2014 (2) TMI 596 - AT - Income Tax

Tax Appeals Decisions: Directions on Disallowances and Merits Review

The appeals for the assessment years 2005-06 and 2006-07 were partly allowed, with directions for the Assessing Officer to verify and adjust disallowances ... Disallowance of expenditure - Search u/s 132 of the Act made - Application for condonation of delay not considered – Held that:- The CIT(A) has disposed of the appeals of the assessee before him, without considering the letter of the assessee and observing that there was violation of provisions of S.249(4)(a) of the Act, on account of non-payment of admitted taxes - Revenue could not controvert the submissions of the assessee – Relying upon CIT V/s. Filmistan Ltd. [1961 (2) TMI 2 - SUPREME Court] - The order of the CIT(A) set aside and the matter remitted back to the CIT(A) for adjudication after considering the request of the assessee for condonation of delay in filing the appeal, in accordance with facts and law – Decided in favour of Assessee. Quantum of disallowance – Held that:- The disallowance is not invoking the provisions of Section 40A(3) but disallowance is u/s 37(1) being unverifiable nature of expenditure - Since the details are not furnished before the authorities earlier, the AO is directed to examine the aspects and exclude the cheque payments out of the disallowance - considering the nature of business of the assessee and the details of expenditure incurred on various site development and construction activities, including labour payments and the difficulty in maintaining proper vouchers , it would be fair to restrict the disallowance to 15% of the cash payments so made out of the items of expenditure considered by the assessing officer – Decided partly in favour of Assessee. Amount disallowed to be added in the income returned or not – Held that:- The assessee has fairly admitted that the assessee firm could not bifurcate the expenditure - part of the opening work-in-progress could have resulted in sale of flats, whereas part of the expenditure claimed in this year under various head could have gone into the construction work-in-progress - In the absence of clear cut demarcation given by the assessee, it may be presumed that 50% of the expenditure claimed in this year would have gone into the closing work-in-progress, being mainly construction of houses, (as there was no sale of open plots of land as in earlier years) – thus, out of the disallowance sustained by the CIT(A), 50% should be added to the income of the year and the balance amount should be adjusted in the closing work-in progress – Decided partly in favour of Assessee. Issues Involved:1. Disallowance of expenditure for assessment years 2005-06, 2006-07, and 2008-09.2. Dismissal of appeal for assessment year 2007-08 due to non-payment of admitted taxes.Issue 1: Disallowance of Expenditure for Assessment Years 2005-06, 2006-07, and 2008-09Facts:The assessee, a real estate developer, faced disallowance of expenditures by the Assessing Officer (AO) ranging from 20% to 60% due to unorganized sector purchases and self-made vouchers. The Commissioner of Income-tax (Appeals) [CIT(A)] reduced the disallowance to 25% for assessment years 2005-06 and 2006-07, and to 10% for 2008-09.Analysis:- Assessment Years 2005-06 and 2006-07:- The AO disallowed portions of expenditures due to unverifiable nature of the expenses.- The CIT(A) reduced the disallowance to 25%.- The Tribunal noted that the AO did not distinguish between cash and cheque payments.- The Tribunal directed the AO to exclude cheque payments from disallowance and limit disallowance to 15% of cash payments.- Assessment Year 2008-09:- The AO disallowed 20% of expenditures, while the CIT(A) reduced it to 10%.- The assessee argued that disallowed expenditures should reduce the closing work-in-progress, not be added to income.- The Tribunal agreed partially, directing 50% of disallowed amount to be added to income and 50% to adjust in closing work-in-progress due to lack of clear bifurcation.Conclusion:- Appeals for 2005-06 and 2006-07 were partly allowed, directing the AO to verify and adjust disallowances accordingly.- Appeal for 2008-09 was partly allowed, with specific directions on handling disallowed expenditures.Issue 2: Dismissal of Appeal for Assessment Year 2007-08 Due to Non-Payment of Admitted TaxesFacts:The CIT(A) dismissed the appeal in limine under S.249(4) because the assessee did not pay admitted taxes at the time of filing the appeal. The assessee paid the taxes later and sought condonation of delay.Analysis:- The CIT(A) relied on the Madras High Court judgment in S. Alagarswamy V/s. ITO, which mandates payment of taxes for appeal maintenance.- The Tribunal noted that the assessee paid taxes within 31 days of filing the appeal and sought condonation with a notarized affidavit.- The Tribunal referenced various legal precedents and concluded that the CIT(A) should have treated the appeal as belated and considered condonation due to bona fide reasons.Conclusion:- The Tribunal set aside the CIT(A)'s order and directed the CIT(A) to admit the appeal after considering the delay condonation request and decide on merits.Final Orders:- Appeals for 2005-06 and 2006-07 (ITA Nos. 1418 and 1419/Hyd/2012) are partly allowed.- Appeal for 2007-08 (ITA No. 1420/Hyd/2012) is allowed for statistical purposes.- Appeal for 2008-09 (ITA No. 1421/Hyd/2012) is partly allowed.Order Pronounced:On 11.1.2013.