ITAT Chennai modifies development expenses disallowance to 10%, emphasizes lack of prescribed rules

The ITAT Chennai partially allowed the appeal, modifying the ad hoc disallowance of development expenses to 10% of the total amount, disagreeing with the AO's and CIT(A)'s arbitrary estimation. The ITAT emphasized the lack of prescribed rules for such disallowances and directed the AO to limit the disallowance accordingly. The decision set aside the CIT(A)'s order and was delivered on January 31, 2022, in Chennai.

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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 Rs. 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 Rs. 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.

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