2015 (12) TMI 1324 - AT - Income Tax

Addition on account of unverifiable construction expenses - CIT(A) deleted the addition - Held that - The assessee had shown the additional income in the returns furnished by him and his son and the AO had not recorded any finding that there was any evidence of any unexplained expenditure/ investment or any income which was not covered in the additional income disclosed by the assessee. CIT (A) has rightly held that there was no justification for making ad hoc disallowance of 10% out of the expenditure claimed to have been incurred by the assessee in construction business. We agree with the Ld. CIT(A) that whether the assessee was a builder/developer or a civil contractor is not relevant and only the issue is estimation of reasonable net profit of the assessee s business. In any case, section 44AD of the Act is not applicable in the assessee s case because the turnover of the business exceeded ₹ 40,00,000/-. When the assessee is a builder/developer and is engaged in construction activities, and the assessee had shown a net profit rate of 10% of his gross receipt, whereas the rate of 8% is given in section 44AD for civil contractor is to be taken only as a benchmark for the purposes of estimation of net profit in such cases. Therefore, we concur with the ld CIT(A) that the ad hoc disallowance was not warranted and we find no merits in this ground of appeal of the department. In view of the above, we hold that the ld. CIT (A) rightly deleted the addition - Decided against revenue Addition on account of cash expenditure exceeding ₹ 20,000/- - CIT(A) deleted the addition - Held that - We find that the payments were made in cash to stamp vendors who acted as the agents of the Government for selling stamp papers, hence, such payments were covered under the exception provided in Rule 6DD(b). We further find that these payments were duly vouched by the physical existence of stamp papers in question which were actually utilized for purpose of acquiring the land in question. Therefore, we uphold the order of the ld. CIT (A) deleting the addition of ₹ 1 lakh made by the AO. Decided against revenue

Summary

Issues Involved:
1. Deletion of addition on account of unverifiable construction expenses.
2. Deletion of addition on account of cash expenditure exceeding Rs. 20,000.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Unverifiable Construction Expenses:

The Revenue challenged the deletion of an addition of Rs. 11,35,949/- made by the Assessing Officer (AO) on account of unverifiable construction expenses. The AO had observed that the assessee, an advocate and deed writer engaged in real estate transactions, did not maintain adequate books of account. During a search under section 132 of the Income-tax Act, 1961, it was found that the assessee incurred an expenditure of Rs. 1,13,59,499/- on construction without producing complete accounts and details. Consequently, the AO disallowed 10% of the expenditure, amounting to Rs. 11,35,949/-.

The Commissioner of Income-tax (Appeals) [CIT(A)] deleted this addition, noting that the assessee had disclosed additional income post-search, which exceeded the income disclosed during the search. The CIT(A) emphasized that the purpose of the search was to detect undisclosed income, and further additions should only be made if there was evidence of income beyond what was disclosed. The CIT(A) found no such evidence and deemed the 10% disallowance unjustified, especially since the assessee's net profit rate was a healthy 10% of gross receipts, exceeding the 8% benchmark in section 44AD.

The Tribunal upheld the CIT(A)'s decision, agreeing that the AO's addition was based on the lack of regular books rather than concrete evidence of additional income. The Tribunal emphasized that income estimation should not be capricious or whimsical, and the AO failed to provide evidence of unexplained expenditure or income beyond the disclosed amount. Thus, the deletion of the Rs. 11,35,949/- addition was upheld.

2. Deletion of Addition on Account of Cash Expenditure Exceeding Rs. 20,000:

The Revenue also contested the deletion of an addition of Rs. 1,00,000/- made by the AO under section 40A(3) of the Act for cash expenditures exceeding Rs. 20,000/-. The AO noted that the assessee made cash purchases totaling Rs. 5,00,000/- in the land purchase account, which were disallowed at 20% as per section 40A(3).

The CIT(A) deleted this addition, observing that the payments were made to stamp vendors acting as government agents for selling stamp papers, thus covered under Rule 6DD(b) exceptions. The payments were vouched by the physical existence of stamp papers used for acquiring land.

The Tribunal upheld the CIT(A)'s decision, agreeing that the payments to stamp vendors were covered under Rule 6DD(b) exceptions and were duly vouched by the physical stamp papers. The Tribunal found no merit in the Revenue's argument and upheld the deletion of the Rs. 1,00,000/- addition.

Conclusion:

The appeal by the Revenue was dismissed, with the Tribunal upholding the CIT(A)'s deletions of both additions on account of unverifiable construction expenses and cash expenditure exceeding Rs. 20,000/-. The Tribunal emphasized the importance of concrete evidence over arbitrary disallowances and the relevance of exceptions under Rule 6DD(b) for cash payments to government agents.