2009 (2) TMI 126 - HC - Income Tax

Court upholds disallowance of illegal construction expenses as undisclosed income

The High Court dismissed the appeals, upholding the Income-tax Appellate Tribunal's decision that the expenses incurred for construction purposes were ... Search and Seizure – Meaning of Undisclosed Income - assessees received unaccounted money towards the sale of flats apart from certain illegal payments such as bribes debited as construction expenses, which are disallowable against gross receipts. Certain unexplained investments in the property made by the senior partner were also detected. Cash was found in excess of cash balance recorded in the books. Some amount was received from the flat owners on various dates towards various expenses involving additional amount paid for acquisition of land and extra amenities provided in the flats - Out of these certain amounts had already been accounted for in the earlier years’ books of account leaving a balance of Rs. 39,68,999 and towards this the assessee offered a sum of Rs. 40 lakhs as undisclosed income. AO proceeded to estimate the cost of construction and arrived at an additional sum of Rs. 30,79,298 for the block period being illegal expenses accounted for in the books as construction expenses. – HC did not find any merit in appeal and dismissed the appeal Issues:1. Whether the expenses incurred for construction purposes were illegal and not allowableRs.2. Whether the unaccounted portion of income should be included in the block returnRs.3. Whether the expenses incurred were camouflaged as labor/construction expensesRs.Analysis:1. The case involved appeals against the Income-tax Appellate Tribunal's order for the assessment year April 1, 1990, to September 26, 2000. The main issue was whether the expenses incurred for completing the construction process, including amenities like electricity and water connection, were illegal and not allowable. The Tribunal concluded that the expenses were illegal and disallowable as they were camouflaged as labor or construction expenses. The Tribunal referred to the Explanation to section 37(1) of the Income-tax Act, stating that any expenditure for an offense or prohibited purpose cannot be considered for business deduction. Consequently, the Tribunal confirmed the addition of Rs. 30,79,298 as undisclosed income for illegal expenses accounted for in the books.2. Another issue was the inclusion of the unaccounted portion of Rs. 27,29,500 in the block return of Rs. 40 lakhs. The Tribunal rejected the claim, considering the seized materials identifying expenses of Rs. 67,79,900. The Tribunal's decision was based on the discrepancy between the claimed amount and the actual expenses found in the seized records. The Tribunal held that the unaccounted portion could not be justified, leading to the dismissal of the appellant's claim.3. The third issue revolved around whether the expenses incurred were camouflaged as labor or construction expenses. The Tribunal found contradictory evidence in the seized records, indicating that the expenses were illegal. Despite the appellant's arguments, the Tribunal upheld the Assessing Officer's estimation of additional construction costs as illegal expenses. The Tribunal's decision was in line with the statutory provisions, particularly the Explanation to section 37(1) of the Income-tax Act, which prohibits deductions for expenses related to offenses or prohibited purposes.In conclusion, the High Court dismissed the appeals, stating that there was no merit in the arguments presented. The judgment highlighted the importance of adhering to statutory provisions and disallowing expenses that are illegal or prohibited under the law.