ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(2)(1), BANGALORE vs. ARUNACHALAM NARASIMHAN, BANGALORE

PER SHRI WASEEM AHMED, ACCOUNTANT MEMBER: This appeal is filed by the Department against the order of Ld. NFAC vide DIN: ITBA/NFAC/S/250/2025-26/1076209123(1) dated 15-May-2025 for the Assessment Year 2023-24.

6.1 The assessee and his co-owner had received 79 apartments under a Joint Development Agreement. During the year under consideration, 49 apartments were sold. Against these flats, total cost of improvement of Rs. 10,11,85,000/- was claimed. The assessee's 50% share thereof was Rs.5,05,92,500/- only.

6.2 During the assessment proceedings, the assessee furnished the Joint Development Agreement, sale deeds relating to the flats sold during the year, sale chart, computation of capital gains and other supporting documents. The assessee claimed total expenditure of Rs. 10,11,85,000/- incurred towards improvement of the flats. The assessee subsequently furnished bills, ledger confirmations and vouchers in support of the improvement of the expenditures. The assessee explained that the flats received under the JDA were unfurnished. The flats required substantial improvement before they could be sold in the market. The expenditure was therefore necessary to make the flats saleable and competitive. The sale deeds also reflected various amenities and improvements provided with the flats.

6.3 The assessee further explained that the complete source of funds was utilised for the improvements. According to the details furnished, Rs. 7,87,72,104/- came from withdrawals from Sunrise Arunachalam Company, Rs. 70,07,374/- from Sunrise Industrials, Rs. 1,28,66,522/- from the assessee's Karnataka Bank account and Rs. 25,39,000/- from the ICICI Bank account of the co-owner. The total source thus worked out exactly to Rs. 10,11,85,000/- only.

6.4 The AO accepted that the assessee had furnished bills and vouchers relating to the improvement expenditure. However, for further verification, the AO called for ledger confirmations and bank statements. Notices u/s 133(6) of the Act were also issued to the parties from whom purchases or services for improvement were claimed.

6.5 According to the AO, five parties did not respond to the notices issued u/s 133(6) of the Act. One party, namely Shri Suresh Kumar Mangilal Prajapath, proprietor of Adithya Lamps and Bilva Enterprises, denied having entered into transactions with the assessee during F.Y. 2020-21. The AO therefore held that the genuineness of the expenditure could not be fully verified.

6.6 The AO further observed that although invoices, bills and ledger confirmations had been filed, the assessee had not produced the bank statements and other supporting evidence to his satisfaction. The AO therefore held that the claim of cost of improvement was not fully proved. Accordingly, the AO disallowed Rs. 5,05,92,500/-, being the assessee's 50% share in the total improvement expenditure of Rs. 10,11,85,000/-, and added the same while computing long-term capital gain of the assessee.

7.1 The Ld. CIT(A) further observed that the source of funds for the expenditure was not in dispute. The source had been demonstrated through withdrawals from the partnership firms and personal bank accounts. The necessity of improvement was also supported by the nature of the flats received under the JDA and the subsequent sale deeds.

7.2 The Ld. CIT(A) was also of the view that the AO had made an ad hoc disallowance without identifying any particular bill or item of expenditure which was found to be false or inflated. Merely because some parties did not respond to notices issued u/s 133(6) of the Act could not, by itself, justify rejection of the entire claim when the assessee had furnished documentary evidence and had also explained the source of funds. Accordingly, the Ld. CIT(A) held that the source of funds was beyond doubt and the necessity of the improvements was established. He therefore held that the improvement expenditure was allowable and deleted the addition of Rs. 5,05,92,500/-added by the AO. Hence, the ground of appeal of the assessee was allowed.

9.1 The Ld. DR submitted that the Ld. CIT(A) erred in deleting the addition merely on the basis of documents furnished by the assessee without properly considering the result of the enquiries made by the AO. The Ld. DR accordingly prayed that the order of the AO be restored.

10.1 The Ld. AR submitted that the AO had not found any defect in the source of funds. The assessee had explained the source of the entire expenditure of Rs. 10,11,85,000/- was through withdrawals from partnership firms and bank accounts. The source and utilisation of the funds thus stood fully explained. This aspect has also been specifically accepted by the Ld. CIT(A).

10.2 The Ld. AR further submitted that bills, vouchers, invoices and ledger confirmations were furnished before the AO. The AO did not identify any particular expenditure as excessive, bogus or unrelated to the improvement of the flats. The entire assessee's share was disallowed merely because some third parties did not respond to notices issued u/s 133(6) of the Act. According to the Ld. AR, the assessee cannot be penalised merely because third parties did not respond to the notices issued by the Revenue.

