2024 (8) TMI 430 - AT - Income Tax

Disallowance of certain expenses - applicability of the rate of disallowance at 20% - HELD THAT - Though before the AO the assessee did not appear, however, before Ld. First Appellate Authority assessee did appear and furnish certain evidences to justify the claim of expenses. Surprisingly, even though the evidences were forwarded to the AO for verification and to furnish a Report, however, ultimately FAA declined to entertain the evidences. This, is in our view is unjustified. Be that as it may, ultimately FAA has found some merit in the submissions made by the assessee as well as evidences furnished, as he has deleted the disallowance made out of Opening Stock and WIP, whereas, he has restricted the disallowance of purchase and administrative expenses at 20% of the amount claimed. On perusal of record, we do not find any basis for applicability of either 50% or 20% rate of disallowance. Considering the fact that the assessee is in construction business, in our view, disallowance @5% of purchases and administrative expenses would meet the ends of justice. Accordingly, the AO is directed to do so. Appeal of the assessee is partly allowed.

Summary

Issues: Disallowance of certain expenses in assessment year 2015-16.

Analysis:
1. The dispute centered around the disallowance of certain expenses by the Assessing Officer (AO) for the assessment year 2015-16. The appellant, a resident corporate entity engaged in construction business, had filed its return of income showing a loss. The AO, after issuing notices under sections 143(2) and 142(1) of the Income Tax Act, proceeded with the assessment under section 144 due to the non-compliance of the appellant. The AO disallowed 50% of the expenses amounting to Rs. 4,01,14,226, as the appellant failed to respond. The appellant contested this disallowance before the First Appellate Authority, who reduced the addition to Rs. 1,56,70,692, disallowing only 20% of the expenses related to purchases and administrative expenses, while deleting the disallowance of opening stock and work-in-progress.

2. The appellant, in its appeal to the ITAT Delhi, focused on challenging the rate of disallowance set at 20%. The appellant argued that being in the construction business, a lower rate of profit should be considered, making the 20% disallowance unreasonable. The Departmental Representative, on the other hand, supported the First Appellate Authority's decision. The ITAT considered both parties' submissions and the available evidence. It noted that the disallowance was based on estimates by both the AO and the First Appellate Authority. Despite the appellant not appearing before the AO, they did present evidence before the First Appellate Authority, which was forwarded to the AO for verification, although the First Appellate Authority declined to consider it. The ITAT found this decision unjustified and ultimately directed a disallowance rate of 5% for purchases and administrative expenses, considering the nature of the appellant's construction business.

3. The ITAT's decision was to partly allow the appellant's appeal by reducing the disallowance rate to 5% for purchases and administrative expenses. The judgment was pronounced in open court on 6th August 2024.