Ambience Private Limited Vs ITO (ITAT Delhi)
NO ITR, NO REPLY -BUT NO LICENCE FOR 30% GUESSWORK: AD HOC DISALLOWANCE OF CONTRACT EXPENSES CUT TO 5%
Summary:
The Delhi ITAT has held that the failure of contractors to file their ITRs or respond to notices issued u/s 133(6) may justify closer verification of the expenditure, but it does not authorise the AO to make an arbitrary disallowance of 30% without examining the services rendered or providing any rational basis for the chosen percentage. Considering the expenditure to have remained partly unverifiable, the Tribunal restricted the disallowance to 5%.
Facts of the case
The assessee, Ambience Private Limited, was engaged in the business of real-estate & infrastructure development.
For AY 2023-24, it filed its return of income on 31.10.2023 declaring a loss of ₹14,05,48,926. The return was processed u/s 143(1) at a loss of ₹14,00,23,611.
The case was subsequently selected for scrutiny under CASS for multiple reasons. One of the reasons was that the assessee had made substantial payments attracting TDS u/s 194C to certain persons who had not filed their ITRs.
During the assessment proceedings, the AO issued notices u/s 133(6) to three contractors to whom payments had been made. However, none of the three contractors responded to the notices.
The AO also observed that these contractors had not filed their returns of income for the relevant year. He therefore concluded that payments aggregating to ₹1,60,83,564 remained unverified & that the assessee had failed to establish the genuineness of the corresponding expenditure.
Instead of disallowing the entire expenditure, the AO estimated a disallowance at 30% of the payments, amounting to ₹48,25,069. The returned loss was accordingly assessed at ₹13,51,98,542 by an order passed u/s 143(3) on 30.03.2025.
The CIT(A) upheld the disallowance & dismissed the assessee’s appeal.
Assessee’s contention
Before the ITAT, the assessee contended that the AO had not pointed out any defect in the books of account, supporting documents or expenditure claimed u/s 37(1).
The expenditure had been incurred wholly & exclusively for the purpose of the assessee’s business. Merely because the concerned contractors had not filed their ITRs or failed to respond to notices issued directly by the AO u/s 133(6), the expenditure could not be treated as non-genuine.
The assessee emphasised that the AO had not doubted the fact that the contractors had actually rendered services. There was also no finding that the payments had been returned to the assessee, that the contractors were fictitious or that the expenditure was not connected with the assessee’s business.
It was further argued that by allowing 70% of the same expenditure, the AO had effectively accepted the existence of the contractors & the services rendered by them. Having accepted the transaction substantially, the AO could not arbitrarily disallow the remaining 30% without identifying any inflation, defect or unverifiable component.
The rate of 30% was not supported by any provision of law, comparable case, material found during assessment or other objective basis. The disallowance was therefore alleged to be founded merely on assumptions, presumptions & conjectures.
Revenue’s contention
The Revenue supported the orders of the lower authorities.
It was argued that notices issued u/s 133(6) remained unanswered & the contractors had not filed their ITRs. Therefore, the assessee had failed to conclusively prove the genuineness of the payments & the corresponding expenditure.
The Revenue further submitted that the AO had already taken a reasonable view by allowing 70% of the expenditure. Since only 30% had been disallowed on account of lack of verification, the order did not warrant interference.
ITAT’s findings
The Tribunal noted the admitted position that the notices issued to the contractors u/s 133(6) had not been complied with. It was also undisputed that those contractors had not filed their returns of income for the year under consideration.
Consequently, the payments made to them & the related expenses could not be independently verified from the recipients.
However, the Tribunal held that before making any disallowance, the AO ought to have examined the nature & extent of services rendered by the contractors.
The AO had not disputed that services were actually rendered. He had also not identified any particular payment as false, inflated or unrelated to the assessee’s business. Despite this, he made a flat disallowance of 30% without explaining the basis on which that percentage was selected.
The ITAT found the 30% disallowance to be ad hoc, unsupported by any rational basis & excessive.
At the same time, the Tribunal considered the fact that the contractors neither responded to the notices u/s 133(6) nor filed their ITRs. It held that the genuineness of the payments & corresponding expenses could not be fully verified.
Considering the overall facts & circumstances, the ITAT restricted the disallowance to 5% of the expenditure & deleted the balance. The assessee’s appeal was accordingly partly allowed.
Author’s comments
The decision reiterates that non-compliance by a third party cannot, by itself, destroy an assessee’s claim. Once expenditure is supported by invoices, agreements, banking transactions, TDS compliance & evidence of services received, the AO must evaluate that material. He cannot outsource the fate of the deduction entirely to the contractor’s response u/s 133(6).
