SURESH RAMACHANDRAN,TISAIYANVILAI vs. ASSISTANT COMMMISSIONER OF INCOME TAX, CIRCLE 1, TIRUNELVELI

The present appeal of the assessee is directed against the order dated 17.06.2025 passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the Ld. CIT(A)”], arising out of the assessment order dated 24.03.2023 passed u/s.147 r.w.s 263 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] by the Assistant Commissioner of Income Tax, Circle-1, Tirunelveli [hereinafter referred to as “the AO”], for the Assessment Year 2017-18.

The brief facts of the case are that the assessee is an individual carrying on business in retail sale of hardware items through his proprietary concern, M/s.V.S.R. Hardwares, and also engaged in real estate development under the proprietary concern M/s.V.S.R. Real Estates. The assessee filed his return of income for the assessment year under consideration on 27.11.2017 declaring total income of Rs.9,65,250/-.

A survey u/s.133A of the Act was conducted at the business premises of the assessee on 01.02.2018, during the course of which certain books of account and documents were impounded. Simultaneously, a sworn statement u/s.131 of the Act was recorded from the assessee. On account of deficiencies noticed in the maintenance of vouchers and supporting evidences relating to land development expenses, the assessee, during survey proceedings, voluntarily offered an additional income of Rs.65,00,000/- for A.Y.2017-18.

Subsequently, the assessment was reopened by issuance of notice u/s.148 of the Act dated 28.12.2018, which was duly served on 01.01.2019. In response thereto, the assessee filed return of income on 27.03.2019 declaring the same income of Rs.9,65,250/- as originally returned.

The reassessment was completed u/s.143(3) r.w.s 147 of the Act on 27.12.2019, wherein the AO disallowed a sum of Rs.7,99,082/- being part of surface levelling expenses and determined the total income at Rs.17,64,332/-.

Thereafter, the Principal Commissioner of Income Tax, Madurai-1, invoking revisionary jurisdiction u/s.263 of the Act vide order dated 25.03.2022, held that the reassessment order was erroneous insofar as it was prejudicial to the interests of the Revenue, on the ground that the AO had failed to consider the admission made by the assessee during survey and had also not properly examined the allowability of the remaining development expenditure. Accordingly, the assessment was partly set aside with a direction to the AO to conduct necessary enquiries and pass a fresh order.

Pursuant thereto, the AO initiated set-aside proceedings and issued notice dated 24.01.2023 calling upon the assessee to produce books of account, bank statements, vouchers, invoices and explanation in respect of the balance amount of Rs.57,00,918/-, being the difference between Rs.65,00,000/- admitted during survey and Rs.7,99,082/- disallowed earlier.

In response, the assessee filed reply dated 13.02.2023 stating, inter alia, that the real estate business involved sale of small plots through instalment schemes; that during the relevant period the State Government imposed restrictions on sale of unapproved plots resulting in virtual suspension of business activities; that instalments collected from customers represented refundable advances and not income; that development expenditure was incurred out of such collections; that several customers had lodged complaints due to inability to register plots; and that the admission made during survey was under a mistaken understanding and without appreciating the legal implications. It was further submitted that all relevant particulars had already been examined during the reassessment proceedings and that taxes arising therefrom had been duly paid.

The AO further placed reliance on the sworn statement recorded on 01.02.2018, wherein the assessee had admitted his inability to substantiate the development expenses and had voluntarily offered Rs.65,00,000/- as additional income. Holding that a mere retraction without corroborative evidence is not acceptable and that statements recorded on oath carry evidentiary value, the AO concluded that the assessee had failed to discharge the onus cast upon him to establish the genuineness of the balance expenditure.

Accordingly, the AO disallowed the balance sum of Rs.57,00,918/- u/s.37 of the Act and brought the same to tax. The total income was thus recomputed at Rs.74,65,250/- vide order dated 24.03.2023 passed u/s.147 r.w.s 263 of the Act.

Being aggrieved by the assessment order whereby an addition of Rs.57,00,918/- was made u/s.37 of the Act, the assessee preferred an appeal before the Ld.CIT(A). However, the Ld.CIT(A), vide impugned appellate order dated 17.06.2025, dismissed the assessee’s appeal and confirmed the addition so made by the AO u/s.37 of the Act.

Aggrieved, assessee is in appeal before us challenging the action of the Ld.CIT(A) in sustaining the addition made by the AO.

We have carefully considered the rival submissions, perused the material available on record and gone through the orders of the lower authorities. The :-5-: ITA. No:3463/Chny/2025 core issue for adjudication before us is the sustainability of disallowance of Rs.57,00,918/- made by the AO u/s.37 of the Act, being the balance land development expenditure, primarily on the basis of sworn statement recorded during survey and alleged inadequacy of supporting evidences.

At the outset, it is an undisputed fact that the assessee is engaged in real estate development and sale of plots, wherein incurrence of expenditure towards surface levelling, road formation and stone fixing constitutes an integral and unavoidable part of the business activity. The AO himself has accepted the existence of layouts and the factum of development work having been carried out. Thus, the incurrence of expenditure per se is not in dispute; only the extent of allowability has been questioned.

The primary basis for the impugned addition is the sworn statement recorded during survey proceedings, wherein the assessee had offered a sum of Rs.65,00,000/- as additional income on account of inability to substantiate development expenses. It is well settled law that a statement recorded during survey, though relevant, cannot by itself be the sole basis for making an addition unless the same is supported by independent corroborative material. In the present case, no incriminating material was brought on record either during survey or during the subsequent proceedings to demonstrate that the development expenditure claimed by the assessee was fictitious or inflated. The AO has merely proceeded on presumptions arising out of self-made vouchers. It is also pertinent to note that the assessee has consistently maintained books of account and the same have not been rejected u/s.145 of the Act. Once the books are not rejected, wholesale disallowance of expenditure is not legally sustainable. The AO has neither pointed out any specific instance of bogus payment nor identified any particular voucher as false. The disallowance has been made in a lump sum manner purely on general observations.

As regards reliance placed on the sworn statement, we find merit in the assessee’s contention that the admission was made under survey

Further, the nature of expenditure involved such as earth work, levelling and stone fixing particularly in semi-urban layouts, is often incurred through petty contractors and daily labour, where third-party bills may not always be available, and self-made vouchers are a common commercial practice. Merely because vouchers are self-prepared, the entire expenditure cannot be disallowed, especially when the Revenue has accepted the corresponding business receipts and existence of layouts.

At the same time, we also cannot lose sight of the fact that complete documentary substantiation has not been produced and certain deficiencies in vouchers do exist. Therefore, to meet the ends of justice, an element of estimation is warranted.

Considering the peculiar facts and circumstances of the case, we are of the considered view that disallowance of the entire balance expenditure of Rs.57,00,918/- is excessive and arbitrary. In our opinion, a reasonable disallowance of 10% of the total development expenditure would adequately take care of possible inflation or unverifiable portion of expenses.

Accordingly, we direct the AO to restrict the disallowance to 10% of the impugned development expenditure. Consequently, the addition made by the AO shall stand confined to Rs.5,71,000/-, and the remaining 90% shall be allowed as deductible business expenditure u/s.37 of the Act. The AO is,

In the result, the appeal of the assessee is partly allowed.