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Facts
The Revenue appealed against the CIT(A)'s deletion of an addition related to unsubstantiated expenses. The assessee had claimed large expenses, and the AO disallowed 15% of these expenses due to incomplete and insufficient bills/vouchers. The CIT(A) deleted the addition, finding substantial compliance and no discrepancies.
Held
The Tribunal held that the CIT(A) erred in deleting the addition without allowing the AO a reasonable opportunity to examine the documents under Rule 46A of the Income Tax Rules. The matter was remitted back to the AO for proper examination of evidence and fresh adjudication.
Key Issues
Whether the CIT(A) was justified in deleting the addition without allowing the AO to examine the evidence as per Rule 46A and whether the disallowance of expenses was justified.
Sections Cited
142(1), 143(3), 46A
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Income Tax Appellate Tribunal, DELHI ‘G’ BENCH,
Before: MS. MADHUMITA ROY, & SHRI NAVEEN CHANDRA
This appeal by the Revenue is preferred against the order of the ld. CIT(A), Delhi dated 07.01.2025 for A.Y 2017-18.
The Revenue has raised the following grounds of appeal:
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 35,48,45,992//- on account of non verifiable expenses? 2. Whether on the facts and in the circumstances of the case, the ld. CIT(A)/NFAC has erred in not considering the decision of the Hon'ble Delhi High Court in the case of M/s Sandeep Marwah Vs ACIT, Delhi HC, 2018? 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) ignored the fact that assessee has failed to substantiate the large expenses? 4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that making such high disallowance appears to be absolutely unjustified whereas the AO has observed otherwise and Ld. CIT(A) has not remanded back the issue to the AO under rule 46A of the Income Tax Rule, 1962? 5. The appellant craves to add, alter or amend any/all of the 5 grounds of appeal before or during the course of the hearing of the appeal.”
Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules.
Brief facts of the case are that the assessee company, M/s JWIL Infra Ltd. was incorporated on 27.10.2006 and is engaged in the business of Water Infrastructure in and outside India. The original return of income for the year under consideration was e-filed on 31.10.2017, declaring a loss of Rs. 8,25,70,958/- under normal provisions and loss of Rs. 7,05,17,651/- under MAT. The return was revised on 30.03.2019
Page 2 of 8 declaring loss of Rs. 2,10,15,475/- under normal provisions and loss of Rs. 7,05,17,651/- under MAT.
Return was selected for scrutiny assessment through CASS and accordingly, statutory notices were issued and served upon the assessee vide which the assessee was asked to produce the complete bills and vouchers of the expenses claimed by the assessee. However, the Assessing Officer found the bills/vouchers to be incomplete and insufficient to substantiate the large total expenses of Rs. 236,56,39,944/-. Therefore, the Assessing Officer disallowed 15% of the total expenses of Rs.236,56,39,944/- amounting to Rs. 35,48,45,992/- as unsubstantiated expenses claimed by the assessee and added back to the total income of the assessee.
Further, the Assessing Officer noticed that the assessee has reduced the amount of Rs. 1,13,11,360/- on account of interest income on fair valuation from the computation of income for business and profession but have failed to recognize such income as income from other sources. In the absence of any reply to the show cause notice, the Assessing Officer added Rs. 1,13,11,360/- to the income of the assessee under the head “income from other sources”.
Aggrieved, the assessee went in appeal before the ld. CIT(A) who deleted the addition of Rs. 35,48,45,992/- holding that the assessee had made substantial compliance by filing reply as well as about 412 pages of evidence in support of these expenses in the form of bills and vouchers on sample basis. The CIT(A) held that the AO did not find any discrepancy in the explanation or sample bills/vouchers submitted by the appellant and that the extent of expenditure vis-à-vis is much less during the year as compared to previous year, hence the disallowance as high as 15% of expenditure is not justified. The CIT(A) further held that the AO neither provided any basis for adopting 15% figure for making the disallowance nor made comparison of expenditure under various sub heads vis-à-vis earlier years nor compared the GP and NP. The CIT(A) however, acknowledged that the AO gave the assessee only a day time to submit the entire record which was not submitted.
Aggrieved, the Revenue is in appeal before us.
The ld DR referred to the assessment order and submitted that various notices u/s 142(1) of the Act along with detailed questionnaire dated 20.05.2019, 01.10.2019, 04.10.2019, 01.11.2019, 21.11.2019, 19.12.2019 and 26.12.2019 were issued and duly served upon the assessee company to which the assessee submitted part responses only
Page 4 of 8 which led to the said disallowance as being unsubstantiated expenses.
The ld DR relying on the orders of the AO, vehemently argued that the CIT(A) should have followed the Rule 46A to get response of the AO on the evidences/documents submitted by the assessee.
Per contra, the ld AR of the assessee strongly defended the order of the CIT(A) and submitted that vide notice u/s 142(1) dated 26.12.2019, the AO gave time of only one day and yet the assessee submitted maximum documents that it could provide in such short time.
The ld AR stressed that the CIT(A) had held that no discrepancy was found by the AO and that the disallowance of 15% of expense in unjustified.
We have heard the rival submissions and have perused the relevant material on record. We find that the AO had issued notices u/s 142(1) on various dates such as 20.05.2019, 01.10.2019, 04.10.2019, 01.11.2019, 21.11.2019, 19.12.2019 and 26.12.2019 along with questionnaire seeking justification of expense towards cost of materials consumed and other expenses. We also find that the assessee had filed part response to these questionnaires at the fag end of completion of assessment time period, where vide its letter dated 20.12.2019 sought an adjournment and vide its letter dated 23.12.2019, submitted part
Page 5 of 8 replies to notice dated 20.05.2019. The assessee, we find, submitted another part response to notice dated 19.12.2019 vide its letter dated 24.12.2019. It is also an averment of the assessee that it was granted only one day time to furnish the response to notice u/s 142(1) dated 26.12.2019 on the issue of interest income on fair valuation which we find was not responded to. In effect, the filing of response was carried through the fag end of assessment year, that too incomplete, where the AO passed the assessment order u/s 143(3) on 26.12.2019 without examining the complete details.
We further note that the though the CIT(A) acknowledges that the assessee filed within one day, its response containing 412 pages of documents before the AO, comprising of copies of bills/vouchers on sample basis which was also produced before him, he glossed over the various earlier opportunities offered by the AO. In such a factual matrix, we are of the considered view that the CIT(A) committed an error in deciding the appeal without taking recourse to the provisions of Rule 46A of the Income Tax Rules 1962 and in not allowing a reasonable opportunity to the AO u/r 46A(3) to examine the 412 pages of bills/vouchers and other documents. When the CIT(A) says that the AO did not find any discrepancy in the explanation submitted, he forgot that the AO had not received the complete details/documents/evidences.
Page 6 of 8 Further, the sample bills/vouchers submitted was also not examined by the AO on account of non-submission/part submission by the assessee at the fag end of assessment period. In view of the above discussion, we therefore, are of the considered view that the issue of disallowance of expenses and addition of interest as other source income, be remitted back to the AO for proper examination of documents/evidences submitted by the assessee and fresh adjudication on the issues discussed above. The AO is directed to afford an adequate and reasonable opportunity to the assessee to present its case. The assessee is likewise directed to furnish documents/evidences as required by the AO. Ground 4 is accordingly, allowed for statistical purpose. As ground 4 is allowed and the issue is remitted to the AO, no adjudication is made on ground 1 to 3.
In the result, the appeal of the Revenue in is allowed for statistical purposes.
The order is pronounced in the open court on 27.10.2025.