Tribunal dismisses revenue's appeal, limits disallowance to 10% of land development expenditure

The Tribunal dismissed the revenue's appeal regarding the deletion of the Rs. 13,00,000 addition under Section 68 and partly allowed the assessee's appeal by directing the AO to restrict the disallowance to 10% of the land development expenditure.

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Issues Involved:
1. Deletion of addition under Section 68 of the Income Tax Act by CIT(A).
2. Adhoc disallowance of land development expenses by AO.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68 of the Income Tax Act by CIT(A):
The revenue's grievance was that the CIT(A) erred in deleting an addition of Rs. 13,00,000 made by the AO under Section 68 of the Income Tax Act, 1961. The Tribunal noted that the appeal was presented on 30/12/2013, and on 10.12.2015, the CBDT issued Instructions No. 21/2015, prohibiting appeals to the Tribunal where the tax effect is less than Rs. 10 lakhs. These instructions are applicable retrospectively, including pending appeals. In this case, the tax effect on the deleted addition was less than Rs. 10 lakhs, making the appeal non-maintainable as per the CBDT Circular. The Tribunal dismissed the revenue's appeal but noted that the Department could approach the Tribunal for recall of the order if, upon re-verification, it is found that the tax effect exceeds Rs. 10 lakhs or falls within the exceptions provided in the instructions.

2. Adhoc Disallowance of Land Development Expenses by AO:
The assessee's grievance was against the confirmation of an adhoc disallowance of Rs. 15,79,749 out of the land development expenses. The assessee declared a total income of Rs. 2,15,16,828 and debited Rs. 63,18,996 towards land development expenses, paid to nine individuals. The AO disallowed 25% of the total expenditure, citing unverifiable and unsubstantiated claims, and added Rs. 15,79,749 to the taxable income. The AO relied on the decision in Vijay Proteins Ltd. Co. V. ACIT, where 25% of unverifiable purchases were disallowed.

The Tribunal examined Section 145 of the Income Tax Act, which provides the mechanism for computing income based on the method of accounting regularly employed by the assessee. The AO can reject the book results and estimate income if the accounts are not satisfactory. Section 144 guides the AO in making a best judgment assessment, requiring a fair estimate based on relevant materials and circumstances.

The Tribunal found that the AO's reliance on Vijay Proteins Ltd. was misplaced, as the nature of the assessee's business (land development) differed from that of Vijay Proteins Ltd. (manufacturing of oil and cake). The Tribunal considered Section 44AD, which provides an estimation of profit at 8% for construction or contractual jobs, though not strictly applicable, it served as a reference for estimating disallowance. The Tribunal concluded that a 10% disallowance of the land development expenditure would be just and reasonable.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding the deletion of the Rs. 13,00,000 addition under Section 68 and partly allowed the assessee's appeal by directing the AO to restrict the disallowance to 10% of the land development expenditure. The order was pronounced on 23rd February 2017 at Ahmedabad.

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