2022 (2) TMI 222 - AT - Income Tax

Ad hoc addition at 1/3 of the development expenses for want of printed receipts and vouchers which were not permissible under law - HELD THAT - We think that both the AO and the CIT(A) has estimated expenditure on pure guess and suspicion. There were no dispute by the AO and CIT(A) that the assessee has incurred expenses for land development charges. The only reason AO noted is that the assessee has not produced any document or evidence in support of the expenses incurred as land development charges. We have given our thoughtful consideration to facts of the present case and in the light of reasons given by the AO to make ad hoc disallowance of expenses and we ourselves don't agree with the reasons of the AO for making Ad hoc 1/3rd of disallowance of expenses for the simple reasons that unless the AO make out specific cases of expenses, which is not supported by evidence, he cannot make Ad hoc disallowance. At the same time it is also admitted fact the Assessee also failed to produce necessary evidence. Therefore, we are of the considered view to settle the dispute between the parties we deem it appropriate to direct the AO to restrict the disallowance of expenses to 10% of the land development Expenses disallowed by the AO - We allow this appeal with modification of prayer made by the assessee and set aside the order of the Ld. CIT(A) and hence partly allowed.

Summary

Issues:
Appeal against Commissioner of Income Tax (Appeals) order for assessment year 2013-14 regarding ad hoc addition of development expenses without printed receipts and vouchers.

Analysis:
The assessee incurred expenses converting agricultural lands into housing sites, debiting ?33,12,000, but fell sick when asked for details, leading to the Assessing Officer disallowing 1/3rd of the expenses. The AO observed lack of details despite providing ample time, resulting in the ad hoc disallowance of ?11,04,000.

The assessee argued before the CIT(A) that the development expenses were reasonable, verified by auditors, and essential for land conversion. Citing cases, the assessee contended that summary disallowances should not be made without rejecting accounts or audit reports. However, the CIT(A) upheld the AO's decision, emphasizing the lack of documentary evidence and citing precedents justifying additions due to non-furnishing of evidence.

During the appeal, the ITAT Chennai found the AO's and CIT(A)'s estimation of expenses arbitrary, as there was no prescribed rule for the ad hoc disallowance. Acknowledging the lack of evidence from the assessee, the ITAT directed the AO to limit the disallowance to 10% of the land development expenses, disagreeing with the AO's rationale for the ad hoc disallowance.

In conclusion, the ITAT allowed the appeal partially, modifying the disallowance to 10% of the land development expenses, setting aside the CIT(A)'s order. The judgment was delivered on January 31, 2022, in Chennai.