CIT (A) deleted the addition, accepting the assessee's explanation that the brokerage expenses were actually land-filling expenses necessary for development. The CIT (A) also noted that the development activity spread over several years, and any overestimation of costs would be revenue-neutral in the future. However, the Tribunal found the CIT (A)'s acceptance of the new explanation without a remand report from the AO to be unjustified. The Tribunal remanded the issue back to the CIT (A) for fresh consideration, allowing the AO an opportunity to verify the claims.

3. Deletion of Addition Under Section 40A(3):

The final issue involves the deletion of an addition of Rs. 40,00,000/- under section 40A(3) for cash payments exceeding Rs. 20,000/-. The AO disallowed the amount because the assessee failed to provide evidence that the payment was made to a farmer without a bank account, as initially claimed. The CIT (A) deleted the disallowance, citing precedents where cash payments were allowed due to business exigencies. However, the Tribunal observed that the assessee presented different justifications before the AO and CIT (A) without substantiating either. The Tribunal concluded that the assessee failed to demonstrate valid reasons to circumvent section 40A(3) and upheld the AO's disallowance, stating that the statutory disallowance was applicable due to the lack of credible evidence from the assessee.

Conclusion:

The Tribunal upheld the CIT (A)'s partial relief on the disallowance of expenses but remanded the issue of cost of goods sold back to the CIT (A) for fresh adjudication. The Tribunal also upheld the AO's disallowance under section 40A(3), concluding that the assessee did not provide sufficient evidence to justify the cash payments. The appeal was partly allowed in favor of the revenue.