Mechineni Projects Private Limited Vs DCIT (ITAT Hyderabad)
CPC Cannot Disallow Improvement Cost for Want of Evidence Under Section 143(1): ITAT Deletes Rs. 2.94 Crore Adjustment
The Income Tax Appellate Tribunal, Hyderabad “B” Bench, in Mechineni Projects Private Limited v. DCIT, ITA No. 2209/Hyd/2025, deleted a disallowance of Rs. 2,94,75,372 claimed as cost of improvement while computing capital gains. The Tribunal held that examining the availability and validity of supporting evidence belonged to scrutiny assessment under Section 143(3), rather than return processing under Section 143(1).
The order, pronounced on 23 October 2026, concerned Assessment Year 2023–24. The Bench comprised Shri Sanjay Garg, Judicial Member, and Shri Madhusudan Sawdia, Accountant Member. It allowed the company’s appeal after finding that CPC had rejected the claim without providing reasons.
Background of the Capital Gains Claim
The assessee-company filed its return of income on 28 October 2023.
While computing capital gains arising from the sale of property, it claimed Rs. 2,94,75,372 as cost of improvement and deducted that amount in its computation.
The Centralised Processing Centre, Bengaluru, disallowed the deduction while processing the return under Section 143(1) of the Income-tax Act, 1961.
The dispute therefore arose from an adjustment made at the return-processing stage. It did not originate from a scrutiny assessment in which the officer had examined the expenditure through a detailed inquiry.
The company challenged the adjustment through the statutory rectification process.
Rectification Application Also Failed
Following the processing disallowance, the company filed an application under Section 154, seeking rectification.
However, CPC again did not allow the deduction.
The Tribunal recorded that CPC had not stated why the claim was rejected, either in the original processing order or while dealing with the rectification application.
The company subsequently appealed before the CIT(A)-11, Hyderabad.
That appeal was dismissed through an order dated 16 October 2025, prompting the company to approach the Tribunal.
The proceedings thus involved both the original adjustment and the unsuccessful attempt to have it corrected without further appellate intervention.
CIT(A) Relied on Absence of Supporting Evidence
The first appellate authority observed that the company had not attached the necessary evidence to establish the cost of improvement.
On that basis, it upheld the adverse outcome.
This reasoning placed the sufficiency of evidence at the centre of the dispute. The question before the Tribunal was whether such an evidentiary inquiry could justify the disallowance in proceedings arising from Section 143(1) processing.
The Tribunal distinguished between evaluating a claim through scrutiny and rejecting it during processing merely because supporting documents were considered unavailable.
That distinction ultimately determined the appeal.
Claim Had Already Been Made in the Return
The Tribunal expressly noted that the company had duly claimed the cost of improvement in its return.
This was therefore not a case in which a taxpayer first sought an entirely new deduction through rectification.
The disputed amount was already part of the capital gains computation presented to the Department.
The Tribunal also found that neither the processing order nor the rectification outcome explained the basis for rejecting that claim.
The absence of reasons, coupled with the reliance on missing evidence at the appellate stage, led the Bench to examine the limits of CPC’s processing jurisdiction.
Evidence Verification Belongs to Scrutiny Assessment
The Tribunal held that questions concerning the availability or validity of supporting evidence could be examined in an assessment under Section 143(3).
Such examination was distinct from processing a return under Section 143(1).
In its view, CPC did not have jurisdiction under Section 143(1) to disallow the claim for want of certain evidence.
The Bench therefore rejected the evidentiary justification relied upon by the CIT(A) for sustaining the adjustment.
Its reasoning preserved the distinction between a processing mechanism and a scrutiny proceeding in which the factual basis of expenditure can be investigated.
Disallowance Deleted Rather Than Remanded
Having found the adjustment beyond the processing jurisdiction identified in the order, the Tribunal held that the disallowance was not sustainable.
It directed deletion of the disputed amount.
The case was not restored for CPC to demand additional evidence and reconsider the same processing adjustment. Nor did the Tribunal direct the company to prove the claim again before the first appellate authority.
The operative relief was deletion of the Rs. 2,94,75,372 disallowance, with the company’s appeal allowed.
This outcome followed from the nature of the proceedings and the basis on which the adjustment had been sustained.
Scope of the Decision
The ruling concerns the use of Section 143(1) to reject a claimed deduction because of perceived evidentiary deficiencies.
It does not dispense with proof of improvement expenditure wherever a lawful scrutiny inquiry requires examination.
The Tribunal itself identified Section 143(3) as the setting in which the availability and validity of such evidence could be tested.
Accordingly, the decision should be understood as a ruling on processing jurisdiction, rather than an exhaustive factual finding establishing every component of the improvement expenditure.
Final Outcome
The Tribunal allowed the assessee’s appeal and deleted the Rs. 2.94 crore adjustment.
The decision reinforces that a claim already disclosed in the return cannot be rejected through the impugned processing route merely by invoking evidentiary verification appropriate to scrutiny assessment.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
The present appeal has been preferred by the assessee company against the order of the Learned Commissioner of Income Tax (Appeals)-11, Hyderabad (hereinafter referred to as “Ld. CIT(A)”), dated 16/10/2025 for the Assessment Year (AY) 2023-24.
2. The assessee company in this appeal is aggrieved by the action of the Assessing Officer (hereinafter referred to as “AO”) in not admitting the claim of the assessee company made by way of a rectification application filed under section 154 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
3. The brief facts of the case are that the assessee company filed its return of income on 28/10/2023, wherein, the assessee claimed cost of improvement of Rs.2,94,75,372/- and claimed deduction of the same while computing the capital gains on the sale of property. The CPC, Bengaluru, however, disallowed the said deduction while processing the return of income of the assessee company under section 143(1) of the Act. Being aggrieved, the assessee company filed a rectification application under section 154 of the Act. However, the CPC, Bengaluru again did not allow the said claim of the assessee company, and even did not point out the reasons for which the same was rejected. Being aggrieved by the said order of the CPC, Bengaluru, the assessee company preferred the appeal before the Ld. CIT(A). The Ld. CIT(A) noted that the assessee company had not attached the requisite evidences to prove the cost of improvement. He, therefore, dismissed the appeal of the assessee.
4. We have heard the rival contentions and gone through the record. Admittedly, the assessee had duly claimed the cost of improvement in the return of income. No reasoning has been given either by the CPC, Bengaluru in the order passed under section 143(1) or in respect of the rectification application filed by the assessee as to why the said claim has been rejected.
So far as the reasoning given by the Ld. CIT(A) of availability/validity of required evidences, etc., is concerned, that, in our view, could be examined in the scrutiny assessment under section 143(3) of the Act and not while processing of return u/s 143(1) of the Act. The CPC, Bengaluru, in our view, has not jurisdiction under section 143(1) of the Act to make a disallowance for want of certain evidences, etc. In view of this, the disallowance made by the lower authorities is not sustainable and the same is accordingly ordered to be deleted.
5. In the result, appeal filed by the assessee stands allowed.
Order pronounced in the open court on 23rd October, 2026.
