Disallowance for Expenses in Construction Business Reduced to 5% for 2015-16, Improving on Previous 20% Rate.

The ITAT partly allowed the appellant's appeal, reducing the disallowance rate for purchases and administrative expenses to 5% for the assessment year 2015-16. Initially, the AO had disallowed 50% of expenses due to non-compliance, which was reduced to 20% by the First Appellate Authority. The ITAT found the 20% rate unreasonable considering the appellant's construction business, thus lowering it to 5%. The decision was pronounced on 6th August 2024.

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Issues: Disallowance of certain expenses in assessment year 2015-16.

Analysis:
1. The dispute centered around the disallowance of certain expenses by the Assessing Officer (AO) for the assessment year 2015-16. The appellant, a resident corporate entity engaged in construction business, had filed its return of income showing a loss. The AO, after issuing notices under sections 143(2) and 142(1) of the Income Tax Act, proceeded with the assessment under section 144 due to the non-compliance of the appellant. The AO disallowed 50% of the expenses amounting to Rs. 4,01,14,226, as the appellant failed to respond. The appellant contested this disallowance before the First Appellate Authority, who reduced the addition to Rs. 1,56,70,692, disallowing only 20% of the expenses related to purchases and administrative expenses, while deleting the disallowance of opening stock and work-in-progress.

2. The appellant, in its appeal to the ITAT Delhi, focused on challenging the rate of disallowance set at 20%. The appellant argued that being in the construction business, a lower rate of profit should be considered, making the 20% disallowance unreasonable. The Departmental Representative, on the other hand, supported the First Appellate Authority's decision. The ITAT considered both parties' submissions and the available evidence. It noted that the disallowance was based on estimates by both the AO and the First Appellate Authority. Despite the appellant not appearing before the AO, they did present evidence before the First Appellate Authority, which was forwarded to the AO for verification, although the First Appellate Authority declined to consider it. The ITAT found this decision unjustified and ultimately directed a disallowance rate of 5% for purchases and administrative expenses, considering the nature of the appellant's construction business.

3. The ITAT's decision was to partly allow the appellant's appeal by reducing the disallowance rate to 5% for purchases and administrative expenses. The judgment was pronounced in open court on 6th August 2024.

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