10.3 The Ld. AR also referred to the written submission/memo filed before the Tribunal giving the year-wise position of sale of the 79 apartments. It was pointed out that 49 apartments were sold in A.Y. 2023-24 and improvement cost of Rs. 10,11,85,000/- was claimed. Thus, the average cost of improvement worked out to approximately Rs. 20.65 lakh per apartment.

10.4 The Ld. AR further submitted that in the immediately succeeding year, A.Y. 2024-25, 29 apartments were sold and similar improvement expenditure of Rs. 7 crore was claimed. In the scrutiny assessment for that year, only about Rs. 39 lakh was reduced/disallowed and expenditure of approximately Rs. 6.61 crore was effectively accepted. Thus, the improvement expenditure accepted by the Department itself in the subsequent year works out to more than Rs. 22 lakh per apartment. In comparison, the expenditure claimed in the year under consideration is only about Rs. 20.65 lakh per apartment. Therefore, the claim for the present year cannot be regarded as excessive or unreasonable merely on suspicion.

10.5 The Ld. AR submitted that the subsequent assessment is a strong corroborative circumstance because the nature of the flats, the project and the improvement expenditure are similar. When the Department itself has substantially accepted a higher per-flat improvement cost in the subsequent year, there is no justification for completely rejecting the cost attributable to the flats sold during the year under consideration.

10.6 The Ld. AR further submitted that one of the parties had allegedly denied having any transaction with the assessee. However, the said adverse information was never confronted to the assessee during the assessment proceedings. The assessee was also not given any opportunity to explain or rebut the statement of that party. Therefore, according to the Ld. AR, such material could not be used against the assessee without first providing a proper opportunity of being heard. He submitted that reliance on such un-confronted material is contrary to the principles of natural justice.

10.7 The Ld. AR therefore submitted that the Ld. CIT(A) has correctly appreciated the materials on record. Once sufficient source of funds was established and substantial evidence regarding the improvements was furnished, the entire expenditure could not be disallowed merely for want of response from certain third parties. He accordingly prayed that the order of the Ld. CIT(A) deleting the addition of Rs. 5,05,92,500/- be upheld and the appeal of the Revenue be dismissed.

11.1 At the outset, we note that there is no dispute regarding the basic transaction. The assessee and the co-owner had received 79 apartments under a Joint Development Agreement. During the year under consideration, 49 apartments were sold. Against these apartments, total cost of improvement of Rs.10,11,85,000/- was claimed and the assessee's 50% share worked out to Rs.5,05,92,500/-. The AO disallowed the entire amount attributable to the assessee.

11.2 The assessment order itself shows that the assessee had furnished bills and vouchers in support of the improvement expenditure. Thereafter, invoices and ledger confirmations were also filed in response to further queries raised by the AO. Thus, this is not a case where the assessee had made a bare claim without furnishing any supporting material.

11.3 The core reason given by the AO for rejecting the claim was that notices issued u/s 133(6) of the Act to certain parties were not responded to and one party denied having entered into a transaction with the assessee during the relevant financial year. On that basis, the AO doubted the genuineness of the expenditure and disallowed the entire share of the assessee.

11.4 In our view, the approach of the AO is too broad. Non-response by third parties may be a relevant factor for verification, but it cannot automatically result in rejection of the entire claim when the assessee has otherwise furnished documentary evidence. The assessee cannot fully control whether a third party responds to a notice issued by the Department. The AO was therefore required to examine the evidence furnished by the assessee and identify which particular expenditure was not genuine, excessive, unsupported or unrelated to the improvement work. No such specific exercise has been carried out.

11.5 We further note that the AO relied upon the denial made by one of the parties for doubting the genuineness of the improvement expenditure. However, such adverse material was not confronted to the assessee and no opportunity was given to explain or rebut the same. In our view, any material proposed to be used against the assessee should first be confronted to him. Therefore, such un-confronted material cannot be made the basis for denying the claim of the assessee. The action of the AO to this extent is also contrary to the principles of natural justice.

11.6 We also find merit in the reasoning of the Ld. CIT(A) that the source of the expenditure was clearly explained. The assessee had furnished a detailed source statement showing availability of funds through withdrawals from Sunrise Arunachalam Company, Sunrise Industrials and the personal bank accounts of the assessee and the co-owner. The total source so explained matched the total improvement expenditure. This aspect assumes importance because the AO has not brought any material to show that the funds were unavailable or that the stated source was false. Once the availability of funds is established and the assessee has also produced bills, invoices and ledger confirmations, the entire expenditure cannot be rejected merely on suspicion. The AO was required to bring some positive material showing that the expenditure was fictitious or that the funds were diverted elsewhere. No such finding is available in the assessment order.