The AO’s approach also contained an inherent contradiction. If the transactions were wholly non-genuine, allowing 70% required explanation. If the services were accepted as genuine, disallowing 30% equally required evidence. An estimate cannot emerge from thin air merely because a round percentage looks convenient.
However, the Tribunal itself sustained 5% on the ground that the expenditure remained unverifiable. This too raises a debatable question: if the services were not doubted & no specific defect was found, what is the statutory or evidentiary basis for even a 5% disallowance? Unverifiability may justify further enquiry or remand, but estimation should ordinarily rest upon some comparable material or demonstrated inflation.
The order grants substantial relief, but also shows how an unsupported 30% guess can occasionally return wearing a smaller 5% hat.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, DELHI BENCH
The present appeal is filed by assessee against the order dated 26.02.2026 passed by Ld. Commissioner of Income Tax (A)-27, New Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-27/10091/2022-23 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 30.03.2025 passed u/s 143(3) of the Act pertaining to Assessment Year 2023-24.
2. Brief facts of the case are that the assessee company is engaged in the business of real estate and infrastructure development. The return of income was filed on 31.10.2023, declaring total loss of INR 14,05,48,926/- which was processed u/s 143(1) of the Act at a loss of INR 14,00,23,611/-. Thereafter, case of the assessee was selected for scrutiny under CASS for various reasons wherein one of the reasons was that large payments were made u/s 194C to persons who have not filed their ITRs. During the course of assessment proceedings, AO had issued notices u/s 133(6) of the Act to 03 of such payees to whom payment u/s 194C were made however, no reply was received therefore, the AO was of the opinion that total expenditure incurred on account of payments made to these 03 parties of INR 1,60,83,564/- remained unverified. It is further observed by the AO that all the 03 contractors had not filed their ITRs therefore, genuineness of the transactions remained unproved. Accordingly, AO disallowed 30% of the total payment which comes to INR 48,25,069/- and the total loss was assessed at INR 13,51,98,542/-.
3. Aggrieved by the said order, the assessee filed an appeal before the ld. CIT(A) who vide impugned order dated 26.02.2026, dismissed the appeal of the assessee.
4. Aggrieved by the order of ld. CIT(A), the assessee is in appeal before the Tribunal by taking various Grounds of appeal as mentioned in the appeal memo.
5. All the Grounds of appeal raised by the assessee are with respect to the of expenditure @ 30% of the contract expenditure therefore, they are taken together for consideration.
6. Before us, ld.AR for the assessee filed a detailed written submission and submits that AO has not pointed out any defect in the expenditure claimed u/s 37(1) of the Act as all the expenses were incurred wholly and exclusively for the purposes of business. Merely because, the payees have not filed their ITRs and had not complied with the notices issue u/s 133(6), the payments made to them were doubted and adhoc disallowance was made. Ld.AR submits that when part expenses were accepted as genuineness and the services rendered by them were not doubted and were admitted and therefore, no disallowance be made. Ld.AR further submits that arbitrarily disallowance @ 30% without basis on assumptions and presumption deserves to be deleted. For this, reliance is placed on the various judicial pronouncements which are stated in the written submissions placed on record. In the last, it is requested that the disallowance so made be deleted.
7. On the other hand, ld. Sr. DR for the Revenue vehemently supported the orders of the lower authorities and submits that AO has already allowed the deduction @ 70% of the total expenditure claimed as has been paid to the parties who have not filed their ITRs thus, the expenditure to this extent remained unverified and therefore, lower authorities have rightly disallowed/upheld the part of the expenditure claimed which order deserves to be uphold.
8. Heard the contentions of both the parties at length and perused the material available on record. At the outset, it is observed that it is an admitted fact that notice issued u/s 133(6) of the Act remained non-complied. Further they have not filed their return of income for the year under appeal therefore, the expenditure incurred as paid to them remained unverified. Under these circumstances, before making any disallowance, the AO should have examined the services rendered by them. However, the AO has not doubted the services rendered by them and made the adhoc disallowance of 30% out of total expenses claimed without providing any basis for such adhoc disallowance of 30% which in our considered view appears to be on higher side. The fact remained that since no compliance was made in response to the notices issued u/s 133(6) of the Act, therefore the genuineness of the payments made to them and the corresponding expenses claimed could not be verified.
9. Considering the entirety of facts and circumstances of the case, we hereby uphold the disallowance @ 5% and remaining disallowance is hereby, deleted. All the grounds of appeal are party allowed.
10. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 09.09.2026.