11.7 We further note that the assessee had explained that the flats received under the JDA were unfurnished and required further improvement before sale. The sale deeds and other material placed before the lower authorities were relied upon to show that the flats were ultimately sold with various amenities and improvements. The Ld. CIT(A) accepted this explanation and held that the necessity of improvement was also established.

11.8 Another important aspect is that the disallowance made by the AO is effectively an ad hoc disallowance. The AO has not identified any specific bill or specific amount which was found to be false. He has also not estimated a reasonable allowable expenditure after rejecting any particular item. Instead, the assessee's entire 50% share of the total expenditure was disallowed. Such a wholesale disallowance, without identifying the defective portion of the claim, cannot be sustained.

11.9 We also take note of the written submission placed before us giving the position of sale of the apartments over different years. In the year under consideration, 49 apartments were sold and total improvement expenditure of Rs.10,11,85,000/- was claimed. This works out to approximately Rs.20.65 lakh per apartment.

11.10 In the immediately succeeding year, 29 apartments were sold and improvement expenditure of Rs.7 crore was claimed. As submitted before us, in the scrutiny assessment for that year, only approximately Rs.39 lakh was reduced and expenditure of about Rs.6.61 crore was effectively accepted. This works out to more than Rs.22 lakh per apartment.

11.11 This subsequent-year position is a significant corroborative fact. The project is the same. The nature of the flats is the same. The character of the expenditure is also similar. When the Department itself has substantially accepted a higher per-flat improvement cost in the subsequent year, complete rejection of the lower per-flat cost of approximately Rs.20.65 lakh in the year under consideration appears inconsistent and unreasonable, particularly in the absence of any specific material showing that the expenditure claimed in the present year was bogus.

11.12 We are conscious that each assessment year is separate and the principle of res judicata does not strictly apply to income-tax proceedings. However, consistency in treatment of identical facts remains a relevant consideration. The subsequent assessment does not by itself conclude the issue, but it strongly supports the assessee's case that the quantum of expenditure claimed in the present year is not abnormal or inherently improbable.

11.13 The Revenue has contended that the Ld. CIT(A) failed to appreciate the efforts made by the AO to verify the expenditure. We are unable to accept this argument. The Ld. CIT(A) has not ignored the enquiry made by the AO. Rather, after considering the evidence placed by the assessee, the source of funds, the nature of the property, the necessity of improvements and the absence of any specific defect identified by the AO, he reached the conclusion that the expenditure could not be rejected in entirety.

11.14 We also find that the AO's observation that the invoices were not reliable remained a general observation. The assessment order does not demonstrate that the invoices were fabricated, that the amounts were inflated, that the parties were fictitious, or that the funds came back to the assessee. In the absence of such material, the entire claim cannot be discarded merely because complete third-party verification could not be achieved.

11.15 The burden initially lies upon the assessee to substantiate the claim. In the present case, the assessee discharged that burden by furnishing the JDA, sale deeds, bills, vouchers, invoices, ledger confirmations, details of sources of funds and bank statements. Once such primary evidence was placed on record, the burden shifted upon the Revenue to point out specific defects in the material or to bring contrary evidence. The Revenue has not done so.

11.16 Considering the totality of the facts, we find no infirmity in the order of the Ld. CIT(A). The source of funds stood explained. The necessity of improvement was established. Documentary evidence was produced. No specific item of expenditure was found to be false or excessive. The disallowance made by the AO was therefore based largely on non-response by third parties and general suspicion.

11.17 The subsequent-year assessment further supports the reasonableness of the claim. In these circumstances, we hold that the Ld. CIT(A) was justified in deleting the addition of Rs.5,05,92,500/-. Accordingly, the grounds raised by the Revenue are dismissed.

Order pronounced in the open court on 02 Sept. 2026 Sd/- Sd/-

KESHAV DUBEY WASEEM AHMED JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore Dated: 02 Sept. 2026 Vms Copy to: ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(2)(1), BMTC BUILDING, KORMANGALA 6TH 1 BLOCK, BENGALURU-560095, KARNATAKA ARUNACHALAM NARASIMHAN, 974-A 2ND MAIN, 4TH BLOCK RAJAJINAGAR BANG ALORE NORTH, 2 INDUSTRIAL ESTATE S.O (BANGALORE), BANGALORE, BENGALURU-560010, KARNATAKA 3 THE PCIT / CIT, 4 THE D.R., ITAT, BANGALORE BENCH 5 GUARD FILE By Order

ASSISTANT REGISTRAR / I.T.A.T., BANGALORE